REYKJAVIK, Dec 3 (Reuters) - Iceland's government, banks and pension funds have agreed a 100 billion crown ($862.4 million) deal to ease mortgage repayments for households hit by the collapse of the island nation's economy.
About a quarter of households have difficulty paying their mortgages, and finding a solution for restructuring private and corporate debt -- equal to around half Iceland's $12.1 billion gross domestic product -- has held up economic recovery.
The government's plan will see the write-off of mortgage debts over a certain limit, increased mortgage tax relief and the lowering of repayment interest rates for some borrowers.
"The total sum involved is likely to exceed one hundred billion krona," the government said in a statement.
Prime Minister Johanna Sigurdardottir said the deal would help around 60,000 households in the nation of just 320,000 people and would support growth.
"It is important that we clean out debts that were created by the banking crash so that the recovery can continue," she told news conference.
The government said the cost of the measures would be two-thirds borne by the banks and other financial institutions, like pension funds, and one-third by the state housing fund.
Finance Minister Steingrimur Sigfusson said an agreement over debt relief for small and medium-sized businesses was in the works, while a deal with pension funds over financing public investment over the next few years was very close.
Debt restructuring is a key issue to get the economy moving again after the country's main banks collapsed within the space of a week in 2008, burdened by mountainous borrowing racked up over a decade of aggressive overseas expansion.
The financial sector has been restructured and new, smaller banks have taken over from the old lenders but still carry much of their debt burden.
Analysts had worried that restructuring would simply shift more of that debt onto the government's balance sheet, meaning even bigger cuts in spending by the government than currently planned.
The economy, which shrank 6.8 percent in 2009, is expected to contract a further 2.6 percent this year, before returning to growth again in 2011. (Editing by Stephen Nisbet)