Iceland gives kick-start to banking system

The plan entails a 270 billion krona ($2b.) recapitalization and the sale of significant equity stakes to creditors.

Iceland has unveiled plans to get its collapsed banking system back on its feet, including a 270 billion krona ($2b.) recapitalization and the sale of significant equity stakes to creditors. The Finance Ministry said the deal is a significant step on the road to recovery for the tiny North Atlantic nation, which became one of the earliest and hardest-hit casualties of the global financial crisis thanks to a pile of debt amassed during years of light regulation of the banking sector. Iceland's principal three banks - Kaupthing, Glitnir and Landsbanki - failed within the space of a week last October, owing about $60b. to foreign lenders. Restructuring the overweight banking sector and repaying creditors is seen by analysts as key to reviving the economy, alongside attempts to stabilize the exchange rate and lower sky-high interest rates. The plan for the banking system comes just days after Iceland's parliament voted by a tight margin to apply for membership in the European Union, moving to give up some of the country's cherished independence in the name of stability. "Our agreements... are a major step forward in the re-establishment of a strong banking system," said Finance Minister Steingrimur J. Sigfusson. "They allow for the recapitalization of the banks, potentially at a significantly lower cost to the taxpayer than originally envisaged, and we believe will result in a fair and equitable outcome for all stakeholders." The government will recapitalize the three new banks it created following the collapse of the failed ones - Islandsbanki, New Kaupthing and New Landsbanki - through a bond issue it expects to be completed by August 14. It said the cost could be reduced to about 200 billion krona if creditors in the old banks subscribed to the controlling equity stakes on offer for Islandsbanki and New Kaupthing. If they do, Glitnir would assume the entire equity of Islandsbanki while Kaupthing would own 87 percent in New Kaupthing, leaving the government with the remaining 13% stake. Each bank will have core tier-one capital ratio of about 12%, which is in line with international standards. The government said it would retain ownership of the third bank, Landsbanki, while a similar plan is discussed with its creditors. In the years prior to the credit crunch, financial deregulation, a stock market boom and a surging krona helped Icelandic entrepreneurs go on a global buying spree, snapping up businesses from Britain's Hamleys toy store to the Karen Millen clothing chain. Iceland's banks drew depositors from around the world with too-good-to-be-true savings rates. Then the global financial crisis struck, and Iceland became one of the earliest casualties. The over-stretched banks collapsed under the weight of debt and retailers went bankrupt. The country's currency, the krona, has plummeted, while unemployment and inflation have spiraled.