By Omar Valdimarsson
REYKJAVIK (Reuters) - Iceland took over its second largest bank, propped up a battered currency and said on Tuesday was seeking a 4 billion euro ($5.44 billion) loan from Russia to help tackle a financial crisis threatening to overwhelm it.
Russian Finance Minister Alexei Kudrin said Russia viewed Iceland's request for a loan 'positively'. "The result will be announced after negotiations," he said.
Prime Minister, Geir Haarde, said government officials would go to Moscow to discuss terms for the loan to bolster the country's foreign reserves and its battered currency.
"With this, like everything else, nothing is certain until it's certain," Haarde told a news conference.
He said Iceland would not default on its sovereign debt.
Home to just 300,000 people, Iceland used emergency powers rushed through on Monday to dismiss the board of directors of Landsbanki
That tipped the country's crown currency into a 35 percent nosedive but it bounced back after the central bank said Moscow had agreed to step in.
An International Monetary Fund spokesman said an IMF staff team was in Iceland on a fact-finding mission and Norway said it was ready to discuss help but had heard nothing from Reykjavik.
So volatile was the currency that Iceland's central bank was forced to introduce a currency peg at a value of 131 per euro. It was last trading around 202.
Commerce and banking minister Bjorgvin Sigurdsson said Landsbanki would be open and run as normal while changes were taking place. Iceland's Financial Supervisory Authority (IFSA) had replaced the bank's board with its own people.
"Domestic deposits are fully guaranteed, as declared by the government. Landsbanki's domestic branches, call centers, cash machines and internet operations will be open for business as usual," the IFSA said in a statement.
"The objective of the IFSA's action is to guarantee a functioning domestic banking system."
RUSSIA LOOMS LARGE
The central bank, Sedlabanki, said a Russian loan would substantially strengthen Iceland's foreign reserves and support the crown.
"Four billion euros would be more or less what Iceland needs to cover the whole banking system assets with their reserves," said Elisabeth Gruie, currency strategist at BNP Paribas.
"It's also a surprising move for Russia that reflects its desire to reaffirm itself as a world power."
Political analysts pondered Moscow's strategy in the light of its increasingly robust dealings with the west.
"I think there will be a lot of eyebrows raised in NATO if Iceland does accept this loan. I think the Icelandic government will need to ask themselves and the Russians a lot of questions before they accept," said Carlo Gallo, senior Russia analyst at Control Risks.
EMERGENCY BILL RUSHED THROUGH
Iceland adopted sweeping powers over banks late on Monday as its financial system tottered and its currency plunged.
The ruling alliance and opposition parties united to pass a bill that gave the state the ability to dictate banking operations, including provisions that allow it to push through mergers or even force a bank to declare bankruptcy.
Its provisions took immediate effect.
"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," Haarde told the nation late on Monday.
Iceland's biggest bank, Kaupthing
Landsbanki said it would restructure and rise again.
"Landsbanki would like to stress that the bank has not been put into liquidation but is in receivership which gives it a temporary protection from payment of debts and obligations as they fall due," the bank said in a statement.
Investment firm Exista kicked off what is expected to be a string of asset sales, saying it had sold its near 20 percent stake in Finnish insurer Sampo to cut liabilities.
Iceland has found itself perched on a faultline in the global financial turmoil.
The North Atlantic island has punched far above its weight in financial terms as its banks expanded overseas, investors took large positions in its high-yielding currency and foreign firms poured money into local projects.
(Editing by Ron Askew)
($1=.7358 Euro)
