ICELAND TOOK a step 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 Icelandic government said it expected the capitalisation to total about 270 billion Icelandic crowns (€1.5 billion) but this would be cut to about 200 billion crowns 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, Landsbanki and Kaupthing – collapsed within a week last October, owing more than €42 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.

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 €7 billion toward Iceland’s recovery.

Under the plans, Glitnir would assume all of Islandsbanki while Kaupthing would own 87 per cent in New Kaupthing, leaving the government with the remaining 13 per cent 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 towards compensating creditors, the finance ministry said. – (Reuters)