Page last updated at 06:05 GMT, Monday, 14 September 2009 07:05 UK

Iceland sets up Glitnir relaunch

Glitnir was nationalised in September after weeks of turmoil

Iceland has set the terms on its proposed relaunch of Glitnir, almost a year after the bank's failure.

Glitnir, which was the country's third-largest bank, collapsed along with Iceland's other big lenders late last year at the height of the crisis.

The banks were nationalised and Iceland had to seek international support in order to stay afloat.

Now, amid signs of a global recovery, Iceland has proposed ways for Glitnir creditors to get their money back.

Creditors can vote on two options.

Islandsbanki vote

The government favours creating a new bank, Islandsbanki, in which creditors would take a 95% stake, while the government would retain 5%.

This way, the government would have to inject no new money, after pledging in August it would inject up to 277bn kroner ($2.2bn) to recapitalise the island's three main banks - Glitnir, Landsbanki and Kaupthing.

The alternative is that Islandsbanki stays under government control.

Investors are then compensated through the sale of bonds that eventually allow them to hold 90% of the bank by 2015 "at a price which provides for the government to receive an appropriate level of return on its investment", the finance ministry said.

Creditors have been given until 30 September to decide.

Iceland's largest banks took on huge foreign debts to finance overseas expansion, many times bigger than the size of the Icelandic economy, and found themselves unable to pay their debts as the global financial crisis unfolded last year.

Glitnir was nationalised on 29 September, and the others followed in a matter of days.

The Icelandic authorities have since created three new banks, by transferring all domestic deposits previously held by the old banks, and recapitalised them.

The Organisation for Economic Co-operation and Development said recently the failed banks "should not stay forever in state ownership".

"While an effective temporary solution, the present set-up is not viable over time," it added.

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