May 30 (Bloomberg) -- Iceland's lawmakers passed a bill allowing the central bank to sell as much as 500 billion kronur ($6.76 billion) of foreign-currency bonds, equivalent to more than a third of the country's gross domestic product.

The bill was passed late yesterday, Thorsteinn Thorgeirsson, chief economist at the Finance Ministry in Reykjavik, said in a telephone interview. The move would allow the central bank to more than triple foreign reserves.

The bank needs to restore confidence in an economy whose currency slumped 20 percent against the euro this year on concern commercial banks may have expanded abroad too fast. The assets of Iceland's three biggest banks were nine times the size of the economy last year. Kaupthing Bank hf, the biggest of the three, had 87 percent of its assets denominated in foreign currencies.

``This definitely helps to boost confidence in the economy,'' said Bjarke Roed-Frederiksen, an economist at Nordea Bank AB in Copenhagen, the biggest Nordic lender. ``But it'll be an expensive loan, if they decide to act on it.''

The krona gained for the first day in four, rising 0.3 percent to trade at 115.4969 against the euro as of 12:16 p.m. in Reykjavik.

``The central bank will probably take advantage of the bill,'' said Ingolfur Bender, head of economic research at Glitnir Bank hf in Reykjavik. ``That's what the government wants them to do and that's what they will do.''

An official at the central bank, or Sedlabanki, declined to comment.

Currency Slump

The krona has tumbled this year on concern the global credit crunch may force some of the island's banks, who rely on money- market funding to run their operations, to turn to the central bank for aid. Interest rates at a record high have failed to reverse the slump in the currency, which pushed the inflation rate to an 18-year high of 12.3 percent this month.

The central bank on May 22 kept the benchmark rate unchanged at a record 15.5 percent, indicating policy makers may prefer to boost foreign reserves to support the currency rather than raise rates further.

``I know the central bank is working quite hard on it right now; they're on a roadshow talking to possible investors in London today and yesterday,'' Bender said. ``I definitely expect them to announce something within the next couple of weeks.''

The bank on May 16 entered an agreement with its Norwegian, Swedish and Danish counterparts to swap kronur for as much as 1.5 billion euros, allowing it to almost double its foreign reserves.

Reserves

``It's clear that this move, and the swap agreement, are more significant at the moment than changes in the interest rate in supporting the krona,'' Roed-Frederiksen said.

Currency reserves stood at 206.8 billion kronur at the end of April, the bank said on May 8. That compares with combined assets of 11.4 trillion kronur at Kaupthing, Landsbanki Islands hf and Glitnir Bank hf at the end of last year. Including the value of the swap agreement entered earlier this month and the debt sale approved today, reserves could rise as high as 880 billion kronur at today's exchange rates.

Moody's Investors Service cut Iceland's credit rating on May 20 to Aa1 from Aaa citing concern that the government may have to cover liabilities at the nation's banks.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at at tbrogger@bloomberg.net

Last Updated: May 30, 2008 09:07 EDT