UPDATE 4-Iceland strikes deal to clean up banking mess

Mon Jul 20, 2009 5:13pm BST

* Govt sees total capitalisation of 270 bln ISK ($2.1 bln)

* Says amount may be reduced to 200 bln ISK

* Old banks to take stakes in Islandsbanki, New Kaupthing

(Adds Glitnir committee chairman in para 14)

By Niklas Pollard

STOCKHOLM, July 20 (Reuters) - Iceland took a step on Monday towards clearing the debris from its financial meltdown, 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 cut to about 200 billion if the old banks took up stakes in two 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 [GLBNK.UL], Landsbanki and Kaupthing -- collapsed within 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. [ID:nLH335632]

Restructuring the banking sector and repaying creditors are seen as key to reviving an economy in the clutches of a deep recession and placating the International Monetary Fund and others that have pledged $10 billion toward Iceland's 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 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.

NECESSARY STEPS

"This is the first step and we'll have to see if the capital will be sufficient," SEB analyst Robert Bergqvist said. "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."

Under the plans, Glitnir would assume all 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. [ID:nLK396417]

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.

Arni Tomasson, chairman of a committee representing Glitnir creditors, said the body would review whether to subscribe to the equity in Islandsbanki in the coming weeks and would decide by the end of September. The agreement on offer suggests creditors should get "everything that there is to get", he said.

PAST MISTAKES

Icelandic Business Affairs Minister Gylfi Magnusson told a news conference the government would put safeguards in place to prevent the new banks from acting as the old ones had done.

"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 banking deal is one of several key issues the government is addressing. Only last week Iceland applied for membership in the European Union after a close vote in parliament.

In the coming days, parliament is also due 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. [ID:nL6500817] (Additional reporting by Love Liman, Anna Ringstrom and Veronica Ek; Editing by Jon Loades-Carter and Rupert Winchester)

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