Iceland Bank Creditors Strike Deal to Sidestep Capital Controls

  • Finance Minister, central bank, approve proposals from lenders
  • Deadline for courts to approve composition agreement extended

Iceland’s Finance Minister Bjarni Benediktsson and the island’s central bank approved proposals from creditors of Kaupthing Bank hf, Glitnir Bank hf and LBI hf that will allow them to sidestep capital controls and avoid a 39 percent tax on all their assets.

The banks’ winding up committees now need to take the accord back to the creditors for approval. The individual composition agreements will then need to be ratified by the court in Reykjavik, Benediktsson told reporters on Wednesday. It’s the "largest economic operation we’ve ever undertaken," he said.

The agreement will need court approval by March 15. Iceland imposed capital controls after its three biggest banks defaulted on a combined $85 billion in October 2008. The collapse forced the north Atlantic island to seek a $4.6 billion emergency package that was led by the International Monetary Fund.

According to central bank Governor Mar Gudmundsson, the deal fulfills Iceland’s condition of not jeopardizing monetary policy, the exchange rate, or financial stability. The krona has gained about 8 percent against the euro in the past year as the central bank has raised rates to guide the economy through the challenges it faces.

Once this stage of the bank creditor settlement is finished, the country can move to the next phase, which is to lift capital controls on the rest of the population and corporations, he said.

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