Hedge Funds to Learn Terms of Icelandic Exit Within Two Weeks

  • Finance Minister pledges krona controls will end in 2016
  • Iceland now focused on managing soft landing for economy

Hedge funds holding $2.3 billion in Icelandic kronur bonds will in the next two weeks learn the cost of exiting those assets after more than seven years of capital controls.

The government is preparing for an auction to exchange krona-denominated Glacier bonds for foreign currency held by the central bank. The auction, which had been slated for earlier this year, is the last major step before broader capital controls on consumers and companies can be rolled back.

Bjarni Benediktsson

Photographer: Arnaldur Halldorsson/Bloomberg

"We’re planning to introduce this to parliament in the first half of May," Finance Minister Bjarni Benediktsson said in an interview on Friday in Reykjavik. "The work is going well and we’re on track with the preparations."

Sedlabanki has been busy sorting out the details of letting foreign investors bid on some of the north Atlantic island’s foreign exchange reserves, without the outflows overwhelming the $17 billion economy. The Glacier bondholders represent the last remnants of a balance of payments problem Iceland has struggled with since the $85 billion default of its three largest banks in 2008.

Funds holding the assets include Loomis Sayles, Eaton Vance Management, Discovery Capital and Autonomy Capital, according to documents seen by Bloomberg. Financial statements suggest some of the funds are expecting a haircut on their kronur holdings of as much as 38 percent. Benediktsson declined to comment on whether the funds’ assessment of the assets’ value was in line with Iceland’s plans.

"However, I anticipate that the terms of the auctions will give an indication as to what they are," he said. When the terms are presented “they’ll answer the question under what conditions the state is holding the auction. But I can’t comment on the extent to which specific investors may have aligned their expectations to what we consider to be realistic."

Preparations for the auctions are continuing as the government faces an election as soon as September. The ruling coalition was forced to promise an early vote in a bid to stay in power after the premier was ousted following allegations he and his wife hid their wealth in offshore accounts.

Benediktsson, who was also implicated in the so-called Panama Papers, on Friday unveiled a five-year plan to boost spending, cut taxes and reduce debt as he underscored the focus on engineering a soft landing for the economy. Unemployment in Iceland is close to 3 percent and wages are rising at an annual pace of more than 10 percent. The government has already successfully dealt with creditors of the three failed banks, allowing them to leave with about $17 billion in cash. Once the auctions are over, Iceland will finally be able to start restoring normalcy to its capital markets.

"We’ll take very large steps, early on," Benediktsson said. "The controls, like we’ve known them over the past few years, will not be in place by the end of the year."

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