May 22, 2014 / 4:11 PM / 3 years ago

INTERVIEW-Iceland central bank won't risk financial stability with quick fix on collapsed banks

STOCKHOLM, May 22 (Reuters) - Iceland's central bank will not be rushed into approving a deal between creditors of failed lender Landsbanki and state-owned Landsbankinn which is seen as a key step to removing capital controls, Governor Mar Gudmundsson said on Thursday.

Iceland's three major banks collapsed in 2008 and, more than five years' later, outstanding creditors' claims still total 7,530 billion Iceland krona ($66.8 billion), dwarfing Iceland's 2013 GDP of 1,786 billion krona ($15.85 billion).

Capital controls are hampering foreign investment but can't be removed until the three collapsed banks - Landsbanki, Kaupthing and Glitnir - can be wound up.

A deal to extend the maturity of 226 billion krona of bonds issued by Landsbankinn to failed Landsbanki could be the first step in a solution, but it depends on Iceland agreeing to allow Landsbanki creditors to repatriate some assets.

"We always said it (a lengthening of the maturity) was part of a solution, part of the things that would help us to lift capital controls," Sedlabanki Governor Mar Gudmundsson told Reuters in an interview on Thursday.

But he said the central bank needed to assess whether the lengthening of the bonds' maturity was sufficient and look at other terms.

"We might say yes, we might say a qualified yes, we might say no," he said. "That depends on how we see this as a part of an overall solution to the unwinding of the old banks and we need to see a solution to more than Landsbanki there," he said.

The central bank and the Ministry of Finance have to give the green light to exemptions from currency controls, but Gudmundsson said the decision would not be rushed.

"There is a deadline on their part, but ... we will not take any decision that will put financial stability and balance of payments equilibrium in Iceland at risk," he said.

Landsbankinn did not make the deadline public, but said it expected documentation to be finalised in the next few weeks.

"If we need more time then we will take more time," Gudmundsson said.

The deal between the winding-up board of Landsbanki and creditors of the old bank would extend the maturity of the bonds to 2026.

NO END IN SIGHT

Lengthening the Landsbanki bonds was a key step in removing capital controls because it would relieve some potential pressure on the Icelandic currency in the next few years.

But Iceland also has to find a solution for freeing up around 327 billion krona in liquid assets held by foreign investors and the estates of failed lenders Glitnir and Kaupthing, before capital controls can be lifted.

Winding up the estates of the old banks would lead to foreign investors holding krona worth around 50 percent of GDP at current values, the central bank estimates, swamping Iceland's foreign currency reserves of around 488 billion crowns.

"I think that the creditors realize they will not be able to realize the full value of everything in these old banks as it is booked now because some of the stuff is very significantly overvalued in the books," Gudmundsson said.

Given the problems associated with removing capital controls, Gudmundsson would not give a time frame for achieving the goal.

"It could happen quickly if everything falls into place. It could take much longer," he said.

"But we will not compromise on the principle of financial stability and economic stability in Iceland just in order to gain speed." ($1 = 112.8450 Iceland kronas) (Editing by Susan Fenton)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below