Overseas creditors might have to accept losses

kronurForeign bondholders hoping to recoup their full investments in Iceland’s three collapsed banks will be eyeing the new government nervously. Anti-austerity election pledges have threatened to force accepted losses on them.

Landsbanki Íslands, Glitnir and Kaupþing owe foreign investors billions after their collapse in 2008 with default on their $85 billion debt. But the incoming government might opt to write down that debt.

Creditors such as the Royal Bank of Scotland, Deutsche Bank, Goldman Sachs, and up to 100 others, including hedge fund owners, are the target of the Independence Party’s Chairman, Bjarni Benediktsson, who said during a March interview that they plan to ‘write down the króna claims of creditors of the failed banks, which everybody knows have to be written off.’

Fortunately the Icelandic tax payer has not so far been burdened with the debt, since the government at the time, lead by a coalition likely to form the next government, refused to bail the banks out. Their books have accumulated liabilities 10 times the size of the nation’s GDP. However, capital controls and IMF measures have resulted in a harsh austerity environment that has seen the Króna plummet 40%, making imports expensive for every day Icelanders.

Both the Progressive Party and Independence Party ran on anti-austerity platforms, promising lower taxes and home mortgage relief, funded in part by forcing overseas creditors to accept losses on the $3.8 billion in krona-denominated assets they’re owed by the three banks.

The decision not the bail out the banks was praised by economists, and the IMF bailout is a thing of the past, inflation has been kept in check and the country posted 2.1 per cent growth in 2012. It cost the coalition their jobs in government but ironically they have now been swept back to power after the opposition took power and cleaned up the mess.

But the move is not without risk to Iceland’s international banking reputation, as  Lars Christensen, of Danske Bank, points out, “Iceland will be locking itself out of the international debt markets and reducing the country’s chances of raising investments.”

Whilst the government at the time pledged to pay back creditors, such as the millions of Brits who deposited their money in the high interest IceSave scheme, it hasn’t said when or how.