OSLO (Reuters) - Iceland's negotiations with the creditors of its failed banks are going much slower than expected and it could still take years before a deal is struck and capital controls can be lifted, Prime Minister Sigmundur Gunnlaugsson said.
Showing his frustration at the intractable nature of talks that are now "hindering investment and growth", he told Reuters "creditors in Iceland have been kept warm in a cosy situation".
Iceland became a European financial hub in the first decade of the century but its banks - Landsbanki, Kaupthing and Glitnir - grew unchecked, amassing assets worth more than 10 times the nation's GDP before collapsing within a matter of days in 2008.
To save the economy from complete meltdown, the government imposed capital controls and analysts at Iceland's Arion Bank now estimate that around 1,200 billion Icelandic crowns ($10 billion), equal to 70 percent of GDP, are locked in the country.
The original creditors of the collapsed banks cut their losses in the years after the meltdown, selling on the assets to foreign hedge funds, leaving the funds and the government staring one another out in negotiations over how and when to restructure the debt.
The government wants to avoid acting unilaterally as it would send out negative signals to future investors, but the impact on the economy makes it hard for the government to wait indefinitely.
"It certainly hasn't gone as fast as we hoped ... but we expected that it could take years even," said Gunnlaugsson, who in June predicted that a deal could come as early as this year.
"It's a question of when the creditors are ready to find a solution ... and it's better if they find the solution," said Gunnlaugsson, who came to power after being elected in April.
Although Iceland recovered rapidly from a big recession in 2009 and 2010, growth has been sluggish and the government expects just 1.7 percent growth this year after 1.6 percent in 2012.
Gunnlaugsson said creditors had sent mixed signals and while there was some movement, concrete proposals had been few.
"In my opinion the Icelandic government has been very helpful to the creditors," Gunnlaugsson said in Wednesday's interview, comparing their situation to countries where governments have punished banks for their collapse in the global financial crisis.
"They've been paid interest, the value of their interest is not only protected, it grew nicely."
The funds, who rarely speak with a single voice, have said they are open to negotiations but declined in the past to discuss their terms.
The prime minister said a writedown on the assets was necessary because letting them exit and convert their crowns into foreign currency would cause a collapse and most of the creditors bought their claim from original investors on the cheap, when capital controls were already imposed.
He added that once a deal with the creditors can be reached, Iceland could move rapidly to lift capital restrictions as this is the single biggest hurdle.
Ratings agency Fitch this month predicted that capital controls would be unwound sometime beyond 2015, potentially weighing on economic and financial stability for years, a statement Gunnlaugsson called "guessing".
Although Gunnlaugsson would not specify an appropriate level for writedowns, in the past he pointed to comments from the central bank that at least 75 percent would be needed.
Editing by Alison Williams