Iceland Gets Tough With Foreign Creditors of Failed Banks

Iceland is a Nordic free-market democracy with glacier-covered volcanoes and hyperactive geysers. If you’re into mind-bendingly complex song lyrics, there’s Björk and Sigur Rós. In the rarefied world of global finance, Iceland is also where local pols and central bankers trample on the interests of bondholders like a herd of marauding reindeer. At least that’s the perspective of foreign bondholders and distressed asset hedge funds hoping to recoup their investments in three Icelandic lenders—Landsbanki Islands, Glitnir Bank, and Kaupthing Bank—that defaulted on $85 billion in debts in 2008.

In a parliamentary election on April 27, the Independence Party—which was in power during the meltdown—and the Progressive Party together won just over 50 percent of the vote. Both ran on an anti-austerity platform of lower taxes and home mortgage relief, to be funded in part by forcing overseas creditors to accept losses on the $3.8 billion in krona-denominated assets they’re owed by three failed lenders. Also in play is $8 billion in deposits and loans owed to overseas creditors that have been trapped in Iceland, thanks to capital controls imposed in 2008.