Creditor Deal Attacked by Iceland Lobbyists With History of Wins

  • InDefence wants Iceland to reject creditor deal and impose tax
  • Iceland Prime Minister Gunnlaugsson is former member of group

InDefence, an Icelandic lobby group that has a history of pushing through changes in international debt settlements, wants its government to reject a proposal that will let bank creditors sidestep an exit tax.

Olafur Eliasson, a spokesman for the group (who’s not to be confused with the Danish-Icelandic installations artist), says that allowing the creditor proposal to go through will result in a “massive balance of payments problem in the future.”

Here’s a recap of what happened in Iceland:

  • Its three biggest banks defaulted on $85 billion in 2008
  • The island received an international bailout and imposed capital controls
  • A functioning domestic banking system was created but international creditor claims against the failed banks have yet to be settled

Under a deal proposed by Iceland’s government in June, creditors of the failed banks have until the end of the year to either agree to pay a combined "stability contribution" of up to $3.8 billion, or face a 39 percent exit tax, equivalent to an estimated $5.1 billion.

Last month, creditors of Glitnir and Kaupthing approved a total of $2.5 billion in payments to the government that they hope will allow them to withdraw their funds without getting tangled in Iceland’s capital controls. Creditors in LBI hf this month approved a $114 million payment.

Prime Minister Sigmundur D. Gunnlaugsson, who used to be a member of InDefence, says creditors need to wrap up any deal fast if they’re to avoid the tax. Creditor groups who fail to do so need to recognize that “the route to taxation is obvious,” he told broadcaster RUV on Wednesday.

InDefence argues that all creditors should be forced to pay the 39 percent exit tax. Eliasson and his group estimate that not paying the levy means creditors “will later be allowed to convert about 500 billion kronur into foreign exchange, which will drastically hurt Icelanders’ quality of life.”

That calculation is “taking it a bit too far,” according to Jon Bjarki Bentsson, an economist at Islandsbanki, who says he arrives at a much smaller figure. There are also benefits to letting creditors exit the economy, because it clears the way for the government to proceed with its plan to remove capital controls, he said.

InDefence has shaped creditor agreements in the past. In 2010, the group ran a campaign petitioning Iceland President Olafur R. Grimsson to use his veto right and reject a government deal with the U.K. and the Netherlands over depositor guarantees in LBI.

In its efforts to influence the latest set of bank creditor negotiations, InDefence has met with central bank Governor Mar Gudmundsson to ask for an analysis of how the proposed creditor deal will affect Iceland’s balance of payments. The group has also written to parliament’s Economic Affairs and Trade Committee, calling on lawmakers to require the central bank to publish its findings.

InDefence has a history of attracting high-profile names. Besides the prime minister, it has also counted his personal adviser, Johannes Thor Skulason, among its members. It has more than 16,000 Facebook supporters.

The group also has managed to gain access to powerful organizations to make its case. Eliasson says InDefence met with representatives from the International Monetary Fund this month to discuss the creditor deal. He wants the Washington-based fund to conduct its own analysis of how it will affect Iceland’s balance of payments.

“If the current deal is approved and creditors are allowed to exit the economy -- well ahead of Icelandic households -- the damage will be irreparable,” Eliasson said. “The government and lawmakers need to reject the creditor deal.”

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