Iceland adopts a plan to rebuild its banks, and economy

LONDON -- Iceland unveiled plans Monday to get its collapsed banking system back on its feet, including a 270 billion krona ($2 billion) 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 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 a week last October, owing around $60 billion to foreign lenders.

Restructuring the 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 narrow margin to apply for membership in the European Union, moving to relinquish some of the country's cherished independence in the name of stability.

"Our agreements announced today are a major step forward in the re-establishment of a strong banking system," said Finance Minister Steingrimur 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 Aug. 14.

It said the cost could be reduced to around 200 billion krona if creditors in the old banks subscribe 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% in New Kaupthing, leaving the government with the remaining 13% stake.