REYKJAVIK/STOCKHOLM Iceland hailed a draft deal to end a row over debts it incurred with the British and Dutch governments in a bailout of depositors in a failed bank.
Analysts said the agreement marked progress in the Icelandic economy's transition back to normality after it went into meltdown in 2008, with ending currency controls and reviving a still fragile banking sector remaining on the agenda.
"The agreement is a giant step in the economic recovery of this country," Finance Minister Steingrimur Sigfusson told state radio on Friday.
Icelandic negotiators said on Thursday they had a draft deal offering better terms than one rejected by the country's voters in March for repaying the $5 billion the two countries spent reimbursing British and Dutch Icesave account holders.
"This agreement is made under totally different circumstances from the previous one when lending rates were much higher and our currency reserves were limited," Sigfusson said.
Analysts welcomed the deal, notably in the context of other positive news about the recovery from a crash that came to symbolize the 2008 global crisis.
"If we can get agreement on Icesave that will be positive for investor sentiment then we might begin to see money flowing back into Iceland," said Danske Bank economist Lars Christensen.
"What happens when you remove the capital controls? I am getting more and more inclined to think that (the ensuing fall in the crown) might not be as big as feared," he added.
Iceland imposed capital controls to protect the crown, a move which also locked in foreign investors who had crown assets after several years of high-yielding glacier bond issuance.
The central bank has said it will not make any moves to lift the controls on outflows this year and that no fundamental changes would be made before March 2011.
SEB emerging markets strategist Mats Olausson said there were opportunities for investors.
"I think that solving (Icesave) brings deregulation one step closer and once that happens the onshore and offshore rates are set to converge. Our view has been that convergence will happen closer to the onshore rate," he said.
He said Icelandic bond yields had already fallen, but that a currency play could bring benefit if there was an appreciation of the crown from its current offshore rate of 240.50 to the euro, toward the onshore rate of 151.80.
"For investors the thing to watch is the timing of deregulation and the opportunity to get into the offshore market. Investors should be very wary about the possible risks, but we think there is potential for a good return when deregulation happens," he said.
BOND YIELDS DOWN
He said investors may have missed the boat on Icelandic bonds as yields have already fallen sharply.
Islandsbanki analyst Ingolfur Bender said in a note on Wednesday that the state treasury had already met its treasury bond issuance target for the year.
He said short-term yields at auctions had come down from more than 7 percent at the start of 2010 to just over 2 percent.
"This must be good news for the taxpayer, although capital owners probably look back on the higher yields of the past quarters with some nostalgia," he added.
Bjarni Benediktsson, leader of largest opposition party, the Independence Party, was quoted by local media on Thursday night as saying the ruling Social Democratic-Left Green government had to "own up to its mistakes over the previous (Icesave) agreement."
He declined to say whether he would support the new deal.
Sigmundur Gunnlaugsson, head of smaller opposition group the Progressive Party, which criticized the earlier Icesave deal, told media group website www.visir.is that he thought it would be "the right thing to do to refer this agreement, like the previous one, to the people in a national referendum."
(Reporting by Omar Valdimarsson; Editing by John Stonestreet)