October 15, 2008 – 11:18 am

The credit crunch swept over the small country of Iceland like a tsunami and Glitnir Bank became the first major Icelandic bank to be nationalized.

The government said it bought a 75 percent stake in Glitnir, the country’s third largest bank, for 600 million euros ($878 million) to ensure broader market stability after it suffered liquidity issues.

Central Bank of Iceland chairman David Oddsson said that Glitnir, which has operations in 10 countries, would have collapsed if the authorities had not intervened.

The government said that the bank would continue to operate as normal and that it does not intend to hold its share “for an extended period.”

The government has stressed that this is business as usual, and that the bank will not default:

Iceland’s Prime Minister Geir Haarde said the country won’t default on its state debt even after the financial system failed and the currency collapsed.

“Of course the Republic of Iceland is not in default,” Haarde said in an interview with Bloomberg television in Reykjavik today. “It will never be in default, I can assure people of that.”

But the implosion of Iceland’s third largest bank by deposits is not an isolated event. It is part and parcel to the collective collapse of three banks whose collective liabilities exceed Iceland’s GDP. A bailout will place monumental strain on the small island’s government.

Haarde today declined to give details of how the government plans to deal with about $61 billion of debt in the three lenders, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf, taken over by the regulator last week.

“Whether there will be defaults on some of the debt remains to be seen,” he said. “But the government as such will of course honor all its obligations.”

According to Portes, Iceland needs to “throw” itself “at the mercy” of the Washington-based fund as soon as possible.

An Icelandic delegation started talks in Moscow today to secure an emergency loan of as much as 4 billion euros ($5.47 billion) from Russia. The talks are expected to last a number of days, an official at Russia’s finance ministry said today.

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