Iceland Needs Krona Guarantees to Grant Bank Creditors WaiversOmar R. Valdimarsson
Creditors of Iceland’s three largest failed banks will need to guarantee that debt accords won’t pose a risk to the krona to be granted waivers from capital controls, the island’s central bank governor said.
“It’s clear that we’ll never grant an exemption to the foreign exchange laws, if that exemption might lead to financial instability or have an adverse effect on the krona’s exchange rate,” Sedlabanki Governor Mar Gudmundsson said in a Jan. 11 telephone interview.
Policy makers, including Prime Minister Johanna Sigurdardottir, have said it will be hard to exempt the creditors from krona controls, which have trapped as much as $8 billion in assets from being sold by offshore investors, according to Arion bank hf estimates. Three lenders defaulted on $85 billion in 2008, causing the currency to plunge as much as 80 percent offshore and sending the island into the worst recession in six decades.
The winding-up committees of both Kaupthing Bank hf and Glitnir Bank hf, whose assets total about $13.6 billion, have both formally applied for exemptions to the island’s capital controls that would enable them to settle with creditors. Landsbanki Islands hf intends to complete a similar accord in the next five to six years, according to the bank’s spokesman, Pall Benediktsson.
The composition agreements pose a considerable risk to the north Atlantic island, while they also present an opportunity “if we play our cards right,” said Gudmundsson. The bank requires guarantees in three specific areas, he said.
“Number one relates to the kronur redemptions” of the failed lenders “which will be handed to foreign parties,” the governor said. “And number two are the shares in the new banks, which are listed in kronur, and future dividends. The third matter is foreign exchange claims the failed banks own against domestic parties, especially domestic parties which don’t have any revenue stream in foreign exchange.”
The nation, which completed a 33-month $4.6 billion International Monetary Fund economic program in August 2011, has been praised for its method of handling its crisis. The controls and Iceland’s decision to allow its banks to renege on their obligations to bondholders underpinned a recovery, according to the IMF.
Gross domestic product will expand 2.9 percent in 2013, the central bank estimates, after contracting 6.8 percent in 2009 and 4 percent the following year.
The bank will need to examine at what price and how assets are released out of the country and what kind of limits will be set on dividend payments, Gudmundsson said. It will also need to set new debt estimates for the country as a whole as well as the future balance of payments, he said.
The krona slid 6 percent last year in onshore trading, its second year of losses. It fell 0.4 percent to 171.08 per euro on Jan. 11, the weakest closing level since April 26, 2010. The currency traded at about 230 per euro offshore, according to Keldan.com, a website run by Reykjavik-based H.F. Securities hf.
The estates of the failed lenders are urging quicker action from the government and the central bank. The winding-up committee of Kaupthing, the largest of the failed banks, in November said it was forced to postpone a credit deal because of opposition from the central bank.
“These banks have been in winding-up proceedings for about four years,” said Steinunn Gudbjartsdottir, the head of Glitnir’s committee, in an interview earlier this month. “Half of the assets of Glitnir have now been sold and are held in cash. Undeniably, this money legally belongs to the creditors of Glitnir.”
Kaupthing is also waiting for the central bank’s response, Johannes Runar Johannsson, a member of Kaupthing’s winding-up committee, said in a Jan. 4 interview.
According to Gudmundsson, the central bank has yet to receive all the information to make a decision.
“We’re not even at the point in time where everything has been delivered to the central bank and the other parties are only waiting for our reply,” said Gudmundsson. “We’re not there yet, although we’re nearing it.”