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Iceland strikes deal to clean up banking mess

Iceland took a step towards clearing the debris of 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 capitali

zation to total about 270 billion Icelandic crowns ($2.1 billion) but this would be reduced to about 200 billion if the old banks, controlled by creditors, subscribed to equity stakes in two of the 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 - all collapsed in the space of 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. Restructuring the banking sector and repaying creditors is seen as key to reviving an economy in the clutches of a deep recession and placating the International Monetary Fund and other foreign lenders that have pledged $10 billion toward Iceland's economic 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 recapitalization of the banks, potentially at a significantly lower cost to the taxpayer than originally envisaged, and we believe (it) will result in a fair and equitable outcome for all stakeholders." The banks would be capitalized through the issue of new government bonds to the banks, the finance ministry said.