Iceland rises from the ashes of banking collapse

Posted 09/10/2013 - 08:45 by anrigaut

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2013-10-05 23

Populist programme of new government includes a squeeze on foreign creditors as country emerges from years of instability

A new mood of proud nationalism is emerging in economically resurgent Iceland after an out-of-control banking system sank the country into financial meltdown exactly five years ago. Riding this wave of confidence is 38-year-old prime minister, Sigmundur Davíd Gunnlaugsson, elected in April on populist promises of mortgage relief for every homeowner.
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Gunnlaugsson's main pre-election pledges were to squeeze [these] foreign creditors – characterised as "hedge funds" or "vulture funds" – in order to bankroll a mortgage relief programme for all homeowners and a string of pro-business tax cuts.
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And Not all of the foreign creditors are the vulture funds Gunnlaugsson talks of. British and Dutch taxpayers still have significant exposure to the Landsbanki administration. As priority creditors they have had almost 55% of their claims repaid, though the remainder will take a good deal longer to be paid out. There are UK local authorities and charities, too, which entrusted more than £1bn with failed Icelandic banks and are still waiting to get much of their money back. Meanwhile, taxpayer-controlled Royal Bank of Scotland had been one of the largest investors in Icelandic bank bonds, a position that has left it a non-priority claimant, expecting only minimal returns in its claims.

Until recently RBS had remained on the banks' creditor lists but sold its positions to distressed debt specialists earlier this year — at a heavy loss — as the outlook for creditors began to look more uncertain in the face of Gunnlaugsson's rising fortunes.

The Icelandic prime minister has promised to give further details of his populist programme for tax cuts and home loan debt relief next month, and will be under pressure to show how he expects to fund such moves. It remains to be seen if he gains more from squeezing foreign creditors trapped within Iceland's capital controls than he loses in terms of the damage to Iceland's reputation among international investors.