Iceland jacked up its key interest rate to 18% and announced a request for help from the European Central Bank and the US Federal Reserve in twin moves today to stave off national bankruptcy.
'Iceland's central bank sent a request to the ECB, the Fed and the Nordic banks on Friday,' Icelandic Prime Minister Geir Haarde said in Helsinki where Nordic leaders were meeting. Haarde said Iceland had not yet received replies to its requests.
Iceland's once booming financial sector has collapsed under the weight of the worldwide credit crunch, forcing the government to take control of the major banks as its currency has nosedived.
Reykjavik agreed with the International Monetary Fund last week on a loan of $2.1 billion but Haarde had said the country would need about $4 billion more.
The country has so far approached the four Nordic central banks in Denmark, Finland, Norway and Sweden, the ECB and the Federal Reserve.
Meanwhile, Iceland's central bank said today it had raised its key interest rate by six points to 18%, the highest level in Europe.
The announcement came as official statistics showed Iceland's 12-month inflation rate soared to a record high of 15.9% in October from 14% a month earlier.
The Icelandic currency, the krona, has meanwhile lost about 40% of its value since the beginning of the year, making imports to the North Atlantic island more costly.
The combination of high inflation and a plunging currency means Iceland's 320,000 inhabitants risk not having access to consumption goods, which are largely imported.
The rate cut came less than two weeks after Iceland's central bank slashed its key interest rate by 3.5 points to 12% to try to stimulate the economy.
Meanwhile, credit insurance group Coface said today it had downgraded the ratings of Iceland, along with a number of other European countries, because of the worsening financial crisis.
Coface downgraded the rating for Iceland from 'A1' to 'A2' over the collapse of its banking system and switch into slump of its former booming property market.
The group forecast that the global credit crisis would continue for between 18 months to two years. Even if the world economy experienced a long phase of sluggish growth, 'businesses will adapt'.
