Creditors in Iceland Banks Face Pressure to Speed Up Settlement

Iceland is considering forcing creditors in the nation’s failed banks to resolve their claims faster as Prime Minister Sigmundur David Gunnlaugsson says he’s looking into passing laws to speed up a settlement.

The existing approach “has never been considered a permanent business model,” Gunnlaugsson said in a Nov. 30 interview in Reykjavik. “Whether we need to address this in law must be one of the matters that we contemplate when we look at whether laws are generally having the impact that they are supposed to.”

Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf have been run by winding up committees representing their creditors since the lenders defaulted on $85 billion in 2008. A time limit on creditor settlements could force the banks into bankruptcy proceedings, according to Icelandic law.

Efforts to reach a settlement have so far been scuppered by disagreement over Iceland’s plan to write down the banks’ krona debt as the nation tries to unwind capital controls without triggering a currency sell-off.

The government plans to reduce 461 billion kronur ($3.9 billion) in combined krona claims against the three lenders. Iceland’s capital controls, imposed five years ago, are blocking about $7.2 billion in krona-denominated assets from exiting the $14 billion economy.

Taxing Banks

Iceland is also taking steps to reduce the failed banks’ assets through taxation. Over the weekend, Gunnlaugsson unveiled plans to raise a proposed tax on debt owed by a bank to 0.366 percent from 0.041 percent, as part of a plan to write down residential mortgage debt and give tax breaks on mortgage payments.

Glitnir and Kaupthing objected to the tax in letters to parliament, claiming it violates Iceland’s constitution.

“When the failed banks collapsed in 2008 it was at a tremendous cost for the society as a whole,” Finance Minister Bjarni Benediktsson said in an interview. “Similar companies in other countries, which have been either resurrected or saved by the government, have had to pay much increased taxes and, in some countries, fines.”

The levy would be imposed on all banks, not only those that failed, he said. The tax increase will bring in about 37.5 billion kronur to Iceland’s Treasury next year, Benediktsson’s ministry estimates.

Debt Relief

The measure will help pay for a plan announced on Nov. 30 to write down mortgages linked to inflation by 150 billion kronur. Gunnlaugsson’s coalition government won elections in April on pledges to ease consumer debt burdens and speed up the nation’s recovery. The government plans to provide homeowners with as much as 80 billion kronur in direct writedowns of home-loan debt and give 70 billion kronur of tax exemptions over three years. The deal is equivalent to 9 percent of Iceland’s economy.

The Financial Services Association in Reykjavik has estimated that Iceland’s banks have already forgiven about $2 billion in debt since 2008. At 14 percent of gross domestic product, that’s the highest ratio in the world.

The government’s actions are aimed at helping households that were hurt by a jump in inflation following the 2008 collapse. Icelandic mortgages are traditionally linked to consumer prices, meaning debt burdens grow as the cost of living rises. Prices rose 37.3 percent between January 2008 and December 2010, according to Statistics Iceland.

The premier said taxing the failed lenders is the next “natural” step in efforts to lift capital controls.

“This doesn’t change the fact that in order for us to lift the capital controls and in order for these hedge funds cash out their profits, some breathing space will have to be formed,” he said.

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