Iceland eyes deal with creditors of failed banks

* Iceland's government eyes deal with creditors next week

* Deal would help capitalise new banks, compensate lenders

* Govt ready to put 280 bln Icelandic crowns in new banks

By Omar Valdimarsson

REYKJAVIK, July 8 (Reuters) - Iceland's government hopes to secure a deal next week with creditors of its failed banks which would allow it to capitalise its new banks and start to compensate foreign lenders for their massive losses.

A deal would likely come ahead of a July 17 deadline to finalise the capitalisation of the so-called "new banks" which were created following the country's financial meltdown, Indridi Thorlaksson, Permanent Secretary at the Ministry of Finance, told Reuters on Wednesday.

"We hope to finalise compensation, in whatever form it may be," Thorlaksson said.

After an overseas acquisition spree over the last few years, Icelandic banks owed more than $60 billion to foreign lenders.

A deal would not necessarily guarantee the full recovery of the money owed to the creditors of Glitnir, Landsbanki and Kaupthing, but it would lay the groundwork for getting the new banks off the ground and returning the hard-hit Nordic country to international capital markets.

It could also help pave the way for the removal of capital controls put in place to stem a massive outflow of funds after its banks collapsed, sending its currency into a freefall.

Creditor talks are taking place in London, and a number of approaches and combinations are being discussed, Thorlaksson said.

"It could be a bond, or some kind of equity stake, or options for equity. Everything is being considered," he said.

The new banks could even go ahead with a bond issue as early as next week to compensate the old banks for assets -- mostly savings deposits -- they took over last year to ensure a functioning financial system on the island.

Creditors are also considering taking a stake in the banks, in which case their loans would be transferred into stock.

"It is not at all impossible that they could have all the equity in one or more of the banks -- it depends on the conditions that are in place," he said.

FRESH EQUITY

Restructuring and rebuilding the bank sector and repaying creditors as well as stabilising its currency are key parts of the $10 billion rescue programme agreed with the International Monetary Fund and Iceland's European neighbours last year.

The long-awaited refinancing of the banks has been held up due to problems valuing the assets of the new banks, but government officials say the new banks are on track to be capitalised by next Friday.

Kristjan Kristjansson, press secretary for the Prime Minister's Office, said that based on the business plans seen so far, the government is prepared to put in some 280 billion Icelandic crowns ($2.2 billion) into the new banks.

"The FME (Financial Supervisory Authority) has been carrying out stress tests of all possible natures, and at moment people believe banks are going to be viable," he said.

"This will mean they will be up and running in a proper way. They will have fresh equity, and will be better able to service their customers."

Iceland's economy, in the grips of what is expected to be its worst-ever recession, is expected to contract at a 10 percent pace this year while the unemployment rate -- at virtually zero ahead of the crisis -- is seen climbing to nearly as much amid mounting corporate bankruptcies.