Hedge Funds Have a Lot Riding on Iceland Coalition Surviving

Iceland PM Resigns Due to Panama Papers Scandal
  • Finance Minister says ending capital controls most important
  • Iceland 10-year yields jump to highest since mid-February

Hedge funds waiting for the final exit from Iceland’s capital controls have a lot riding on the survival of the current government coalition.

Iceland Finance Minister Bjarni Benediktsson promised to stick to a plan to remove capital controls after Prime Minister Sigmundur D. Gunnlaugsson’s forced resignation on Tuesday threw the government into turmoil. The coalition still faces a no confidence vote maybe as soon as Thursday, in a drive led by the poll-leading Pirate Party, which advocates a crackdown on banks.

The government and central bank have been preparing for an auction in the first half of this year to free about 291 billion kronur ($2.4 billion) held by investors, including hedge funds, in so-called Glacier bonds that were sold in the run up to the nation’s economic collapse in 2008. It’s the last hurdle before the country can start exiting capital controls for households and corporations, which were imposed in 2008.

“It’s an important part in renewing the coalition to explain to our countrymen how we envision the next months, what the projects are -- and they are certainly many,” Benediktsson said in Reykjavik. “The most important one and closest to us is the removal of capital controls, which we need to manage.”

The coalition would stand to lose an election were one held today. A Frettabladid poll published on Wednesday showed the government getting only 29.5 percent backing. Meanwhile the Pirate Party would get 43 percent and the two other parties in the opposition a combined 21.4 percent. Some 56 percent of those polled also called on Benediktsson to resign.

Birgitta Jonsdottir, a spokeswoman for the Pirate Party said there are no plans to withdraw the confidence motion. If the current coalition holds, it will still have 40 of the 63 seats in Iceland’s parliament until an election is called.

Bond markets show that investors are getting jittery about Iceland. The yield on Iceland’s 2025 note has risen 22 basis points to 6.10 percent on Wednesday, almost a two-month high.

The finance minister, who heads the Independence Party that forms part of a two-party coalition, urged the opposition to withdraw a no-confidence motion that had been triggered by revelations in the Panama document leak that Gunnlaugsson and his wife held offshore investments. Benediktsson is meeting on Wednesday with Agriculture Minister Sigurdur Ingi Johannsson, whom Gunnlaugsson put forward as his successor.

The current coalition was voted into power in 2013, promising to resurrect the $17 billion economy and remove the capital controls. The coalition’s pledges to write down mortgage debt and relax austerity measures also won support, prompting Icelanders to hand back the reins to the parties that had been in power in the run-up to the island’s economic collapse.

By many measures, Gunnlaugsson was a success. Last year, he managed to craft an accord with the creditors of the failed banks, clearing the biggest hurdle in lifting capital controls. The economy is expanding at an annual pace of more than 3 percent, unemployment has fallen below 3 percent and inflation is less than 2 percent.

In a statement released late Tuesday, Gunnlaugsson said he was “very proud” of the government’s success in resurrecting the economy and forging a deal late last year with the creditors in the banks that collapsed under an $85 billion mountain of debt.

Benediktsson said he wants the coalition to continue to ensure “we have a mutual vision in these matters and the priorities in the coming months.” He said lawmakers “will also have to discuss when we’ll eventually call elections, whether we’ll complete this term which ends in April next year."

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