Iceland strikes deal to clean up banking mess

July 20, 2009

STOCKHOLM, July 20 (Reuters) – Iceland took a step towards clearing the debris of its financial meltdown on Monday, unveiling a deal with creditors of its failed banks and plans to capitalise the new ones.
The government said it expected the capitalisation to total about 270 billion Icelandic crowns ($2.1 billion) but this would be reduced to about 200 billion if the old banks, controlled by creditors, subscribed to equity stakes in two of the new banks — Islandsbanki and New Kaupthing — as planned.
The volcanic island nation with a population of just 320,000 stunned the world after its main commercial banks — Glitnir, Landsbanki and Kaupthing — all collapsed in the space of a week last October, owing more than $60 billion to foreign lenders.
Iceland’s new centre-left government, which took over after its predecessor fell amid protests over its failure to avert the crisis, has begun the task of cleaning up the mess left by the meltdown while applying for an EU membership it hopes will provide economic stability.
Restructuring the banking sector and repaying creditors is seen as key to reviving an economy in the clutches of a deep recession and placating the International Monetary Fund and other foreign lenders that have pledged $10 billion toward Iceland’s economic recovery.
“Our agreements announced today are a major step forward in the re-establishment of a strong banking system,” Icelandic Finance Minister Steingrimur Sigfusson said in a statement.
“They allow for the recapitalisation of the banks, potentially at a significantly lower cost to the taxpayer than originally envisaged, and we believe (it) will result in a fair and equitable outcome for all stakeholders.”
The banks would be capitalised through the issue of new government bonds to the banks, the finance ministry said.

Under the Icelandic government’s plans, Glitnir would assume the entire equity of Islandsbanki while Kaupthing would own 87 percent in New Kaupthing, leaving the government with the remaining 13 percent stake.
The government said it would retain ownership of Landsbanki, providing an estimated 140 billion crowns of capital. A bond would be issued next month to go toward compensating creditors, the finance ministry said.
Islandsbanki would receive an estimated 60 billion crowns of fresh capital from the government while New Kaupthing’s share would be 70 billion, the Ministry of Finance said.
“I think these are necessary measures, but I believe it will take more to boost the Icelandic economy,” SEB analyst Robert Bergqvist said.
“This is the first step and we’ll have to see if the capital will be sufficient. That is really hard to gauge today, but now they’ve shown that they are prepared to take these measures and that in itself I think will have a stabilising effect.”

Business Affairs Minister Gylfi Magnusson told a news conference the government would see that safeguards were put in place that would ensure that a similar expansion to that of the former banks would not take place.
“Of course they may grow in the future. There are no strict limits on that. But obviously we will make sure that then they will have to follow a more risk-averse path than their predecessors,” he said.
The capitalisation of Iceland’s banking sector is one of several key issues of the North Atlantic island’s coalition government which only last week applied for an Icelandic membership in the European Union.
In the coming days, the Icelandic parliament is also to vote on whether to approve a fiercely debated deal to reimburse Britain and the Netherlands for billions of pounds and euros owed to savers with Icelandic accounts.
Separately on Monday Nordic bank SEB reported a sharply weaker-than-expected second-quarter operating profit, with the Swedish lender suffering from its exposure to deepening recession in the Baltic region.
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