(Updates with central bank governor comment in fifth paragraph.)
Sept. 27 (Bloomberg) -- Iceland’s central bank is urging creditors in the nation’s failed banks to scale back their demands, which policy makers say risk destabilizing the nation’s current account balance.
Kaupthing Bank hf and Glitnir Bank hf won’t be able to complete a creditor accord unless they come up with a solution to deal with $3.8 billion in krona-denominated claims that doesn’t hurt Iceland’s economy, central bank Governor Mar Gudmundsson said.
“In order to go into composition they need an exemption from the central bank of Iceland,” Gudmundsson said in an interview from Reykjavik. “For the central bank of Iceland to make that exemption or give that exemption, there has to be a solution regarding the krona assets of these banks that’s compatible with the balance of payments equilibrium in Iceland and financial stability.”
Offshore creditors hold about $8 billion trapped by krona restrictions as policy makers struggle to scale back the measures without triggering a currency selloff. Prime Minister Sigmundur David Gunnlaugsson has said he wants writedowns on 461 billion kronur ($3.8 billion) in claims held by the creditors of Kaupthing, Glitnir and Landsbanki Islands hf to help the government ease the currency controls. Creditors have asked to circumvent the controls to help recoup their investments.
“It’s very clear that the condition for giving that exemption is not fulfilled,” Gudmundsson said. The creditors and their representatives at the failed banks “know that, and if they want the exemption they have to take measures to fulfill that condition,” he said.
The caretaker of Kaupthing said last week it won’t ask creditors to accept kronur claims to be written off in full.
“The winding up committee is obliged by law to preserve the value of Kaupthing’s assets,” Johannes Runar Johannsson, a member of the winding-up committee, said in an interview last week. “It’s therefore difficult, or even impossible, to see how the winding-up committee could make such a recommendation, given its legal duties.”
Kaupthing, Glitnir and Landsbanki all failed in October 2008 after running out of cash to sustain their debt-funded expansions. The banking meltdown plunged the economy into its worst recession in six decades, forcing the government to impose restrictions on the krona and to seek an international bailout.
The central bank is probing ideas from both Kaupthing and Glitnir on how to move forward with creditor settlements, according to Gudmundsson. Conditions for granting exemptions to the lenders have yet to be fulfilled, he said.
“They know that, and if they want the exemption they have to take measures to fulfill that condition,” he said.
--Editors: Jonas Bergman, Tasneem Brogger