The creditors of the three banks that failed in 2008 won’t get any special treatment as the nation seeks to exit capital controls, Prime Minister Sigmundur David Gunnlaugsson said.
Abolishing capital controls on the creditors first would mean that “the Treasury was indebting itself further in order to increase the value of the claims,” Gunnlaugsson said in the text of a speech delivered in parliament yesterday. “Icelandic society would be left with hundreds of billions of kronur in cost.”
Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf defaulted on a combined $85 billion in October 2008 after running out of cash to sustain their debt-funded expansions. The banking meltdown plunged the economy into its worst recession in six decades, forcing the government to impose restrictions on the krona and to seek an International Monetary Fund bailout.
Offshore creditors hold about $8 billion trapped behind the capital controls as policy makers in the $14 billion economy struggle to scale back the measures. Gunnlaugsson has said he wants writedowns on 461 billion kronur ($3.8 billion) in claims held by the creditors of Kaupthing, Glitnir and Landsbanki. That would help the government ease the controls and deliver on election promises of tax cuts and mortgage-debt writedowns.
A taskforce created to look into the execution of cutting mortgage debt is supposed to deliver its proposals in November and the work is “going well,” Gunnlaugsson told the Reykjavik-based legislature. “Writedown of debts is first and foremost a just economic act, which will give households the necessary oxygen for them to breathe.”
Cutting household debt will happen parallel to writing down the assets of creditors, according to the premier, which is the premise to removing the country’s krona restrictions.
“Abolishing the controls is in the interest of everybody,” said Gunnlaugsson. “It’s therefore in the common interest of everybody to create the circumstances that allow the abolishment of the controls.”