Icelandic banks Landsbanki (IceSave) and Kaupthing Edge have been under real scrutiny since early this year over concerns that they might collapse. They have always maintained that they are not in difficulty.
But Tryggvi Herbertsson, economic adviser to the Icelandic prime minister, said the government could and would step in.
“Definitely we would come to the rescue of a bank – definitely.
“The banking system in Iceland is very large compared to the economy, but still we think we can maintain the problem because the balance sheet of the bank is very good.”
“They have not been involved in sub-prime or buying housing debts from abroad and we are pretty confident that the balance sheet is healthy and the banks can operate healthily in the future.”
BBC Money Box, 4 October 2008
Both Icesave and Kaupthing are larger than the Icelandic economy. It seems to me that the Icelandic government is saying is that they would come to the rescue because they believe the banks are well managed and run – their only problem being their inability to raise money on the markets. Quite an assumption to make.