Hedge Funds Face Tax as Iceland Poised to End Capital Controls

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Hedge funds and other investors who bought claims against Iceland’s failed banks face a tax that targets the lenders’ estates as the government prepares to unveil its plan for exiting capital controls in the coming days.

“The idea behind the stability tax relates to isolating the problem to the banks that are in winding up proceedings,” Finance Minister Bjarni Benediktsson said in an interview in Reykjavik on Wednesday. Other issues relating to the capital controls will be “dealt with in a different way,” he said.

The stability tax differs from an exit tax that had also been discussed by policy makers in that it targets bank assets. The levy threatens to hit hedge funds who snapped up distressed banking assets after Kaupthing Bank hf, Glitnir Bank hf and LBI hf collapsed under an $85 billion debt burden in 2008. The capital controls, enforced later that year, are estimated to be blocking about $6 billion from leaving the country.

Benediktsson estimates the tax will generate revenue for the Treasury amounting to “hundreds of billions of kronur.”

Ever since Iceland imposed capital controls as a temporary measure, the country has struggled to lift the restrictions amid concerns over financial stability and the exchange rate. In an effort to offset these risks, Iceland has implemented and plans to put in place a number of rules, including giving regulators the power to stop capital flows deemed excessive and limit foreign-currency borrowing.

“Our approach in dealing with this problem has been focused on protecting the domestic economy; that the adjustment to a new real exchange rate has already taken place,” said Benediktsson. “We’re not the least considering the pressure from the kronur assets” of the failed banks, he said.

Creditors that have bought claims against the failed banks include hedge funds Davidson Kempner Capital Management LLC, Quantum Partners LP and Taconic Capital Advisors LP.

“It’s no secret that I would have wanted to introduce this to the cabinet on Friday, but my people are still working on this so it remains to be seen,” said Benediktsson. “That date isn’t all that matters -- this matter will be resolved in the next few days.”

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