Iceland Blames Creditors for Slow Exit From Krona Controls

Iceland's Prime Minister Sigmundur David Gunnlaugsson said creditors in the nation’s failed banks are the main obstacle to lifting capital controls as he stepped back from promises to provide a full-fledged plan by this month.

The 38-year-old premier swept into power in April with pledges of writing down mortgage debt and extracting the nation from capital controls put in place after its economic collapse in 2008. In May, he said it wouldn’t take “too long” to complete the work, and said he hoped to be finished this month.

“It’s not necessarily the case that all aspects of this plan will be made readily available publicly,” Gunnlaugsson said yesterday in an interview in London. “We’re already in a place where we feel that it’s likely that we’ll be able to lift capital controls in the foreseeable future. But that’s of course based on the reckoning that those that have their funds locked behind the capital controls are willing to assist us.”

Offshore creditors representing about $8 billion have been trapped by the controls since Iceland tried to seal off its markets from capital flight almost five years ago. Gunnlaugsson has previously said he wants writedowns from creditors holding about $3.8 billion in claims denominated in kronur to help take pressure off the currency once controls are phased out. He declined yesterday to give an amount.

It won’t be necessary to use “all the leeway” to write down household debt, according to the premier, who pledges not to raise “long-term debt” in order to deliver on his promises.

“We don’t think it’s is necessary or practical to increase long-term government debt to tackle this issue,” he said.

No Talks

The island’s financial system collapsed after its banks buckled under the weight of their debts in 2008, defaulting on $85 billion. The credit event, which sent the krona down as much as 80 percent against the euro in offshore trading, plunged the economy into its worst crisis in six decades.

Iceland’s creditors and their representatives at the failed banks have petitioned the central bank for exemptions to the controls to help recoup their holdings.

“The government isn’t entering into negotiations with creditors,” Gunnlaugsson said, adding that he has also not permitted the central bank to begin negotiations.

Iceland’s central bank last month kept its benchmark interest rate unchanged for a sixth consecutive meeting after intervening in the currency market and predicted it will take longer to tame inflation. The seven-day collateral lending rate was kept at 6 percent, the highest in western Europe.

Swift Removal

Iceland suspended foreign currency purchases designed to build up reserves at the beginning of the year and in February announced it would instead buy kronur to take pressure off rates. The krona has risen 4.5 percent this year against the euro, the biggest gainer among European emerging market currencies tracked by Bloomberg.

Together with Finance Minister Bjarni Benediktsson, the premier has pledged to target a swift removal of the controls while making it clear that Iceland will need to keep some restrictions in place to prevent speculation.

It’s “apparent to anyone who looks at the situation that some leeway must be created in order for us to lift the capital controls,” he said. “Obviously, if all these funds would leave the economy directly, that would not make it possible for us to lift the capital controls.”

The caretakers of Iceland’s three failed banks hold a combined 461 billion kronur ($3.8 billion) in krona-denominated assets, according to their latest financial statements. Both Glitnir Bank hf and Kaupthing Bank hf have requested that Sedlabanki grant them exemptions to the capital controls to help them complete creditor settlements.

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