Iceland Targets Creditor Writedowns as Accord Sought This Year

The creditors in Iceland’s failed banks will need to accept writedowns of their assets as the government will push for an accord this year to ensure economic stability, Finance Minister Bjarni Benediktsson said.

“We’re trying to maintain stability in Iceland,” he said today in an interview with Bloomberg Television. “Write-offs will need to take place and the market is also showing that this will need to happen if you just look at what’s available in terms of pricing of claims against the estates.”

The government is in the midst of hiring advisers to help it assess the economic and legal issues around granting exemptions to capital controls imposed in 2008 after Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf defaulted on $85 billion of debt. Those controls, which have trapped about $7.2 billion in assets, have so far prevented the bank’s administrators from completing creditor settlements.

Hedge funds including Davidson Kempner Capital Management LLC snapped up debt in anticipation that returns might rise as the bank’s original creditors sold their holdings after seeing about three-quarters of their value wiped out.

Benediktsson said that the government has for “too long” been asking if a solution can be found with the estates of the banks and that “concrete answers” will be needed in 2014. “If not we have to consider alternate options” he said.

All Incentives

“We are concerned about the balance of payment going forward,” Benediktsson said. “A solution can be created, the incentives are all here, some people are waiting to gain access to their assets and we are concerned about having the controls for too long.”

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

The country yesterday sold 750 million euros ($1 billion) in bonds, and received almost three times the bids for the issue from international investors. Since its financial collapse in 2008, the island has also sold two separate $1 billion dollar-denominated bonds in 2011 and 2012.

It exited a 33-month International Monetary Fund program in August 2011 and has relied on capital controls since the 2008 failure of its three largest banks caused the krona to plunge. The currency has climbed about 7 percent against the euro since a low last year as the central bank intervened.

The debt proceeds will be used to repay loans received during the bailout to lower financing costs, according to Benediktsson. “We’re a hundred points lower on this issue than we were in 2009,” he said.

Iceland owes $1.8 billion to the IMF, Nordic governments and Poland, after repaying the rest of the $4.6 billion it borrowed following the 2008 collapse. The IMF loans are due by 2016 and the Nordic loans from 2019 to 2021.

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