Financial companies, from which the Central Bank of Iceland has requested new collateral, were given a seven-day extension after a meeting yesterday between representatives of the companies in question, the government and the Central Bank.
According to Morgunbladid, one of these companies, Sparisjódsbankinn (SPB, formerly known as Icebank), cannot provide collateral for its ISK 68 billion (USD 596 million, EUR 451 million) loan in the Central Bank and depends on support from the government to survive.
Like the other companies, SPB has been granted a one-week extension. “Obviously it means nothing else than more time for us to reach an agreement with the government. This problem won’t be solved in any other way,” said CEO of SPB Agnar Hansson.
The Central Bank is facing considerable loss of assets following the collapse of the banking system.
The bank had granted loans worth approximately ISK 300 billion (USD 2.6 billion, EUR 2.0 billion) in total to financial companies, from which it now demands new collateral, on the basis of unprotected shares in Glitnir, Landsbanki and Kaupthing banks, which have now been nationalized.
After these banks were nationalized, the value of the shares, which the Central Bank had accepted as collateral from other financial companies, decreased by around 50 percent.
“The Central Bank’s equity will lessen,” said Minister of Commerce Björgvin G. Sigurdsson, adding that the extent of the loss is unclear. When asked how the government will react to the loss of the Central Bank, Sigurdsson said, “Then the state has to provide new equity.”
“If the Central Bank was a normal bank it would possibly be facing a technical bankruptcy,” Ólafur Ísleifsson, a lecturer in economics at Reykjavík University, told Fréttabladid. “If the bank suffers a considerable loss of assets, the state treasury will have to provide new funds so that it will be operable.”
According to a statement from the Central Bank, it had sought to provide domestic financial companies with assistance during the economic crisis with its loans to them.
“The Central Bank thereby followed the example of other central banks, increased lending and consequently took a risk. It did not, however, go as far as some other central banks,” the statement reads.
Ísleifsson pointed out that when the state decided to acquire a 75 percent stake in Glitnir Bank, the Central Bank had rejected collateral, which representatives of Glitnir had submitted in request for a loan, while accepting collateral from other financial companies in the form of unprotected shares.
Click here to read more about the Central Bank’s call for new collateral.