Iceland Failed Bank Creditors Face Writedowns, Gudmundsson Says

The creditors of Iceland’s failed lenders will have to write down as much as 200 billion kronur ($1.6 billion) in claims against the three lenders, central bank Governor Mar Gudmundsson said.

The currency, already under “considerable” pressure from payments on foreign loans, faces an additional overhang of krona assets that will be needed to be paid out to foreign creditors, the governor said in a parliament hearing in Reykjavik today.

The creditors “can take all the foreign exchange, which they claim from foreign parties, but” the krona assets “will be written down to a considerable degree,” he said. “So it may well be that their return on this will not be great or that it will be very negative.”

Iceland imposed capital controls in 2008 after Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf all failed within weeks of each other, defaulting on $85 billion in debt. The controls are now blocking as much as $8 billion from being offloaded.

Iceland refused to bail out its banks to avoid a sovereign default. Most of the domestic assets were siphoned into new state-created units and shares in the new banks, Arion banki hf, Islandsbanki hf and Landsbankinn hf, were then handed over to the creditors of the failed banks as compensation.

“Even though we can calculate that this will be 200 billion kronur, which will be added to the kronur overhang if this will all be paid out, we also know that this will never be the case,” Gudmundsson said today.

Steinunn Gudbjartsdottir, head of Glitnir’s winding up committee, said on Friday she had no knowledge of any plans forcing the failed lender to write off its kronur assets. A call to Johannes Runar Johannsson, a member of Kaupthing’s winding-up committee, wasn’t immediately returned.

Iceland’s economy and financial system collapsed in 2008 after its banks were unable to roll over the debt they’d amassed. The country, which exited an International Monetary Fund program in August 2011, is now emerging from the meltdown and outgrowing much of Europe. Iceland earlier this month had the outlook on its Baa3 rating raised to stable from negative by Moody’s Investors Service.

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

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