Iceland suspends bank stocks as krona plunges

Iceland suspended trading in its main banks and guaranteed savers' deposits yesterday after the country's currency went into freefall and the Government was faced with the prospect of financial and economic meltdown.

The suspension of share dealing in banks and other financial firms by the Financial Supervision Authority just before the local stock exchange opened was designed to stop panic trading.

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The regulator said fears about the banks' security had reached the stage where prices would not be set norm-ally. The decision was also made to ensure equal treatment of invest-ors because "the issuers cannot ensure confidentiality of price-sensitive information which has not been made public".

The Icelandic Government became the latest to guarantee all bank deposits in a bid to reassure local savers.

The krona, which had already lost a fifth of its value against the euro, plunged a further 23 per cent yesterday to a record low of 230, after steep declines last week. The currency's woes put further pressure on Iceland's banks and the country's 320,000 people by increasing the cost of their foreign debts.

Iceland's biggest bank, Kaupthing, said at the weekend that it was financially sound but investors were panicked after Glitnir, its smaller rival, was rescued last week despite repeated government assertions that the financial sector was in good health.

After the Government spent €600m bailing out Glitnir, fears about the rest of the country's banks has hit confidence in Iceland's once-booming economy. Iceland's banks have expanded internationally and piled on loans in recent years, resulting in the assets of the biggest three lenders totalling about 14 trillion krona, or nine times the country's economy.

Iceland's banks are now looking to sell overseas assets and bring the money back into the country to reduce pressure on the currency and ease local credit conditions. Landsbanki, the island's second-biggest bank, has already agreed to sell off some businesses, including its UK-based brokerage business.

Kaupthing bought the UK bank and wealth manager Singer & Friedlander in 2005 and is a lender to Baugur, the investment company whose UK retail holdings include Hamleys, and the entrepreneur Robert Tchenguiz. The Government is also calling on pension funds to repatriate overseas funds.

Another bailout would be hard for the Government to finance because the central bank's foreign reserves stood at 308bn krona in August.

Marathon talks at the weekend failed to produce a hoped-for financial stability plan. The increasingly divided Government's banking minister, Brogvin Sigurdsson, said the plan was "well under way".

The cost of insuring against debt default by the three biggest banks rose to records in credit default markets (CDS) last week, making the lenders the least-trusted issuers of bank debt in Europe. Markets have also shunned the country's sovereign debt, with CDS prices hitting a record last week after a series of downgrades by rating agencies.

Iceland's woes are the most extreme example of the further financial stress facing European financial systems. Yesterday, BNP Paribas completed the virtual dismantling of Fortis, the Benelux financial services group.

The French bank paid €14.5bn to take over Fortis's Belgian and Luxembourg banking operations and Belgian insurance arm in a deal brokered by Belgium's Government. The move followed the Dutch Government's shock nationalisation of Fortis's Netherlands business on Friday.

Shares in Italy's UniCredit were suspended repeatedly yesterday as its shares fell sharply after a U-turn move to raise €6.6bn from investors.