Iceland may shelve plans to sell its first Eurobonds since 2006 after President Olafur R Grimsson refused to sign a $5-billion depositor debt accord with the UK and Netherlands, Finance Minister Steingrimur Sigfusson said.
“We’ll obviously have to stop and evaluate the position and see what the next days and weeks -- five, six weeks -- will bring us,” Sigfusson said in an interview in Reykjavik yesterday. “It’s clear that this means that we’re not completing the matter in the next few days and that we’ll have to re-evaluate many of the things we had been preparing.”
Iceland had hoped to tap international bond markets this year as 713 million euros ($975 million) in bonds comes due, Sigfusson said last month. The island’s efforts to repair international investor relations after its 2008 banking collapse helped push its credit default swaps lower than those on Spanish debt this month. The cost of insuring against an Icelandic default may now rise after Grimsson said his country’s voters must have the final say on repaying British and Dutch depositor losses stemming from the 2008 failure of Landsbanki Islands hf.
“The uncertainty that follows the decision could mean that investors will demand higher premiums against covering for an Icelandic default,” said Valdimar Armann, an economist at Reykjavik-based asset manager GAMMA.
Yesterday’s announcement marks the second time Grimsson has rejected an agreement designed to compensate the UK and Netherlands. His January 5, 2010, refusal to sign a prior depositor accord prompted Fitch Ratings to cut Iceland’s credit grade to junk. Moody’s Investors Service and Standard & Poor’s give Iceland’s debt the lowest investment grade.
Referendum timing
A referendum on the depositor bill will be held as soon as possible, Prime Minister Johanna Sigurdardottir told reporters yesterday. A previous accord was rejected by 93 per cent of voters in March last year.
According to a January poll, 56.4 per cent of voters backed the December depositor agreement, which would cost the state less than a third of the earlier deal, Frettabladid reported on January 25. Still, Grimsson said he couldn’t sign the latest accord after receiving a petition with more than 42,000 signatures asking him not to. It is unclear whether the British and Dutch will be willing to resume talks should the bill be voted down in a referendum, Sigfusson told reporters yesterday.
Costs
The latest accord, which was agreed between the governments of Iceland, the UK and Netherlands in December and passed by more than two thirds of the Reykjavik-based parliament last week, will cost Iceland’s government 47 billion kronur ($403 million), compared with the 162 billion kronur the state was facing under the previous accord, according to the negotiating committee representing Iceland at the Icesave talks, named after the high-yielding internet accounts offered by Landsbanki. The rest will be covered by the proceeds from divesting Landsbanki assets. The British and Dutch governments bore the initial cost of backing the claims.
Grimsson’s decision also comes as the central bank is preparing to remove capital controls that have shielded the krona since the end of 2008. Sigfusson declined to comment on what impact the setback of an Icesave accord may have on plans to scale back currency restrictions. “We need time to consider and evaluate that,” he said. “The relevant parties have to get an opportunity to do so. It’s obvious that this has an impact on the situation that the country is in.” Capital controls, put in place after the krona lost as much as 80 per cent against the euro offshore after the October 2008 collapse of Iceland’s biggest banks, are preventing about $3.6 billion in krona assets from leaving the country, the central bank estimates.
