Oct. 3 (Bloomberg) -- Iceland's government will ``very soon'' announce a plan to inject liquidity into the financial system, the prime minister's economic adviser Tryggvi Herbertsson said.

``We're working on a plan,'' Herbertsson said in a telephone interview from Reykjavik today. ``It's obvious that if you look at the markets that we have to do it very soon.'' Central bank Governor David Oddsson told broadcaster RUV there will be no announcement ``until we can back it up with hard fact.''

The krona has plunged 12 percent against the euro this week on a series of rating downgrades and after the government bailed out the No. 3 lender, Glitnir Bank hf. The government is working ``day and night'' to secure a foreign loan, Minister for Banking Affairs Bjorgvin Sigurdsson told TV station Stod 2 late yesterday.

``The foreign sources of funding have completely dried up; there's no money market at the moment,'' said Sunil Kapadia, an economist at UBS Ltd. in London. ``The central bank needs to step up the liquidity provision, for sure.''

The cost of protecting government debt from default soared to a record yesterday, according to traders of credit-default swaps. Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a year to protect 10 million euros ($13.8 million) of bonds, CMA Datavision prices show.

The krona gained less than 0.1 percent to trade at 155.69 against the euro as of 2:26 p.m. in Reykjavik. It had fallen as much as 0.5 percent earlier in the day.

Wait and See

``The krona has obviously weakened very sharply in the last few days,'' said Yngvi Orn Kristinsson, head of investment banking at Landsbanki Islands hf, the country's No. 2 lender. ``Perhaps what Mr. Herbertsson is saying makes people want to wait and see.''

Herbertsson declined to provide details of the plan. He ruled out a loan from the International Monetary Fund.

``The money that the IMF would be able to provide would be minimal,'' Herbertsson said. ``We're an industrialized country, the fifth-richest country in the world per capita. We are working on various measures to provide liquidity to the economy and you'll see that soon, but the IMF is not an option.''

The government's decision to bail out Glitnir through the purchase of a 75 percent stake will probably be the only rescue of a commercial lender, according to Herbertsson.

``Glitnir is what had to be done,'' he said. ``The other banks are in a much better position and we don't think we need to go into those banks. But having said that, it's obvious that this can change in a few days.''

`No Hurry'

The government is in ``no hurry'' to sell its stake in Glitnir, Herbertsson said.

``We'll hold a stake until it is certain that the bank is in a good position and until somebody who we trust can come in and buy the bank,'' Herbertsson said. ``If it's one month, then it's one month. If it's two years, then it's two years.''

In the 24 hours after the collapse of Glitnir, Standard & Poor's and Fitch Ratings lowered the country's rating and Moody's Investors Service put Iceland's national Aa1 rating on review for a potential downgrade.

``The economic situation has in a short space of time changed very much for the worse,'' Prime Minister Geir H. Haarde said in a speech to parliament last night. ``Government, companies, households and people have seldom faced such great difficulties.''

Nowhere

Iceland's central bank has done little to ease the liquidity shortage, even as central banks across the rest of Europe and in the U.S. pump money into their financial system and help their banks.

``Everybody is basically waiting for the central bank to do something,'' said Beat Siegenthaler, a senior strategist at TD Securities in London. ``They're the only central bank around the world that hasn't stepped in, in some way, to support their financial sector. At the moment the feeling is that they're just nowhere, they're just not present''

The slump in the krona will probably send the inflation rate as high as 20 percent, compared with the central bank's target of 2.5 percent, Siegenthaler said. Consumer prices rose an annual 14 percent in September.

``Many traders are saying they've never seen a currency lose as much in such a short time and without the central bank saying anything or attempting any kind of supportive measures,'' he said.

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

Last Updated: October 3, 2008 12:12 EDT