Hedge Funds Snubbed as Iceland Reviews Bankruptcy: Nordic Credit

Jan 22, 2014 9:05 am ET

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Jan. 22 (Bloomberg) -- Hedge funds and other creditors in Iceland’s failed banks are trying to get a response from the nation’s authorities on the status of their claims as the government considers amending the bankruptcy law.

More than five years after Iceland’s biggest banks defaulted on $85 billion, the nation has yet to arrive at an agreement with creditors on how to settle their claims. At stake for Iceland is its financial stability as authorities search for a solution that doesn’t trigger a krona sell-off just as the island tries to scale back capital controls.

The banks’ winding up committees, which represent the bondholders, have requested exemptions to capital controls in order for them to complete settlements.

“The central bank has yet to respond to our offer and we’ve gotten no feedback from the bank on whether, or when, they will respond,” Steinunn Gudbjartsdottir, head of Glitnir Bank hf’s winding-up committee, said in a phone interview. The committee sent an offer in November detailing how to complete composition without risking financial stability or the krona, she said.

‘Various Probes’

Stefan Stefansson, the central bank’s spokesman, said it has held “several meetings,” including with representatives of the winding up committees and creditors and is conducting “various probes” on what “kind of solutions will harmonize with stability, as anticipated in law.”

“It needs to be kept in mind that the matter is vast and complicated and doesn’t allow for many attempts,” he said.

The government has so far declined to participate in talks with creditors. Prime Minister Sigmundur Gunnlaugsson and Finance Minister Bjarni Benediktsson both say that failure to arrive at a settlement could prompt the government to amend Iceland’s bankruptcy act. If that happens, all foreign-currency holdings at the failed banks could be converted into kronur before being paid out to creditors.

“I’m unaware of them having found any solution” which would allow the banks to complete creditor settlements, Gunnlaugsson said yesterday while leaving a conference in Reykjavik.

Seeking Exemptions

Glitnir was the first of Iceland’s banks to collapse at the end of 2008 after it ran out of cash needed to sustain a debt- funded expansion. Kaupthing Bank hf and Landsbanki Islands hf also failed, sending the economy into its worst recession in six decades and forcing the government to impose currency restrictions and to seek an international bailout.

Since the crash, the estates of the banks have been run by winding-up committees, which have sought exemptions from capital controls blocking about 461 billion kronur ($3.97 billion) in assets. In total, the capital controls are blocking about $7.2 billion, according to a central bank estimate.

Gunnlaugsson’s government won elections in April after promising voters it would write down mortgage debt, cut taxes and end krona restrictions. Gunnlaugsson in September said the controls could be lifted “in the foreseeable future” if the owners of krona-denominated assets are “willing to assist us.”

Benediktsson said in an interview this month there’s no communication “at all” with the creditors.

Iceland Praise

While Iceland has won praise from the International Monetary Fund for its crisis management, failure to end currency restrictions threatens to delay foreign investment needed to bring about a full recovery, according to the fund.

The economy will expand 2.7 percent this year and 2.8 percent in 2015, according to the Organization for Economic Cooperation and Development. That’s better than the average for the OECD-area as a whole, which is seen growing 2.3 percent and 2.7 percent, the Paris-based group estimates.

The caretakers of Kaupthing are also eager to reach creditor settlements through a composition agreement and are seeking an exemption to the currency restrictions. The bank’s winding-up committee would need to file for bankruptcy once it no longer deems that such as solution is achievable, Johannes Runar Johannsson, a member of Kaupthing’s winding-up committee, said in a September interview.

Johannsson and fellow committee member, Feldis Lilja Oskarsdottir, didn’t respond to several phone calls seeking a comment.

“It’s definitely not Glitnir that’s delaying the process when it comes to completing creditor settlements,” said Gudbjartsdottir. “Our proposals have simply not been answered, making it impossible for us to move forward.”

--Editors: Jonas Bergman, Tasneem Brogger