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Iceland Faces Bank Talks as Krona Risk Contained: Nordic Credit

Iceland Faces Bank Talks as Krona Risk Contained
Pedestrians pass the Icelandic parliament building in Reykjavik, Iceland. The March 9 parliament agreement to drop the 2013 deadline for capital control removal was accompanied by a second bill designed to make it more difficult for offshore investors to re-invest their kronur inside the island. Photographer: Arnaldur Halldorsson/Bloomberg

Iceland is ready to start talks with the creditors of its failed banks as the island tries to unwind a currency overhang that’s blocking foreign investments, its finance minister said.

Parliament last week abandoned a 2013 deadline on the removal of capital controls, which are blocking as much as $8 billion in krona assets from being offloaded. The island imposed the restrictions after its three biggest banks defaulted on $85 billion in 2008, driving the currency down as much as 80 percent against the euro offshore and plunging the nation into its worst recession in six decades.

“The reason we abolished the sunset clause is that we’ve mapped out the status of the estates,” Finance Minister Katrin Juliusdottir said in an interview from Reykjavik. “We’ve realized what kind of impact it may have on financial stability and the outflow of foreign exchange. We’re now almost ready to enter into formal discussions with the creditors of the failed banks on how to complete the winding up proceedings.”

The banks’ winding-up committees are lobbying to win exemption from the controls, in place since 2008, as they seek to complete composition agreements to repay at least 454 billion kronur ($3.6 billion) assets trapped by the collapse. Central bank Governor Mar Gudmundsson said Feb. 25 the krona assets will need to be written down by a “considerable degree” as the currency comes under “considerable” pressure.

Protecting Icelanders

The March 9 parliament agreement to drop the 2013 deadline for capital control removal was accompanied by a second bill designed to make it more difficult for offshore investors to re-invest their kronur inside the island.

If approved, investors affected by the controls will be unable to purchase securities that can be used in repo transactions with the central bank. The bill includes Treasury bonds with shorter maturities, Thordur Gunnarsson, an analyst at Jupiter Capital Management hf, said in a note to clients on March 13. Offshore investors owned 197 billion kronur in Treasury bonds and Treasury bills as of Feb. 28, he said.

Scrapping the capital control deadline shows that the nation is willing to take any “measure needed to protect the interests of Iceland,” according to Juliusdottir, whose coalition government faces an election on April 27.

Election Looms

“The kronur claims against the banks are registered at their nominal value at the moment,” she said. “Then there’s the question -- when we’re in this sort of an environment --what the true value of the kronur claims is and what they’re willing to offload them for in order to take them out of the Icelandic economy.”

Icelanders head to the polls on April 27, four years after the Social Democratic-led government ousted its pro-deregulation predecessor following a wave of protests over economic mismanagement. Most polls suggest the government of Prime Minister Johanna Sigurdardottir, who also backs writedowns on bank creditors’ krona claims, won’t be re-elected.

The krona has lost about 7 percent against the euro since an August peak. That’s spurred inflation and left Icelanders worse off. Households owe the island’s banks 1.43 trillion kronur in debt indexed to inflation, according to a statement the parliament’s website on March 7.

EU Membership

The nation has been praised for its approach in handling the crisis, in part because it put households’ wellbeing ahead of honoring bank creditor claims. The country emerged from an International Monetary Fund-backed program in August 2011 and is now outgrowing most of Europe. The island’s economy expanded 1.6 percent last year, according to Statistics Iceland.

The government in January agreed to freeze membership talks on joining the European Union until after elections. Iceland began EU accession talks in July 2010.

“So far time has been on our side,” said Juliusdottir. “However, those discussions need to take place soon and we have to prepare for that. These discussions will most likely begin before the elections.”

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