June 4, 2013 / 12:10 PM / 6 years ago

Iceland debt write off possible this year - PM

KIRKENES, Norway (Reuters) - Iceland could reach a deal with foreign creditors on a debt write-off before the end of the year and will use the money gained to reduce household debt, its new prime minister Sigmundur Gunnlaugsson said.

Sigmundur Gunnlaugsson, leader of Iceland's centre-right Progressive party, listens to the media in Reykjavik May 22, 2013. REUTERS/Sigtryggur Johannsson

Creditors appear open to a deal based on early talks but the government is also preparing a plan B, which would involve setting up a temporary fund to pay for household debt relief and then recouping the costs once a deal is done, he said.

At issue is $3.8 billion (2.4 billion pounds) worth of Icelandic crown assets held in banks that failed in 2008, triggering the country’s spectacular economic collapse and forcing the government to impose capital controls to save the currency.

“Hopefully we’ll see something this year,” Gunnlaugsson, who took office less than two weeks ago, told Reuters in Norway while attending his first major international summit.

“Creditors appear willing to actively seek a solution ... It’s in everyone’s interest.”

Gunnlaugsson said the government would stay out of the talks with creditors but will not accept a deal unless the write-off is large enough to support the lifting of capital controls, which are crippling the country’s economy.

Iceland became a European financial hub in the first decade of the century but its banks grew unchecked and amassed assets worth more than 10 times the nation’s GDP.

When the global financial crisis brought down its three big banks - Landsbanki, Kaupthing and Glitnir - in a matter of days, controls were imposed that left foreigners unable to get their money out of the country.

Crowns held by foreigners in the failed banks are equivalent in value to Iceland’s entire foreign currency reserves.

“If we are to lift capital controls ... it would be impossible to let all of these assets leave. So solving this is a precondition to lifting controls,” Gunnlaugsson said.

He declined to say what would be an appropriate write-down but pointed to comments by the central bank that at least 75 percent would be needed. New finance minister Bjarni Benediktsson has also said such a figure “sounded about right”.

PLAN B

Most of the original creditors have already sold their claims to hedge funds such as Burlington Loan Management Limited and CCP Credit Acquisition. Gunnlaugsson argues that all of them bought into Iceland knowing that a write-off would be necessary.

If no deal is reached this year, the government will still help households, whose debts keep on growing because of inflation-indexed mortgages, despite several rounds of debt relief over the past five years.

“An alternative could be, for example, the establishment of a fund that would be used temporarily, in some ways along with the lines with what they did in the U.S. with TARP,” Gunnlaugsson said.

TARP or the Troubled Asset Relief Program, was set up in 2008 to purchase distressed assets from banks in the United States to relieve their balance sheets.

Although the write-off may be a necessary step to lifting capital controls, it is not the only one. Several big corporations, such as Reykjavik Energy, have huge outstanding foreign debt, which still have to be fully tackled.

Gunnlaugsson would not be drawn on when capital controls could be lifted, saying it “shouldn’t take too long... but can’t be done until we have assurances the economy would survive”.

The prime minister, who opposes Iceland joining the European Union, said the country should still meet the euro zone’s Maastricht criteria, not because it was a pre-condition for eventual membership but because they were sensible criteria.

“They involve more or less all of the things we need to tackle, such as inflation, government debt, and balancing the budget. It’s a sensible thing to do, regardless if you want to join the EU,” he said.

Editing by Catherine Evans

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