January 17, 2014 / 4:21 PM / 5 years ago

Iceland cold-shouldered as crisis countries rebound

(This story originally appeared on IFRe.com, a Thomson Reuters publication)

By Chris Spink

LONDON, Jan 17 (IFR) - As fresh money pours back into crisis-hit countries including Ireland, Portugal and even Greece, Iceland remains frozen out of international capital markets as its government remains locked in a battle with creditors over pre-crisis borrowings.

About a year ago, the dispute between Iceland and its creditors seemed to be thawing, with a deal seen as imminent.

But the election of Progressive Party leader Sigmundur Gunnlaugsson as prime minister on a populist strategy to cut people’s mortgages partly by retrospectively imposing a tax on the assets of its failed banks has once again stoked up the heat in the fight.

Since Gunnlaugsson took over power, yields on Iceland’s five-year bonds have gapped out from 4.1% to 6.4% earlier this month.

At the same time, similar maturities of Irish government paper have hit fresh euro-era low yields of 1.8% after the government returned to capital markets. Portugal, which has also returned to markets, has seen its five-yield yield fall to 3.8%.

Just two years ago things were looking rosy for the Nordic country. Iceland had exited its IMF programme ahead of schedule in August 2011 and returned to market with a USD1bn five-year bond with a skinny 5% coupon.

Even the Icesave saga, where the populace had rejected in two referenda plans to pay back EUR4bn to the UK and Dutch governments after they had stepped in to bail out depositors in failed lender Landsbanki, had been forgiven by the markets, with a deal agreed.

By 2012 the winding-up committees of the two other banks - Kaupthing and Glitnir - were also preparing to file for composition, the Icelandic equivalent of an insolvency agreement, that would allow any recoveries, estimated at EUR2.5bn or 28% of Iceland’s GDP, to start flowing to creditors.

The preceding government had already tightened the capital control rules in a last ditch effort to match Gunnlaugsson’s rhetoric. Now the finance minister as well as the central bank must approve any temporary requests to take money out of the country.

CREDITORS’ SOLUTION

Iceland, perhaps legitimately, fears that a mass exodus of foreign currency - and the Kaupthing and Glitnir recoveries could amount to EUR2.5bn or 28% of Iceland’s GDP - would hit the krona. But the creditors are proposing a solution.

“There is no other jurisdiction where the value of insolvency claims can be drastically cut by the government,” Barry Russell, partner at law firm Bingham McCutchen, told IFR. “There is no justification. Many of the creditors whose claims are at par have already lost 70% of their money.”

Gunnlaugsson and colleagues have frequently characterised all claimants as vultures, sucking blood out of the Nordic country’s economy. But this is a mischaracterisation. Research by Moelis found that only a handful of Glitnir claims traded at the low point of 5 cents in the dollar in late 2008.

The average purchase price was 14 cents, half the current 28 cents level. And many claimants are original par bondholders who bought at 100 cents. Factoring those in, means the average entry price was 47 cents, above the current traded level.

Russell is advising a group of bondholders and other creditors who make up the majority of claims. He and Matt Hinds, partner at Talbot Hughes McKillop, financial adviser to this group, are also frustrated at the lack of progress in negotiations with the Icelandic authorities.

“We have had very little direct engagement,” said Hinds. “Clearly a consensual solution is of benefit to both parties. It would help the Icelandic economy. Our core request is for the authorities to review our proposals, which we believe could help the government realise its programme.”

Retrieving money from Iceland was always going to be a problem after capital controls were imposed in late 2008 - a supposedly temporary measure to stop a slide in the value of the Icelandic krona.

For the krona assets due to them, which are mainly stakes in Iceland’s new domestic banks, they will put in equivalent capital, in hard currency. A swap facility will be set up to ease any fears about the krona collapsing and the bulk of assets will be returned over years as Iceland recovers.

So far Hinds and Russell have not been invited to discuss this compromise, either with the central bank or finance minister Bjarni Benediktsson. Hinds said: “We have had no feedback from the other side yet.”

Last week Benediktsson warned that if a deal could not be cut, then the old banks could simply be made bankrupt. Hinds and Russell both want the authorities to engage properly before embarking on such a drastic route. They argue a deal that helps lift capital controls will boost Iceland too.

“The investment community has been buying the debt of other credits around the periphery of Europe, such as Greek banks,” said Hinds. “Ultimately attracting foreign investment will be the only way for Iceland’s economy to recover.” (Reporting by Chris Spink, Editing by Gareth Gore)

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