Iceland Warns Hedge Funds Against Suing After Imposing Tax

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Iceland Seen Threatened by Capital Flight From Its Own Citizens
Photographer: Arnaldur Halldorsson/Bloomberg

The prime minister of Iceland said any hedge fund planning to challenge the legal basis of a planned tax on failed bank assets should think again.

“If they wanted to make some kind of an example out of Iceland, to threaten people, then this wouldn’t be a good case for them,” Prime Minister Sigmundur D. Gunnlaugsson said in an interview in Reykjavik on Monday. “This is founded on solid legal ground.”

Iceland has tried to ensure its treatment of creditors caught in an $85 billion banking default won’t drag the island through an Argentine-like period of litigation. The 2008 financial meltdown wiped out its three biggest banks after the government said the $15 billion economy didn’t have the means to save them. In the economic collapse that followed, Iceland imposed capital controls to stop an investor flight.

Gunnlaugsson on Monday unveiled legislation to unwind the restrictions after almost seven years. To make sure the measures don’t result in a capital exodus led by hedge funds, the island imposed a one-time stability tax of 39 percent. That could bring in about $5.1 billion in state revenue, the government estimates.

Creditor Talks

The winding-up committees representing creditors in the failed banks can avoid the tax by reaching a composition agreement that’s approved by the central bank and finance ministry by the end of the year.

Committees for creditors of the failed banks, Kaupthing, Glitnir and LBI, on Monday proposed deals to avoid the tax, seeking pay-outs in bonds, cash and shares in the new banks. At least 70 hedge funds weren’t part of the talks and are still analyzing the proposals, the Wall Street Journal reported, without saying where it got the information.

Kaupthing and LBI debt rose about 1 cent to 25 and 12 cents on the euro respectively, while Glitnir’s gained 0.5 cent to 34.5 cents since the beginning of the week as investors hope to receive the first distributions by the end of the year, according to two people familiar with the matter, who asked not to be identified because the trades are private.

Among hedge funds that were part of the talks were Davidson Kempner Capital Management LLC, Taconic Capital Advisors LP, Silver Point Capital and Solus Alternative Asset Management, according to other investors involved. Spokesmen for the firms declined to comment.

Less Costly

Finance Minister Bjarni Benediktsson signaled that reaching a composition agreement may be the least costly route for the creditors. They probably need to leave at least 500 billion kronur ($3.8 billion) in the economy to reach a deal, Benediktsson said in a separate interview on Monday.

It’s likely that “the actual stability payment will be lower than the levied stability tax,” he said.

Iceland is prepared for challenges from disgruntled creditors, the prime minister said.

“We’re very confident in the legislation we’ve just presented and have no doubts about its legal validity,” Gunnlaugsson said in an interview with Bloomberg Television’s “Market Makers” on Monday.

Some hedge funds will try to “safeguard their interests quite strongly,” he said. “But it’s important to keep in mind that it’s in their interest to get a resolution. And this is exactly that, a resolution both for the Icelandic society and these investors. So I think the parties can be satisfied.”

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