Iceland in move to restructure foreign-held debt

Iceland in move to restructure foreign-held debt

By David Ibison in Reykjavik

Published: February 27 2009 02:00 | Last updated: February 27 2009 02:00

Iceland's new government is working on a plan to restructure billions of dollars of its bonds held by foreign investors as part of a drive to restore confidence in its shattered economy.

Foreign investors own up to ISK400bn ($3.6bn, €2.8bn, £2.5bn) in krona-denominated bonds, which the central bank fears could be dumped once capital controls imposed during its banking crisis are removed.

The Icelandic central bank has warned a huge outflow of currency would seriously destabilise the krona and these fears are one of the main reasons the capital controls are still in place.

The new government is considering asking Icelandic owners of foreign assets, such as the nation's pension funds, to swap their overseas assets for the Icelandic assets held by the foreign investors, according to Steingrimur Sigfusson, finance minister.

Mr Sigfusson said the government was also considering offering foreign investors the chance to swap their existing bonds for longer maturity instruments, thus eliminating the chance of a sudden withdrawal.

"Swapping assets will not solve the whole problem as there are not enough Icelandic foreign assets to match the ISK400bn, but other foreign investors might be interested in taking advantage of high interest rates over a longer time and decide to stay," he said.

The plan is significant because it gives international investors an exit, having had their investments frozen since trading in the krona was halted last year.

If adopted, the plan could clear the way for capital controls to be removed, a potent symbol of Iceland's return to normality, and then make it easier for interest rates to come down from the current 18 per cent as the currency will no longer need such overt support.

"This is one of our high priorities. We realise that not dealing with it will hinder lowering interest rates and lifting capital controls," said Mr Sigfusson.

The new left-leaning government, comprising the Social Democrat Alliance party and the Left Green party, was formed this month after the previous administration led by the rightwing Independence party collapsed amid public protests at its handling of the banking crisis last year.

Iceland's gross domestic product is forecast to contract 10 per cent this year. The country was forced to accept a $10bn (€7.8bn, £7bn) bail-out led by the International Monetary Fund.

IMF representatives arrive in Reykjavik today to discuss the progress of a plan it devised with the last government to reform the economy and banking system.

Copyright The Financial Times Limited 2009

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