Iceland is seeking to hire advisers to present hedge funds and other creditors in its failed banks with a list of the economic and fiscal conditions needed to grant them exemptions from capital controls, according to two people close to the planning process.
The advisers will present the government’s projections on Iceland’s balance of payments, economic growth and trade figures, according to one of the people. Hiring a team of advisers could take two to four weeks and the plan may be presented as early as next month, one person said. Both asked not to be identified by name because the preparations aren’t yet public.
The government, which has so far ignored creditor requests to meet, is exploring the option of opening a dialogue in order to help it unwind capital controls that were put in place to protect the economy after its 2008 banking collapse. The default by Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf on $85 billion in debt sent Iceland into its worst recession in six decades. Iceland averted a sovereign default by rejecting pleas to save its banks and has since relied on currency controls to protect its $16 billion economy.
Elva Bjork Sverrisdottir, a spokeswoman for the Finance Ministry, declined to comment today.
The administration of Prime Minister Sigmundur D. Gunnlaugssonis reluctant to tip its hand ahead of an announcement, according to one of the people. Creditors so far have had unrealistic expectations of what they could get in a potential settlement, the person said.
The perception that authorities are negotiating with the creditors is sensitive on the island. Gunnlaugsson has repeatedly said that no talks will be held with the investors.
According to Eirikur Bergmann, professor of politics at Iceland’s Bifrost University, it’s a difficult situation since Gunnlaugsson has “built his career” on being opposed to the creditors.
“Since there are indications that the government is planning to approach the creditors, his domestic politics and appearance in the eyes of the creditors becomes a balancing act,” Bergmann said.
Gunnlaugsson’s balancing act includes appeasing not only voters but even members of his own government. According to Bergmann, there are still “prominent ministers” who are “seriously contemplating forcing the banks into bankruptcy, taking the foreign assets home and handing over Icelandic kronur.”
Still, doing so might not be viable because “there are questions as to whether simply transferring the foreign assets to Iceland is physically possible, as the creditors are likely to put up a fight every step of the way,” he said.
Most of the pre-crisis creditors in the banks sold their holdings after some three-quarters of the value of their investment was wiped out. Hedge funds including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP subsequently snapped up the debt in anticipation that returns might rise.
The government is targeting a composition agreement that would make creditors owners in holding companies overseeing the failed banks’ assets, most of which aren’t denominated in kronur, one of the people said. Iceland is struggling to arrive at a settlement that doesn’t result in a krona sell-off as capital exits the island.
Creditors, represented through winding-up committees, want the government to let them sidestep the currency controls.
Landsbankinn hf said May 8 it agreed with the administrators of LBI hf -- formerly Landsbanki -- on extending the maturity of 226 billion kronur ($2 billion) in bonds. LBI said then such a deal was contingent on obtaining “certain exemptions from the capital controls” as part of its plan to extend the maturity on the debt by eight years to October 2026.
Bonds issued by Glitnir last traded at about 29 cents on the dollar, while Kaupthing debt traded at 24 cents, according to Keldan. Landsbanki bonds traded at just over 5 cents.
To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at email@example.com