The Icelandic authorities today went cap in hand to Russia for emergency funding after they were forced to bail out two of the island's largest banks.

Iceland's Prime Minister Geir Haarde said he is in talks with Moscow and Russian President Dmitry Medvedev over a €4 billion (£3.11 billion) loan, and that any aid from the Kremlin would be welcome.

It came after the government of Iceland took control of the country's second largest bank, Landsbanki, and the central bank provided larger rival Kaupthing with a €500 million loan. A third bank, Glitnir, was effectively nationalised last week when the government took a 75% stake.

The dramatic developments highlighted the threat to Iceland's financial sovereignty, seen as the most serious facing any country since the credit crunch started last year.

The crisis could have a significant impact on the UK High Street, where a host of stores including Hamleys, House of Fraser and Oasis rely on Icelandic funding.

Property tycoons the Candy brothers, West Ham United Football Club and investment tycoon Robert Tchenguiz have all received funding from the same sources.

Kaupthing owns City broker Singer & Friedlander while Landsbanki is the parent of Teather & Greenwood as well as online bank Icesave, which today blocked savers withdrawing cash.

The International Monetary Fund today sent a factfinding team to Iceland. With just 300,000 people and a national economy of £11 billion, the country's foreign debts of almost £80 billion have brought it to the brink of bankruptcy.

Reykjavík University economist Ólafur Ísleifsson said the government had to ensure a less ambitious banking system sufficient to “serve the Icelandic people and Icelandic industry”.

Paul Biszko of RBC Capital Markets said: “The banking system is not functioning. Everybody's cutting them off.” Confusion surrounded details of the loan from Russia today. Russia's ambassador in Iceland, Victor Tatarintsev, said it will provide Iceland with the loan for three to five years, but Russia's Deputy Finance Minister Dmitry Pankin said no decision had been made.

Prime Minister Geir Haarde said: “People from our side will be going to Russia today or early tomorrow morning to discuss the exact terms. “With this, like everything else, nothing is certain until it's certain.”

Central bank governor David Oddsson also said the announcement over the €4 billion loan was “overstated” and talks are still ongoing.
The credit crisis has sent Iceland's currency into a tailspin over concerns rapid expansion of the country's banks has left the financial system crippled.

Deutsche Bank economist Henrik Gullberg said Iceland is “probably in the worst position in the developed world to cope with the ongoing crisis”.