Iceland Tells Hedge Funds Not to Bet on 75% Claims Writedown

Iceland’s government says speculation by creditors in the island’s failed banks, many of whom are hedge funds, that they will need to take a 75 percent writedown on their claims is an exaggeration.

“The 75 percent was mentioned at a lunch meeting, very unofficially,” Finance Minister Bjarni Benediktsson said in an interview in Reykjavik. “That has been exaggerated as an assumption.” He said the final figure could be higher or lower.

Creditors in Iceland’s failed banks are trying to reach an agreement with the island’s authorities on how to treat $3.8 billion in krona-denominated claims without triggering a currency slump. Iceland has said it won’t lift capital controls unless creditors accept writedowns as the nation tries to avoid a balance of payments crisis.

“We want to work toward a solution on a professional basis,” Benediktsson said. “I aim at creating a solution in the coming weeks and months that we can work with.”

The government, elected in April after promising to help households through debt relief, estimates it will be able to unwind capital controls in place since 2008 within six months of striking a deal with creditors.

Debt representing 71 percent of claims against Glitnir Bank hf has been sold on by the original creditors since the bank’s 2008 default, according to a Nov. 16 posting on its website. The amount reflects transactions conducted by only 7 percent of original claimants, according to the bank.

$85 Billion

The claims are a five-year-old legacy stemming from the failures of Kaupthing Bank hf, Glitnir and Landsbanki Islands hf, whose combined default on $85 billion lurched Iceland into its worst recession in six decades. Unemployment jumped nine-fold and the government was forced to turn to the International Monetary Fund to avoid national bankruptcy.

A number of the creditors waiting to get their money back are hedge funds that had bet on a faster resolution of Iceland’s banks. Firms including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP, bought claims on the lenders’ assets at prices well below face value.

Kaupthing had assets of $6.5 billion and Glitnir had $7.5 billion at the end of June, according to reports from the banks. Glitnir claims trade at about 31 cents on the dollar, up from 28 cents at the beginning of the year, according to Andrew Jent, president of Dallas, Texas-based Hayman Capital Management LP, which bought Glitnir claims in mid-2012.

Claims Paid

Priority claimants, including depositors and lenders with collateral against the three banks, have been paid a total of 935 billion kronur ($7.7 billion), the central bank estimated in October. Of that amount, Landsbanki has paid priority creditors about 705 billion kronur, according to Sedlabanki.

Though most creditors have yet to be repaid, Iceland’s crisis management program has won international praise and the $14 billion economy is now growing faster than the euro area. The European Commission estimates the economy of the 17-nation currency bloc will shrink 0.4 percent this year before growing 1.1 percent in 2014. Iceland’s economy will expand 2 percent in 2013 and 2.5 next year, according to the Reykjavik-based statistics agency.

Removing the capital controls, which are blocking about $7.2 billion in krona assets from exiting the island, remains Iceland’s main hurdle in accomplishing a full recovery, according to the IMF and ratings companies.

Even behind capital controls, the krona has weakened almost 8 percent against the euro since May this year. It traded little changed at 163.55 as of 8:06 a.m. in Reykjavik.

Legal Obligation

“It would be preferable if we could accomplish lifting the controls before 2019,” Benediktsson said. “Certainly, I’ve been hopeful that we’d reach bigger milestones in the near future.”

The central bank, which has the power to grant exemptions to the capital controls alongside Benediktsson, is due to meet with the representatives of the failed banks’ creditors today.

In a September interview, the caretaker of Kaupthing said it must protect creditor assets.

“The winding up committee is obliged by law to preserve the value of Kaupthing’s assets,” Johannes Runar Johannsson, a member of the committee, said at the time. “It’s therefore difficult, or even impossible, to see how the winding-up committee could make such a recommendation, given its legal duties.”

The central bank estimates that non-krona debt owed by others than the Treasury and Sedlabanki, due through 2018, totals about 700 billion kronur ($5.7 billion). Projected current account surpluses over the next five years aren’t estimated to reach even half that and will be equivalent to a shortfall of about 20 percent of gross domestic product.

“These factors are the main reasons for the capital controls,” Benediktsson said.

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