Iceland’s new Economy Minister Arni Pall Arnason wants to make clear to the U.K. and Netherlands his government won’t negotiate a depositor claims settlement at any price and may resort to the courts in pursuit of better terms.
Arnason, 44, formerly the country’s social affairs minister who took over the economy portfolio after Gylfi Magnusson was dismissed in a Sept. 2 cabinet reshuffle, said the dispute over $5.1 billion Iceland owes the U.K. and Dutch in depositor claims may need to be resolved through the European Free Trade Association’s court in Luxembourg.
Iceland’s failure to settle the feud almost two years after the collapse of Landsbanki Islands hf left foreign depositors in the lurch has soured the island’s international relations. The central bank has been protecting the krona against a selloff through capital controls since Iceland’s 2008 banking meltdown. The island’s debt was cut to “junk” at Fitch Ratings in January and Moody’s Investors Service has warned it will follow suit if the claims dispute isn’t resolved.
“We want to find a negotiated solution, but we aren’t willing to negotiate at any price,” Arnason said in an interview in Reykjavik. “The other avenue is of course possible, which is that the complaint lodged by the EFTA Surveillance Authority goes through and these issues go through the formal legal channels and end up in court.”
The EFTA Surveillance Authority, which ensures that Iceland, Norway and Liechtenstein act in line with European rules, sent a letter to the island in May calling on the government to guarantee minimum compensation for Dutch and British depositors at Icesave, a unit of Landsbanki, after its October 2008 failure.
Delegations from Iceland, the U.K. and the Netherlands met in The Hague earlier this month in their latest attempt to reach an accord on how Iceland should repay its debt. So far, the parties have been unable to strike a deal on the interest rate to be paid.
Those talks were “useful,” though the three countries failed to reach any agreement or even to set a date for when negotiations can continue, the Finance Ministry said on Sept. 3.
“It’s a bilateral dispute which we are in the process of solving, either through negotiations or other means,” Arnason said. “And it will be solved. Iceland is going to participate in the wider world.”
The U.K. Treasury said in an e-mailed statement that “dialogue is continuing between the U.K., Dutch and Icelandic authorities. The U.K. and Dutch governments have consistently engaged with the Icelandic government and offered generous repayment terms to support Iceland’s economic recovery and minimize the burden on Icelandic taxpayers.”
Investors trading derivatives on the island’s debt are signaling they’re less confident now about Iceland’s ability to repay its obligations than they were a month ago. Credit default swaps on five-year debt traded at 309 basis points yesterday, compared with 285 basis points at the beginning of August, according to data available on Bloomberg.
Still, buying insurance against an Icelandic default is cheaper than it was at the beginning of the year, when CDS on five-year debt traded at 412 basis points.
“We will of course have to take on the risks of a court case, if we decide to go that route,” Arnason said. “There’s still a window of opportunity open to negotiate a settlement.”
Moody’s in July said continued failure to resolve the Icesave dispute may prompt the International Monetary Fund and other lenders to withhold future disbursements. Iceland has been relying on a $4.6 billion IMF-led loan since 2008 to stay afloat. The fund said on July 23 it was aiming to conduct its third review of Iceland’s loan in early September. Arnason said a date for that review has yet to be set.
“We are in a difficult situation,” he said. Still, the government “can be relatively content with the progress made.”
The island’s banking industry may be facing a second wave of failures following a June 16 Supreme Court ruling making lenders liable for currency losses on loans indexed to foreign exchange rates. Finance Minister Steingrimur Sigfusson said on July 7 the ruling may cost Iceland’s banks, state-created offshoots of their failed predecessors, as much as $4.3 billion, or about a third of Iceland’s total economic output in 2009.
The District Court of Reykjavik subsequently ruled in a case relating to a retail car loan that banks can charge higher interest rates, or rates set by the central bank instead of the borrowing costs that applied to the original loans indexed to foreign currency such as Swiss franc or Japanese yen. That decision has been appealed to the Supreme Court.
“The rule of law requires that we respect the outcome of the Supreme Court,” Arnason said. “Legislation therefore, has to be based on that ruling and has to, to the extent necessary, encompass the requirement that creates a level playing field.”
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