Iceland Parliament Poised to Reject Bank Rescue Plan as Insolvencies Loom

[marmar]

By Omar R. Valdimarsson


Aug. 2 (Bloomberg) -- Iceland’s parliament may block any government attempt to recapitalize the island’s banks after a court ruling threatened to leave some lenders insolvent, opposition party leaders and coalition members said.

Thirty-four lawmakers in the 63-seat Reykjavik-based assembly plan to vote against a government proposal to rescue lenders, according to three opposition party heads and three members of the coalition. The government, which can’t bail out the banks for a second time in as many years without parliamentary backing, may need to support the industry after a June 16 court ruling made them liable for currency losses on as much as $28 billion in loans.

Iceland’s government debt, which had Moody’s Investors Service top Aaa grade until May 2008, will reach 150 percent of gross domestic product this year, the rating company estimates. Moody’s said last week it may cut Iceland’s credit grade to junk if the state is forced to increase its debt burden to generate cash for the banks. The June court ruling may cost the island’s banks between $1.1 billion and $4.3 billion, the government and the country’s financial regulator estimate.

“I wouldn’t support” a recapitalization, said Gudfridur Lilja Gretarsdottir, a lawmaker in the junior coalition partner the Left Greens, in an interview. “Enough money has been pumped into the banks; the financial system is much too large.”

The Financial Supervisory Authority expects to have an estimate on the banks’ capital needs no later than November, Director Gunnar Andersen said in a July 29 interview. “After that, we’ll know exactly what the equity needs to be, but the uncertainty will not have been eliminated by that time and uncertainty requires equity.” ...........(more)

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