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Iceland Targets Wealth Funds as New Law Hits Bondholders

Iceland Targets Wealth Funds, Bondholders Hit by Krona Laws
Iceland returned to international bond markets last June with a $1 billion sale, marking a milestone in the island’s recovery from its 2008 meltdown. Photographer: Arnaldur Halldorsson/Bloomberg

Iceland wants to target wealth funds from China and Norway next time it sells debt to foreign investors after fixing its krona controls to prevent some bondholders getting their returns in other currencies.

The parliament’s March 13 agreement to backtrack on a program to ease currency controls by targeting debt investors it characterized as speculators won’t affect Iceland’s ability to tap international bond markets in the future, Economy Minister Steingrimur J. Sigfusson said.

“Investors will focus more on how the economy has been developing and the status of Iceland’s finances today and how we’ve continued to reach results,” he said in an interview in Reykjavik.

Iceland returned to international bond markets last June with a $1 billion sale, marking a milestone in the island’s recovery from its 2008 meltdown. It was the nation’s first such sale since its banks defaulted on $85 billion in debt, an event that plunged the $13 billion economy into a recession and pushed unemployment up nine-fold. The government says it may sell 10-year bonds to build a yield curve, even though its $9 billion in currency reserves means it doesn’t need the funds.

The June dollar bond was more than twice oversubscribed, and the yield on the five-year issue has dropped to about 4.6 percent from almost 5 percent when first sold. The difference in yield on the 4.875 percent bond due June 2016 and the U.S. Treasury curve has narrowed to about 355 basis points from 422 basis points at the end of last year.

‘Can’t Hide’

The yield on the five-year dollar note jumped seven basis points today, to 4.63 percent, according to Bloomberg generic pricing.

“We were very satisfied with the demand” in the last sale, “not least from large funds, some located on the west coast of the United States,” Sigfusson said in the March 23 interview. “I can’t hide the fact that I think it would be alright if the Norwegian oil fund and the Chinese would also purchase our debts.”

Iceland may struggle to attract private investors after this month’s move to tighten capital control, according to Islandsbanki hf Head of Economic Research Ingolfur Bender.

Parliament agreed this month to remove a loophole from its capital controls to prevent bondholders in inflation-linked bonds from getting paid in foreign currencies. The law also blocks investors in krona-denominated bonds from tapping currency markets to exchange their returns. The benchmark 2014 HFF krona-denominated mortgage bond slumped 14 percent the day the law was passed.

‘Convince Investors’

Targeting bondholders with stricter capital controls “will come at some cost” to Iceland’s debt markets, Bender said in a note the same day. “It will probably be more difficult to convince investors wishing to invest in Iceland.”

According to Sigfusson, investors will be able to distinguish between past events and the island’s future intentions.

“In regards to the capital controls, general investors that are interested in investing in the job sector or something else are likely to be startled, until they look into the matter more closely,” he said. “Once they do that, they’ll see that the capital controls don’t apply to any new investments and the return on those investments can come and go as it pleases.”

Iceland’s economy will expand 2.5 percent this year, the International Monetary Fund said March 2. That compares with a 0.3 percent contraction in the 17-member euro area, the European Commission said Feb. 23. The U.S. economy will grow 2.2 percent in 2012, the World Bank said Jan. 18.

Iceland’s central bank last week raised its main interest rate a quarter of a percentage point to 5 percent as it exits crisis management mode and steers the island’s recovery.

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