Iceland Bank Creditors Warn They Will Fight Debt Relief Measures
Local properties are reflected in windows at the Kaupthing Bank in Reykjavik, Iceland, on Tuesday, Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News
Creditors at Iceland’s banks said they will fight measures that hurt their financial interests after the government sought a guarantee from the country’s lenders that they forfeit their right to sue the state.
The administration of Prime Minister Johanna Sigurdardottir last week started talks with lenders, opposition lawmakers and other interest groups on proposals that include writing down 155 billion kronur ($1.4 billion) in mortgage debt. Creditors are trying to protect their interests in state-created successors to Iceland’s failed banks to ensure assets in the new lenders are used to compensate bond holders.
Creditors “reserve all rights to pursue any and all legal remedies to prevent the losses caused by the proposed legislation,” according to a letter signed by Ragnar Adalsteinsson, a lawyer with Adalsteinsson & Partners representing the Coordination Committee of the International Commercial Lenders Group, which includes creditors of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf.
Icelandic law requires the board, directors or resolution committees at financial institutions to safeguard that institution’s interests, mainly for the benefit of shareholders and creditors, Adalsteinsson said in the letter, dated Oct. 26. He confirmed having sent the document to 12 Icelandic banks, in a phone interview yesterday.
‘Held Liable’
“If the persons entrusted with this task fail to guard the institution’s interest or forfeit its rights under law or the constitution such persons can be held liable under civil law and in some cases even criminal law,” Adalsteinsson said in the letter.
Sigurdardottir’s Social-Democrat, Left-Green coalition has tried to speed up debt-relief measures after as many as 8,000 protestors gathered outside the country’s parliament last month. Pledges to force banks to forgive debt have met resistance inside Iceland as pension funds try to protect their assets. A 155 billion kronur write-down would be equivalent to 10 percent of Iceland’s 2009 gross domestic product.
The Financial Supervisory Authority yesterday said 28 percent of households have mortgage debt that exceeds the value of their properties, while 63 percent of loans to households and businesses are non-performing, according to the International Monetary Fund.
“The fundamental principle” is that “debt beyond ability to pay be written off, while making sure that the cost of debt restructuring is not socialized,” Economy Minister Arni Pall Arnason said in a statement yesterday, following an International Monetary Fund Mission report.
IMF View
The IMF on Nov. 14 said it needs more time to assess the impact of debt-relief measures on the island’s finances before proceeding with the fourth review of its program. Iceland is relying on a $4.6 billion IMF-led loan to rebuild its economy.
Iceland’s special prosecutor is investigating former executives at the failed banks in an effort to reclaim funds that may have been siphoned off before the lenders collapsed more than two years ago.
Special Prosecutor Olafur Thor Hauksson said searches were conducted in 16 houses today, adding that interrogations of suspects are “still underway,” in an e-mailed statement. The investigation “focused on suspicion of violations against the penal code,” he said.
‘Won’t Waive’
Though the banks haven’t provided the state with any guarantee that they won’t sue, the government will move ahead with the planned bill, said Helgi Hjorvar, chairman of the parliament’s economy and tax committee.
“The financial companies are saying they won’t waive their right to claim damages beforehand,” Hjorvar said in a phone interview yesterday. “The matter is on the parliament’s agenda.”
Parliament hasn’t set a date for passing the bill. Today’s debate will be the first of three. Other measures up for discussion include limiting debts to 110 percent of property values or a step-by-step reduction of obligations to 90 percent of asset values.
The government has already thrown its support behind measures to reduce debt burdens per household by 1.5 million kronur on average for debtors relying on foreign-currency linked loans. Sigurdardottir’s administration also wants to allow bankrupts to walk away from their debts after two years. The Economy Ministry on Oct. 22 said it will give lenders up to 60 days to calculate the impact of the proposals on their balance sheets as it waits for their assurances they won’t sue.
Property Rights
“The fact alone that the government seeks such statements from stakeholders in advance of the legislation being presented to the parliament shows that the government seems to acknowledge that the proposed legislation infringes or may infringe on the property rights of affected parties,” Adalsteinsson said.
Arion Bank hf, the successor to Kaupthing, which failed in October 2008, can confirm receipt of the letter representing the creditors, said head of communications Ida Bra Benediktsdottir, in a phone interview yesterday.
Asking banks to guarantee they won’t sue “is first and foremost a very unusual request and it doesn’t have any precedent in this country,” Benediktsdottir said. “The statement as such possibly violates the interests of the banks and its owners and therefore the board of the bank can’t agree to it.”
Kristjan Kristjansson, a spokesman at Landsbanki successor NBI, also confirmed receipt of the letter, without elaborating.
“Our clients urge you on behalf of your institution to refrain from signing any statement forfeiting the rights of the institution, at least without first acquiring full support of all stakeholders,” Adalsteinsson said.
To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net
To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net
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