Iceland moves closer to bankruptcy

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Reykjavik, Iceland, October 9:: Iceland plunged further into financial turmoil - and muddled into a diplomatic spat with Britain over its handling of the crisis - on Wednesday as the country's third largest bank went into receivership and the government abandoned attempts to put a floor under its free-falling currency.

As increasingly worried Icelanders attended a protest concert in the capital's main square and reported problems withdrawing and transferring money from banks, their government was scrambling to get a hold on the spiraling situation.

Prime Minister Geir H. Haarde acknowledged that it will take the tiny Nordic nation of just 320,000 people several years to recover from the crisis, which has been wrought by the exposure of the country's top heavy banking sector to the global credit squeeze.

"What we have learnt from this whole exercise is that it is not wise for a small country to try to take a leading role in international banking," Haarde said. "We are too small to sustain a banking system that has become too big."

A stock market boom in the mid-1990s supported the rapid growth of the country's banking sector, which now dwarfs the rest of the economy with assets at nine times annual gross domestic product of $19 billion.

In urgent moves to downsize that overgrown sector, Iceland on Wednesday said it had put Glitnir, the country's third largest bank, into receivership under the Icelandic Supervisory Authority. The regulator immediately began to restructure the bank, saying it would sell its Finnish and Swedish businesses.

That decision was a sign that problems at Glitnir were larger than the government thought when it announced less than two weeks ago that it would nationalize the bank - the switch into receivership gives Glitnir temporary protection from its debt obligations.

But a similar move with the country's second largest bank, Landsbanki, which went into receivership on Tuesday, started a diplomatic incident over the standing of accounts held by Swedish and British customers of the bank's Online arm, IceSave.

After British Prime Minister Gordon Brown said he would pursue legal action to recover the lost deposits of some 300,000 Britons who hold accounts with IceSave, Haarde said that discussions had begun between the two countries to find a "mutually satisfactory solution."

"The government of Iceland is determined not to let the current financial crisis overshadow the long standing friendship between Iceland and the United Kingdom," Haarde said as he attempted to salve the situation.