U.S. Funds Default Claim Hits Hurdle in Iceland’s Court Process

Iceland has taken the unusual step of trying to block the nation’s court system from appointing a specialist as it seeks to fight off a claim by U.S. funds that it committed a sovereign default by imposing haircuts in an offshore krona auction earlier this year.

Eaton Vance Corp. and Autonomy Capital LP asked the Reykjavik District Court in June to appoint specialists to investigate whether Iceland had any economic grounds for refusing to exchange their kronur at market prices at a June auction. The specialist investigation would then be followed by a lawsuit where the plaintiffs would argue that the government violated their constitutional property rights.

The government is defending itself as in every other case where it “holds that something is lacking or misconstrued,” Gudrun Thorleifsdottir, head of the Economic Affairs and Financial Services Office at the Finance Ministry, said by telephone on Thursday.

The government has managed to get a continuance to deliver more written arguments against appointing specialists. The funds are seeking too broad a mandate for the specialists, according to the government.

"It’s very unusual -- if not unheard of -- that someone requests court appointed specialists in the manner that has been done in this case,” Thorleifsdottir said. “The request is to say the least wide open."

The June currency auction was designed to erase an overhang of about 319 billion kronur -- or $2.7 billion at current rates -- in securities that had been trapped behind capital controls since 2008. The auction partially failed as the funds balked at accepting an almost 40 percent discount on their kronur.

The government’s action is seen as an attempt to prevent the matter from being probed by a neutral third party, according to Petur Orn Sverrisson, a member of the team of lawyers representing the two funds before the Icelandic court.

“It is evident that the government is not keen to have a third party evaluate the necessity of the harsh actions enacted against offshore ISK holders, including holders of Icelandic sovereign bonds, as a result of the capital controls legislation in May,” said Sverrisson.

The allegations come on top of a case that has been referred to the EFTA Surveillance Authority, a body that monitors the compliance of European Economic Area members like Iceland with the rules that govern the European Union’s internal market. In the existing EFTA filing, the two funds say Iceland discriminated against investors who chose not to accept the terms of the auction by locking them into low-rate accounts.

While Iceland’s biggest banks defaulted in 2008, the government managed to get through its crisis without reneging on any of its obligations to creditors, though it did draw on the International Monetary Fund and other international lenders for support.

The country is now taking its final steps toward rejoining the global financial community, with remaining restrictions on consumers and corporations due to be lifted by the end of the year. The Nordic economy, which is not part of the EU, will grow 4.5 percent this year and 4 percent in 2017, according to the central bank. That compares with average growth of less than 2 percent in the EU this year and next, according to the European Commission.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE