Iceland government buys 75 per cent of struggling bank

REYKJAVIK: Iceland's government today said that it would buy a 75 per cent stake in the country's third-largest bank Glitnir, a temporary move to ease the bank's liquidity woes and aid the banking sector.

"The government, through the intermediation of the Central Bank of Iceland, will provide Glitnir with equity amounting to 600 million euros (about USD 860 million) and will own 75 per cent of shares in Glitnir," the Prime Minister's office said in a statement.

"This action is taken in light of temporary liquidity difficulties faced by Glitnir and because of the unusually difficult situation currently reigning in the global financial market," it added.

Glitnir saw trading of its shares suspended on the Reykjavik Stock Exchange following the news at 15.70 Kronur (USD 0.16 dollars) a share.

"The Financial Supervisory Authority deems Glitnir's capital and asset portfolio to be solid and its loan book of good quality," the statement said, adding that "the bank's operations will be uninterrupted."

"The government does not plan to hold its share in the bank for an extended period," it said, adding that "the purpose of this action is to enhance stability within the financial system."

Beyond helping Glitnir, the government also hoped to limit the impact of the international crisis on Iceland's economy, which is particularly vulnerable to the global problems.

Iceland is one of the most prosperous countries in the Organisation for Economic Cooperation and Development (OECD), but strong growth in recent years has led to overheating, with inflation soaring and the central bank increasing its main interest rate sharply to 15.5 per cent as a result.