Iceland's government signaled this week that it is closing in on
a plan that would unfreeze the assets of three failed banks for
creditors owed tens of billions of dollars.
At a meeting Tuesday, a government lawyer told some creditors
that Iceland would propose a plan early next year to restructure
the debt of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki,
according to people familiar with the talks. The banks, formerly
the country's three largest, collapsed in 2008 after their
debt-fueled overseas expansion fell apart amid the global financial
crisis.
Strict capital controls put in place during the crisis restrict
assets from leaving the tiny island country. Those controls, which
keep collateral out of the reach of creditors not based in Iceland,
have stalled the restructuring process as creditors have sought
access to assets. The creditors have proposed a repayment plan to
Iceland's central bank that would give them some of the proceeds
from the bank's asset sales, a note guaranteeing a portion of
future asset-sale proceeds and an equity stake in the failed banks
that would give them some measure of control over the future sale
of assets, one of the people said.
Hedge-fund firms Davidson Kempner Capital Management, Halcyon
Asset Management LLC and Centerbridge Partners LP are among the
banks' creditors, according to people familiar with the matter.
Many of the creditors bought up the debt at a discount after the
banks failed.
Tuesday's meeting suggests the government may be willing to
relax those controls, which would allow the non-Icelandic creditors
to be paid. Advisers for the creditors were given the opportunity
to offer input on what they'd like to see in the restructuring
plan, people with knowledge of the meeting said.
It isn't clear what shape the restructuring plan will take or if
the government will heed the creditors' suggestions.
The process has so far been fraught with political and economic
complications. Icelandic authorities fear that allowing the
creditors to take the banks' assets out of the country could lead
to a rapid weakening of the krona.
Government leaders have also balked at capitulating to the
distressed-debt investors that own much of the bank debt, a
situation not unlike what happened in Argentina. The South American
country has for years battled with hedge funds that hold its
sovereign bonds over the country's 2001 default.
The Iceland situation is the legacy of the turmoil that gripped
Iceland as the global financial crisis was just heating up. All
three of Iceland's big banks collapsed in the space of days in
October 2008, devastating the economy and forcing it to seek a
rescue from the International Monetary Fund. The meltdown triggered
a change of government and a spike in unemployment in the country,
which has a population of just 320,000.
The government took control of Kaupthing, Glitnir and Landsbanki
when it became clear that the banks could no longer meet their
obligations. Rather than bailing out the banks, officials put them
into "winding up" proceedings, in which administrative boards were
charged with disposing of their assets in the most cost-efficient
manner.
Some have expressed concern that allowing creditors to take the
krona-denominated assets would upset the balance of payments in the
country, fueling runaway inflation.
A recent report from Iceland's central bank said a settlement of
the estates allowing the assets to leave the country would
negatively impact Iceland's balance of payments by 510 billion
Icelandic kronur ($4.1 billion), or 26% of the country's gross
domestic product.
The authorities took a step toward loosening the capital
controls last week by exempting some priority claims on the
Landsbanki estate from the restrictions.
That decision allowed foreign-denominated liquid funds worth 400
billion Icelandic kronur ($3.2 billion) to go to priority
creditors, including the U.K. government. The U.K. is out of pocket
after reimbursing British savers who put money in Landsbanki's
Icesave online savings accounts.
Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com and Charles
Duxbury at charles.duxbury@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires