Iceland Said Close to Inviting Hedge Funds to Talks on Debt

Iceland is close to inviting hedge funds and other creditors in the nation’s failed banks to discuss their claims for the first time, two people close to the matter said.

Iceland’s government, which has so far ignored creditor requests to meet, is now ready to listen to their demands and explain its position after being briefed on the legal ramifications of doing so, the two people said, asking not to be identified because the decision hasn’t yet been made public. Talks may take place as early as within the next month, they said.

The meeting would mark a milestone in Iceland’s efforts to normalize its relations with international capital markets. The 2008 default by Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf on $85 billion in debt made Iceland a global example of how financial systems can destroy an entire economy. Iceland averted a sovereign default by rejecting pleas to save its banks. Since then, the nation has relied on currency controls to prevent a capital flight and to protect its $16 billion economy.

The government is now confident it can outline what kind of a settlement would allow creditors an exemption from the capital controls, the people said. The composition agreement it’s pursuing would make creditors owners in holding companies overseeing the failed banks’ assets, most of which aren’t denominated in kronur. Iceland is struggling to arrive at a settlement that doesn’t result in a krona sell-off as capital exits the island.

Speculative Buying

Five-year credit-default swaps on Iceland’s government debt rose six basis points to 177 basis points yesterday, their biggest jump since March 14, according to data compiled by Bloomberg. An increase in default swaps signals a perceived deterioration in an issuer’s credit worthiness.

Sigurdur Mar Jonsson, a spokesman for the government, didn’t comment when contacted by phone yesterday. He said the administration may offer an official response today.

Most of the pre-crisis creditors in the banks sold their holdings after some three-quarters of the value of their investment was wiped out. Hedge funds including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP subsequently snapped up the debt in anticipation that returns might rise.

Bond Losses

Creditors, represented through winding-up committees, want the government to let them sidestep the currency controls. Prime Minister Sigmundur D. Gunnlaugsson said as recently as January that such a settlement wasn’t viable.

That hasn’t stopped the failed banks’ winding-up committees from looking for ways to reach a settlement. Landsbankinn hf said May 8 it agreed with the administrators of LBI hf -- formerly Landsbanki -- on extending the maturity of 226 billion kronur ($2 billion) in bonds. LBI said then such a deal was contingent on obtaining “certain exemptions from the capital controls” as part of its plan to extend the maturity on the debt by eight years to October 2026.

Bonds issued by Glitnir are trading at about 29 cents on the dollar, while Kaupthing debt is trading at 24 cents, according to Keldan. Landsbanki bonds are trading at just over 5 cents.

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