The deal, which was announced by the central banks of Sweden, Denmark and Norway on Friday, saw the Icelandic krona (ISK) appreciate 4.5 percent, reversing a slide of as much as 26 percent this year.
The liquidity boost will give the Central Bank of Iceland access to as much as 500 million euros from each of the Nordic banks through currency swap agreements.
The funds will almost double the foreign exchange reserves held by the Icelandic Central Bank which had promised to support the country’s banks if they defaulted on their foreign loans.
“In times of uncertainty and turmoil, the central banks have a responsibility to cooperate,” Stefan Ingves, the governor of Sweden’s Riksbank, said in a statement.
The deal hopes to calm the financial markets in Iceland which have been uneasy since the beginning of the year when rumours of a banking crisis led speculators to bet against the country’s currency.
Analysts welcomed the agreement, saying it would provide Iceland with much-needed assistance in its efforts to steady its currency and its image in global markets.
“The chances are good that this will be a turning point for Iceland,” said Fridrik Mar Baldursson, a specialist in finance at Reykjavik University. “It should increase confidence in Iceland and make it easier for the government of Iceland to borrow money at a reasonable rate.”
Icelandic banks, often described as the likely trigger for a collapse, also appear to have improved their positions. The spreads on credit default swaps (CDS) have narrowed, indicating that investors are less worried about the possibility of the banks going bust. The credit default swaps for Icelandic banks decreased by 50 to 55 points when the Nordic Stock Exchange in Iceland opened on Friday morning.
The CEOs of Iceland’s three largest commercial banks Kaupthing Bank, Glitnir Bank and Landsbanki Bank were pleased with the measures taken by the Icelandic Central Bank and believe it will have a continued positive influence on the market.
Glitnir Bank was recently able to raise capital in Norway through a covered bond issue for NOK 7 billion (EUR 900m) and has held preliminary talks with international investors about taking a stake in the bank. Shares of all the major banks also rose on Friday.
“We’ve already seen a degree of turning in the situation,” said Richard Portes, an economist and expert on Iceland at the London Business School. “People are waking up to the fact that these are well-run banks.” He also said the amount of credit provided by the Nordic central banks could probably be increased if necessary.