Experimental feature

Listen to this article

00:00
00:00
Experimental feature

Even Iceland, a country brought to its knees by its banks, has discovered it still needs the blasted things. Without them, economic recovery has no hope at all. That is why Reykjavik is carving up its former “Viking invaders” – Glitnir, Kaupthing and Landsbanki – in a restructuring that might make bankers elsewhere blanch. Yet Iceland’s financial crisis has been so acute that everyone recognised the need to compromise. Iceland’s banks were more than too big to fail: with assets nine times larger than the economy, they were too big to save. A carve-up of the system, rather than parts of it, was inevitable.

The aim of the scheme is simple: to form a local banking system, funded by Icelandic deposits, backed by some $17bn of domestic assets extracted from the old banks. Their creditors, such as bondholders or foreign savers, are compensated for this transfer by a mixture of government bonds, equity in new banks or options. In theory, the equity will give them a stake in the new banks’ success. The greater equity creditors take, the less money Reykjavik has to spend recapitalising them.

The plans look good on paper. But there are three problems. First, the agreement to compensate British and Dutch retail savers for the $5.5bn they deposited in internet bank Icesave needs parliamentary approval. That will be contentious, given the number of angry locals wearing “Iceslave” T-shirts. Second, the creditor workout at the old “international” banks is yet to begin; with liabilities of about $60bn, claimants will form the usual disorderly queue. Finally, in a deteriorating economic environment the new local banks’ assets will also be suffering, so further restructuring of dud domestic loans will be needed. Iceland’s financial retooling has only just begun.

E-mail the Lex team confidentially
OR
Post public comments

The Lex column is on Twitter

_________________________________________

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe to FT.com

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Get alerts on European companies when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article