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Iceland Parliament Rebels Against Bank Aid as Insolvencies Loom

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-five lawmakers in the 63-seat Reykjavik-based assembly plan to vote against any government proposal to rescue lenders, according to all opposition party heads and six members of the coalition contacted by Bloomberg. 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.”

‘Uncertainty Requires Equity’

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.”

The Supreme Court’s June decision was based on two private car loans and one corporate property loan indexed to foreign- currency rates. The ruling limited the borrowers’ liabilities to the principal, while lenders were left to cover currency losses.

“The government will on the one hand look toward ensuring stability and economic resurrection, and on the other hand to achieving fair and necessary solutions on behalf of individuals and families,” Prime Minister Johanna Sigurdardottir said in a July 20 e-mail.

The island may be heading for its second financial crisis while the legislature is on vacation. Parliament has been in recess since June 24 and won’t reconvene until Sept. 1. The court’s decision in June may mean some Icelandic banks will be unable to fulfill the FSA’s 16 percent capital adequacy requirement, Andersen said July 19.

‘Tough Decisions’

“It sometimes feels a bit like the summer of 2008 when there was a need for a lot of tough decisions,” said Gisli Hauksson, an economist at Reykjavik-based researcher GAM Management hf. “We’re now faced with a lot of tough decisions and the bureaucratic system is off on vacation.”

With the legislature absent, the cabinet could pass an emergency bill to allow a capital injection. Any law would need to be approved by parliament no later than six weeks after it reconvenes, according to Gisli Kr. Bjornsson, a constitutional expert at the Lagarok law firm in Reykjavik.

The government’s hands may be tied by the International Monetary Fund, which is leading Iceland’s $4.6 billion bailout. Fiscal terms attached to the IMF loan are likely to prevent the state from increasing its debt, Hauksson said.

Tax Payers

Margret Tryggvadottir, opposition lawmaker for the Movement Party, said she finds it “unacceptable that the profits are always privatized and the losses are always footed by tax payers.” Bjarni Benediktsson, who leads the Independence Party of former Prime Minister Geir Haarde, said “the government should try to avoid” recapitalizing the banks “at all cost.”

Sigmundur David Gunnlaugsson, chairman of the opposition Progressive Party, and Left Green lawmakers Ogmundur Jonasson, Asmundur Einar Dadason and Lilja Mosesdottir also said in interviews they oppose any government efforts to recapitalize the banks.

The risk of a second wave of bank failures threatens to derail the island’s efforts to rebuild relations with investors almost two years after its financial system collapsed. Iceland, the fifth-richest nation per capita as recently as 2007, faces litigation from creditors in the island’s banks, said Arni Tomasson, the head of Glitnir Bank hf’s resolution committee. Creditors sought to limit their losses last year by converting some of their claims against the banks to equity.

Creditors

Arion Bank, the state-created successor to Kaupthing Bank hf, Islandsbanki, which was created out of Glitnir, and NBI, the successor to Landsbanki Islands hf, said in June the impact of the court’s decision on their assets is unclear. Any losses at the new banks would deplete assets earmarked for compensating creditors.

Kaupthing’s creditors, including Deutsche Bank AG and Commerzbank AG, are owed $57 billion by the bank, its resolution committee said April 30. Glitnir’s resolution committee said Dec. 10 claims from its creditors stood at $28 billion. Only depositors in Landsbanki will have their claims covered, while bondholders will probably lose their investments, the bank’s resolution committee said Oct. 14.

Thuridur Backman of the Left Greens and Anna Margret Gudjonsdottir of the Social Democrats said in interviews they want to merge Arion and Islandsbanki instead of giving them cash support. They said they’d back an NBI rescue.

Iceland faces “significant and persistent uncertainties” that have “the potential to undermine” the island’s recovery, according to New York-based Moody’s.

Without any capital injection from the government, Iceland may have no choice but to force a consolidation of its financial industry and merge Arion and Islandsbanki, Hauksson said.

“The IMF has said that the banking sector in Iceland is too large, so perhaps this will be a stepping stone towards streamlining the system,” he said.

To contact the reporter on this story: Omar Valdimarsson in London at valdimarsson@bloomberg.net

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