Iceland Prepares First $3.3 Billion Depositor Claims Payment

Iceland is preparing to make its first payment to cover a total of about $11 billion in depositor losses stemming from the U.K. and Netherlands, as the island moves closer to ending a three-year dispute with the countries.

Failed lender Landsbanki Islands hf, which sold the Icesave Internet accounts outside Iceland, has enough ready cash to pay about a third of the total owed “as soon as possible,” said Kristinn Bjarnason, an attorney and a member of the bank’s winding-up committee.

“We believe that the value of the first interim payment could be 432 billion kronur ($3.3 billion), using the exchange rate from April 22, 2009,” Bjarnason said in an interview in Reykjavik late yesterday. “The goal of the winding-up process is to get something into the hands of the creditors as soon as possible.”

Iceland in September said it will reimburse Landsbanki’s foreign depositors for all losses, more than double the amount covered by guarantees. The island’s Supreme Court a month later upheld an emergency bill that gave depositors priority status over bondholders, paving the way for Icesave repayments to start and healing relations with the U.K and the Netherlands.

Still, valuing the assets held in Landsbanki may become more difficult as Europe’s debt crisis sends markets into a tailspin.

Crisis Calculations

“We have to take into the calculations that the European economic situation isn’t at its best,” Larentsinus Kristjansson, the chairman of Landsbanki’s resolution committee, said in an interview. “As of now, that doesn’t impact our loan portfolio.”

The bank’s committees may delay the sale of Iceland Foods, of which Landsbanki holds 67 percent, initially due to be completed this year, to the beginning of 2012, Kristjansson said. Iceland Foods is Landsbanki’s biggest asset.

“We hope that we can complete the sale early next year, obviously under the condition that the price is right,” he said. “If we’re not satisfied with the offers we get for our shares, we might well postpone the sale and wait until the economic climate is more favorable.”

Landsbanki’s committees said yesterday the bank had recoveries estimated at 1.35 trillion kronur as of Sept. 30, exceeding the total 1.32 trillion kronur book value of priority claims, calculated at exchange rates as of April 22, 2009. The bank had the equivalent of 510 billion kronur in cash at the end of last quarter, or about 37 percent of priority claims.

Banks Defaulted

Funds remaining for general claimants such as bondholders will be between 20 billion kronur and 30 billion kronur, Bjarnason said. Landsbanki bondholders stand to get about 5 cents on the euro, according to the latest prices available on the website of HF Verdbref.

Iceland’s banks defaulted on $85 billion at the end of 2008, as the government seized domestic operations in an effort to protect the $12 billion economy from total collapse. The local assets of Landsbanki, Kaupthing Bank hf and Glitnir Bank hf were taken over by the state, which created new banks.

Landsbanki’s failure triggered a diplomatic row with the Netherlands and the U.K., which both had to cover depositors in the lender’s Internet accounts. The so-called Icesave dispute left about 350,000 foreign depositors in the lurch.

Iceland, which completed a 33-month International Monetary Fund program in August, has since outperformed a number of euro area nations in recovering from the crisis. It will see its economy grow at more than double the pace of the euro-area average next year, the IMF said in September.

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