Iceland's Credit Ratings Dip On Admission Of Risky Move To Guarantee Bank Deposits

Reykjavik, Iceland (AHN) - Iceland followed the example of Germany by guaranteeing 100 percent of all bank deposits. The guarantee came after the country's second largest bank, Landsbanki, was nationalized Tuesday.

Icelandic Prime Minister Geir Haarde announced the bank guarantee in a press conference at the capital city Monday after Iceland failed to borrow money from Russia. "It is every country for itself... We want to save what can be saved," Haarde said, as quoted by Bloomberg.

The global credit crunch has caused Iceland's currency, the krona, to dip 31 percent against the dollars in the past month, causing the debts of the nation's banks to rise to 12 times the size of its national economy. It led to the financial collapse of Landsbanki and Kaupthing Bank.

The prime minister admitted the move to guarantee bank deposits was perilous.

"It is too risky for the Icelandic nation as a whole to secure a lifeline for the banks... The danger is real that the Icelandic economy would be sucked, along with banks, under the waves and the nation would become bankrupt," Haarde said in a televised address.

Following Haarde's address, Standard & Poor changed Iceland's long-term credit rating to BBB+/A-2 from A+/A-1 and its foreign currency rating to BBB/A-3 from A-/A-2.

The country's parliament is discussing a bill authorizing the Financial Supervisory Authority to take control of the assets of Iceland banks and appoint boards.

Russian Ambassador Victor Tatarintsev had earlier informed Iceland that Russia will lend it $5.4 billion (4 billion euro) and it was confirmed by Russian Prime Minister Vladimir Putin. But Russia backed out the last minute.

Hours after Haarde's announcement, the holding company which holds a 41 percent stake in Landsbanki, sought temporary protection from creditors from a district court.