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Tue, Jul 21, 2009 - Page 10 News List

Iceland to recapitalize banking system

PROBLEMS Iceland’s biggest banks, which went on a borrowing spree in the 1990s, could not function after Lehman Brothers’ collapse and the drying up of credit flow

BLOOMBERG

Iceland will pay 270 billion kronur (US$2.1 billion) to recapitalize its banking system, issuing bonds to the banks that emerged from the collapse of the industry last autumn and handing control to their creditors.

The government has reached agreement in relation to how compensation for the transfer of net assets into the new banks will be achieved, the Finance Ministry said in an e-mailed statement yesterday. For two of the new banks, Islandsbanki and New Kaupthing, this includes a conditional agreement for the old banks to subscribe for majority equity interests.

The agreements “are a major step forward in the re- establishment of a strong banking system,” said Icelandic Finance Minister Steingrimur Sigfusson in the statement. “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.”

Iceland’s biggest banks, which went on a borrowing spree and racked up debts in the 1990s, were unable to function after the collapse of Lehman Brothers and the drying up of credit flows. The government seized the three banks in the autumn and the island had to turn to the IMF, World Bank and Nordic countries for a bailout as the economy plunged into recession.

Iceland is relying on the US$5.1 billion IMF-led loan to rebuild its financial industry and protect government finances. The government hopes to unlock the second tranche of the loan, which the IMF indicated would not be released until creditor claims had been resolved.

The Finance Ministry said it conditionally agreed with the resolution committees of Glitnir and Kaupthing, representing the creditors of the failed banks, that they should have majority ownership of the new banks “to facilitate their independent development.”

The creditors will capitalize the new banks, Islandsbanki and New Kaupthing, as part of the agreement.

The government and the creditors of Old Landsbanki “have agreed to a further period to allow completion of due diligence” and “the finalization of the terms of a bond instrument to be issued by New Landsbanki in connection with compensation.”

The capitalization of the new banks will take place on Aug. 14, the ministry said in the statement, and will be achieved by the issue of new government bonds to the new banks. Each bank will be “prudently” capitalized with a core tier 1 ratio of approximately 12 percent, the statement said.

Total capitalization will amount to 270 billion kronur and if Glitnir and Kaupthing complete their subscription agreements, this may be reduced to 200 billion kronur, the ministry said.

“These levels of capital commitment are significantly lower than the estimated commitment of 385 billion kronur at the time of the original transfer in October 2008, leading to lower fiscal cost and impact on gross state debt than that previously envisaged,” the statement said.

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