Bloomberg News

Iceland Court Backs Emergency Bank Bill Blocking Bond Claims

October 28, 2011

Oct. 28 (Bloomberg) -- Iceland’s Supreme Court ruled in favor of emergency legislation passed in 2008 that gave depositors priority status over other creditors and protected banks from bondholder claims.

The decision by the Reykjavik-based court was based on eleven cases brought by claimants, according to the text of today’s rulings.

Iceland’s banks defaulted on $85 billion in debt when they failed at the end of 2008, as the government ring-fenced its financial industry in an effort to avert an economic collapse. The domestic assets of Landsbanki Islands hf, Kaupthing Bank hf and Glitnir Bank hf were taken over by the state, which has since created local banks from the failed lenders. Bondholders are still trying to recoup their funds.

The government’s decision at the time helped spur Iceland’s recovery, according to Nobel Laureate Paul Krugman, who has contrasted the island’s rebound with the fate of euro member Ireland.

Iceland, which completed a 33-month International Monetary Fund program in August, will see its $12 billion economy grow at more than double the pace of the euro-area average next year, the IMF said in September. Iceland returned to international bond markets in June as investors sought twice the $1 billion the government offered. It costs 40 percent less to insure against an Icelandic default than a credit event on debt from Italy, the third-largest economy in the euro area.

The October 2008 emergency bill covered all deposits in the north Atlantic island’s domestic banks, amounting to 2.3 trillion kronur ($20.4 billion).

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik

To contact the editor responsible for this story: Tasneem Brogger at

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