From combined dispatches
REYKJAVIK, Iceland Iceland took over its second-largest bank and sought a $5.44 billion loan from Russia on Tuesday to help tackle a crisis that threatens to make the small island nation the first “national bankruptcy” of the global financial meltdown.
Russian Finance Minister Alexei Kudrin said Moscow looked positively on the request from Iceland, whose prime minister said it faced the risk of financial collapse.
Prime Minister Geir Haarde said Icelandic officials would travel to Moscow to discuss terms for the loan to bolster the country’s foreign reserves.
“With this, like everything else, nothing is certain until it’s certain,” Mr. Haarde told a news conference.
Even with the ruble near an 18-month low and the stock market suffering its worst rout since the 1998 default, Russia has weathered the global credit crunch with $563 billion in currency reserves, the world’s third-largest amount.
That financial muscle is giving Prime Minister Vladimir Putin a weapon to challenge the U.S., which is grappling with its worst financial crisis since the Great Depression.
Iceland’s financial woes lapped across the North Atlantic Tuesday all the way to the headquarters of the European Union.
But the 27-nation bloc, based in Brussels, hasn’t taken sweeping joint action to deal with the global financial meltdown.
Instead, it’s essentially left member countries to go it alone with a patchwork of measures aimed at keeping banks afloat.
Frustrated investors want to know why, and some have begun to question whether the European Union - at its core, an economic union - will survive.
Although the European Union pledged to act as one to calm roiled markets, it hasn’t done much beyond a move Tuesday to boost guarantees on savings accounts.
That’s led member states to take an a la carte approach, with major economic powerhouses such as Britain and Germany putting together rescue packages, leaving smaller nations like Iceland to take the fall.
It’s a risky business for the European Union. In the short term, banks in poorer countries may founder and fail. And by relinquishing key decisions to its members just as they’re turning to EU headquarters for guidance at a time of crisis, the bloc could see decades of attempts to forge unity simply disintegrate.
Failure to pull together on the financial crisis could push member nations even further apart, perhaps emboldening a resurgent Russia’s influence on the fringes of the enlarged European Union.
“Europe is in the midst of a once-in-a-lifetime crisis,” 256 of the continent’s leading economists said Tuesday in an open letter to EU leaders.
“Unless European leaders immediately unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath,” the economists said. They evoked “the dark years of the 1930s,” adding: “It is not an exaggeration to say that it could happen again if governments fail to act.”
Iceland, home to just 320,000 people on a territory the size of Kentucky, has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy - from fashion retailers to top soccer teams.
The strategy had given Icelanders one of the world’s highest per-capita incomes. But now they are watching helplessly as their economy implodes - their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.
“Everything is closed. We couldn’t sell our stock or take money from the bank,” said Johann Sigurdsson as he left a branch of Landsbanki in downtown Reykjavik.
The government had earlier announced that it had nationalized the bank under emergency laws enacted to deal with the crisis.
“We have been forced to take decisive action to save the country,” Mr. Haarde said of the sweeping new powers that allow the government to take over companies, limit the authority of boards and call shareholder meetings.
A full-blown collapse of Iceland’s financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent.
One of Iceland’s biggest companies, retail investment group Baugur, owns or has stakes in dozens of major European retailers - including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley’s.
The speed of Iceland’s downfall in the week since it announced that it was nationalizing Glitnir bank, the country’s third-largest, caught many by surprise, despite warnings that it was the “canary in the coal mine” of the global credit squeeze.
Despite sunny skies Tuesday, Reykjavik’s mood remained grim - cafes were half-empty, real estate agents sat idle, and retailers reported few sales.
“I’m really starting to get worried now. Everything is bad news. I don’t know what’s happening,” said retiree Helga Jonsdottir as she headed to a supermarket.
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