This statement provides information that has become available since the issuance of the staff report. The new information does not alter the thrust of the staff appraisal.

The process of re-establishing the three main banks continues, although hurdles remain to a final Landsbanki deal. Creditor representatives for Glitnir have exercised their option to acquire 95 percent of the shares in Islandsbanki (the successor bank). Meanwhile the Resolution Committee for Old Landsbanki has agreed to the outline of a deal regarding compensation for assets transferred to New Landsbanki. The full compensation package would include a bond, a 20 percent equity stake in the bank, and a contingent bond (with upside capped to limit total compensation). The agreed base compensation is significantly above the estimate on which the bank’s business plan was based, and is accordingly under review by the bank’s auditors and the FME. While the tentative deal could yet fall through—including due to the results of the auditors’ and FME’s examination—finalization remains targeted by mid-November. The Islandsbanki acquisition would reduce government debt by 3 percent of GDP relative to program projections; the Landsbanki deal would reduce debt by 1 percent of GDP (with the impact of partial creditor ownership largely offset by the extra capital required to support the larger-than-projected balance sheet).

Parliament has passed legislation establishing a framework for debt restructuring, to be underpinned by agreements among financial institutions on procedures. The framework introduces new generalized and specialized assistance for households. Generalized assistance includes maturity extensions and payment smoothing, to be available to all (on an opt out basis for krona loans, and an opt in basis for fx loans). Specialized assistance includes rules for writing down debts to 110 percent of assets for the most distressed but viable borrowers. The Housing Financing Fund has also been authorized to participate in private sector work-outs, and to acquire loan portfolios from commercial banks and to restructure them on flexible terms. For corporations, the law also lays out general considerations that creditors should take into account in voluntary corporate debt restructurings, including equal treatment once rules are set. The framework aims to accelerate restructuring and support private sector demand. Financial institutions have estimated that the potential costs are manageable and can be financed within existing provisions for credit losses. Ongoing review of the implementation of the framework, in particular to ensure that further private sector losses do not migrate to the public sector balance sheet, will be needed under the program.

In accordance with program commitments, the government has now completed a review of the insolvency regime. The authorities have identified a number of revisions to the insolvency regime, including simplification of the process for approval of debtor-creditor agreements, and establishment of a reasonable moratorium on secured debt in the context of debtor-creditor agreements. However, further review will be necessary to strengthen incentives for out-of-court debt restructurings and accelerating liquidation of non-viable firms (such as the timeliness of court approval of voluntary debtor-creditor agreements), the priority ranking of new financing, and the strengthening of procedures for the efficient exit of nonviable corporations. Work and discussions are continuing with a view to submitting legislation to parliament by end-November.