Iceland Backs Off Icesave Repayment

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Finance Minister Steingrimur Sigfusson said in an interview today there is no indication the government will collapse.

Standard & Poor's on Dec. 31 raised its outlook on Iceland's BBB- rating to stable from negative and said parliament's ratification of the depositor bill is a step "that will contribute significantly to securing crucial external financing throughout 2010." Moody's rates Iceland's debt Baa3, one level above junk.

The presidential veto interrupts a series of settlements needed to rebuild the economy, which was the worst hit in the western world after the credit crisis.

Bill History

The Social Democrat, Left Green coalition of Sigurdardottir, which has been working for the past year to resurrect the island's financial system, said last month it completed a bank recapitalization plan after creditors accepted settlements. Iceland's three biggest lenders collapsed in October 2008, leaving about $80 billion in outstanding claims.

Lawmakers on Dec. 31 voted 33 to 30 to allow the government to provide a state guarantee for the U.K. and Dutch loans to cover the Icesave depositor claims.

Thousands of British and Dutch depositors risked losing their savings when Landsbanki collapsed along with the rest of Iceland's over-leveraged banking system in October 2008. By passing the bill, lawmakers hoped to pave the way for unlocking further disbursements from a $4.6 billion bailout from the International Monetary Fund and Nordic countries.

Earlier Accord

The bill would have allowed Iceland's government to guarantee repayments of as much as 2.35 billion pounds ($3.8 billion) borrowed from the U.K. and 1.2 billion euros ($1.7 billion) borrowed from the Netherlands to repay Icesave depositors.

A tentative agreement on repaying the depositor claims and a state guarantee attached to them was reached on June 6. The agreement had to be ratified by Iceland's parliament, which attached conditions to the state guarantee.

Parliament's conditions linked repayments to economic growth, preserved the island's right to legally challenge its payment obligation, and called for a full suspension in repayments in 2024. Some of the conditions were rejected by the U.K. and Netherlands, sending the three nations back to the negotiating table.

The bill that Grimsson rejected today allowed for some of parliament's original conditions, such as linking payments to economic growth. It also established a mechanism on how to settle any outstanding claims in 2024, for which Iceland bears full responsibility. The Netherlands and U.K. allowed Iceland the right to challenge the agreement, according to a joint statement from the three countries published on Oct. 19.

The failure of Landsbanki, Glitnir Bank hf and Kaupthing Bank hf led to the collapse of the currency and forced Iceland to go to the International Monetary Fund to get a $2.1 billion loan, with a further $2.5 billion pledged by Nordic nations.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net

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