Iceland ’s Principal Three Banks to Re-capitalize

Iceland plans to recapitalize its formerly massive banking system with around $2 billion, and will offer creditors equity stakes in two of its three major banks, the country's finance ministry said Monday.

The ministry said in a statement that it plans to re-capitalize the country's principal three banks, formerly known as Kauthing, Glitnir and Landsbanki, with around 270 billion Icelandic kronur ($2.13 billion). The banks failed in a matter of days last autumn as global financial turmoil swelled, throwing the country into economic crisis, Wall Street Journal reports.

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 banking regulation.Iceland's principal three banks — Kaupthing, Glitnir and Landsbanki — failed within the space of a week last October, owing around $60 billion to foreign lenders, Los Angeles Times reports.

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 $5.1 billion International Monetary Fund-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, Bloomberg reports.