The ill wind sweeping through the world’s financial markets gathered momentum in Iceland yesterday as Straumur-Burdaras, the investment bank, said that it would pay €380 million (£300 million) to buy assets from Landsbanki, the country’s second-largest bank.

The development in Iceland’s troubled banking sector comes just days after the Government was forced to buy a 75 per cent stake worth €600 million in Glitnir, Landsbanki’s smaller rival, to prevent it going bankrupt. Yesterday Glitnir issued a profit warning.

The deal yesterday will lead to Straumur taking control of the bulk of Landsbanki’s overseas corporate finance and securities brokerage operations. That includes full ownership of Landsbanki Securities, which includes the UK brokers Teather & Greenwood and Bridgewell Securities. Landsbanki bought Teather & Greenwood in 2006 and Bridgewell last year.

The deal, which requires regulatory approval, also includes Landsbanki’s 84 per cent holding in Merrion Landsbanki, the Ireland-based stock broker and corporate finance firm and full ownership of Landsbanki Kepler, the bank’s European and US securities arm.

The combined revenues of the three aquired Landsbanki companies, which employ 680 people, amounted to €232 million last year and had a combined profit before tax of €30 million, according to Straumur.

Iceland’s banking system has been under intense scrutiny this year as it struggles with soaring inflation and the fallout from an overheated economy and collapsing currency. In an effort to check runaway wage and price inflation, the central bank has raised interest rates to 15.5 per cent, causing pain for Icelandic households. High interest rates severely curbed the ability of Iceland’s banks to fund their businesses and the global liquidity squeeze has made matters worse.

This week Standard & Poor’s cut Iceland’s long-term foreign currency sovereign credit rating, citing the Government’s decision to buy 75 per cent of Glitnir. “The required capital injection underlines our often-stated concerns about the high external leverage of the Icelandic financial system, and the contingent liabilities this poses to the sovereign,” S&P said. Moody’s and Fitch put the country’s credit ratings on review for possible downgrade.

Iceland’s big banks – Glitnir, Kaupthing and Landsbanki – had expanded rapdily and have accumulated assets of almost €100 billion. That figure is about ten times the size of the Icelandic economy.

Landsbanki said that yesterday’s sale would result in no material loss or gain for the company and would strengthen its tier-one capital ratio. Strategically it will allow the bank to refocus its model on core banking operations.

“Following this transaction, Landsbanki will consolidate its corporate and commercial banking operations in Europe through its overseas banks and branch network,” the bank said.

Straumur said that it would pay for the aquisition in cash, a subordinated debt issue and a sale of loans. Its bank capital position would continue to be extremely strong. it said.

William Fall, Straumur’s chief executive, said: “Straumur has been able to take advantage of this unique opportunity to become a substantially broader and more client-focused bank with a truly pan-European investment banking and securities platform.”

Landsbanki’s net income was €1.25 billion last year and it made a pretax profit of €520 million. Straumur made a pretax profit of €191 million on revenues of €330 million.

Shares in Straumur closed down 6.35 per cent, while Landsbanki lost 1.96 per cent.

The Icelandic kronur lost further ground, falling to a fresh record low of 157.68 to the euro before recovering to trade around 153.20.

The cost of protecting Iceland’s sovereign debt against default rose sharply yesterday on continued concerns about the Icelandic economy. Credit default swaps on Iceland’s sovereign debt rose by 45 basis points to 635 basis points, or $635,000 to insure annually $10 million of debt over a five-year period, according to CMA Datavision.

Iceland by numbers

Population 304,367
Labour force 181,000
Unemployment rate 1 per cent
Life expectancy 80.5 years
Literacy 99 per cent
Imports $6.18 billion (2007)
Exports $4.79 billion
Interest rate 15.5 per cent
Inflation14 per cent
Area103,000 sq km
Coastline 4,970 km

GDP by sector

Services 69.1 per cent
Industry 25.7 per cent
Agriculture 5.2 per cent

Source: CIA World Fact Book

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