* Claims against banks total $66 bln, assets $22 bln
* Paying out creditors would destabilise economy, krona
* Says creditors need to reduce expectations for payout
By Simon Johnson
STOCKHOLM, May 27 Iceland's defunct banks could
be put into bankruptcy if creditors do not agree to a haircut on
debts owed by Kaupthing, Glitnir and Landsbanki, which collapsed
in 2008 owing more than $75 billion, the finance minister warned
Iceland slapped on capital controls after the financial
meltdown, hampering much needed investment, but these cannot be
removed until a deal to wind up the left-overs of the old banks
- around 2,500 billion krona ($22 billion) in cash, shares and
bonds - is reached with creditors.
"It should be obvious to everyone that winding up procedures
can't take forever," Finance Minister Bjarni Benediktsson said
in a telephone interview. "If they are unsuccessful, then we
have to take it to the next step. That (bankruptcy) may well
happen. One should not exclude that possibility if the winding
up procedures that started in 2009 don't show any success."
Bankruptcy would mean a fire-sale of assets and probably
much lower recoveries for creditors, who have claims against the
old banks totalling 7,530 billion Iceland krona ($66 billion),
dwarfing Iceland's 2013 GDP of 1,786 billion krona.
Benediktsson said plans put forward so far by the old banks
for paying creditors did not go far enough to reduce the risk of
destabilising the economy and the krona.
But he would not be drawn on how much of a haircut,
creditors - such as Bayerische Landesbank and Deutsche Bank
Trust Company Americas - would need to take.
"It has been evident and it has been clear for years that
assets in the estates will not and cannot all exit (through) the
FX market without severe effects on the exchange rate in
Iceland," Benediktsson said.
"There is no logical reason why the central bank or the
government would allow that to happen."
Creditors, however, have complained Iceland has not said
what kind of deal it wants.
Kaupthing and Glitnir put forward plans to pay creditors in
late 2012, but say they have yet to receive a formal response
from the central bank, which, along with the Finance Ministry
has to okay any deal.
In May, the estate of Landsbanki agreed a deal with its
creditors to extend repayment of around 226 billion krona in
bonds issued when the government took over the bank.
Benediktsson said this would reduce repayments by
state-owned Landsbankinn - which took over Landsbanki's assets -
over the next few years, a key step in removing capital
But the terms of the deal - including exemptions from
capital controls - needed to be considered carefully.
"We do not want to give a precedent that others cannot
enjoy," he said. "They have given us three months to answer. We
will just have to see what the answer will be."
While Iceland will not risk financial stability for a quick
fix to the problem of the old banks, Benediktsson said capital
controls could be removed relatively quickly, if a comprehensive
agreement with creditors is reached.
"I don't think we need to drag out the capital controls for
years and years," he said. "It is about aligning the
expectations and up to now expectations on their behalf are not
aligned to our ideas."
($1 = 113.6450 Iceland Kronas)
(Reporting by Simon Johnson)