No relief in sight for banks' creditors

Creditors of Iceland's failed banks are poised to lose about $US3.6 billion ($3.5 billion) no matter what party wins next month's parliamentary elections.

"Everyone realises that these kronur claims will be written down in one way or another," Bjarni Benediktsson, head of the Independence Party, the largest opposition group, said.

"The winding-up proceedings of the failed bank estates will be completed using a completely different, and much weaker, exchange rate than the official one."

Icelanders head to the polls on April 27, four years after the Social Democratic-led government ousted its pro-deregulation predecessor following protests about economic mismanagement.

The country's three biggest banks - Glitnir, Kaupthing Bank and Landsbanki Islands - defaulted on $US85 billion in debt in 2008, sending the $US13 billion economy into its worst recession in six decades and the krona into a free fall.

Most polls suggest the government of Prime Minister Johanna Sigurdardottir, who also backs write-downs on bank creditors' krona claims, will not be re-elected.

The banks' winding-up committees are lobbying to win exemption from Iceland's capital controls, in place since 2008, as they seek to complete composition agreements to repay at least 454 billion kronur ($3.6 billion) of krona assets trapped by the collapse. In total, $US8 billion has been tied up by the controls, Arion Banki estimates.

Central bank governor Mar Gudmundsson said in February that the krona assets will need to be written down to a "considerable degree" as the currency is under "considerable" pressure.

The krona has lost about 10 per cent against the euro since a peak in August, and 4 per cent against the US dollar in the same period. That has spurred inflation and left households worse off. More than 80 per cent of the nation's private debt is linked to consumer prices.

The public's interests will "take priority over" the creditors, Social Democratic Alliance leader Arni Pall Arnason said in an interview.

"We need to make sure we don't create a system of relentless outflow pressures, which could lead to a downward spiral of the exchange rate with a resulting negative impact on the domestic economy.

"The first task of a new government after April 27 will be to complete a comprehensive evaluation of the country's balance of payments, in light of the payments from the estates of the banks, and also taking into account other factors," Mr Arnason said. "That government will have to seek a broad political agreement on how to proceed. It's best to leave an issue like this until after an election."

Iceland has been praised for its handling of the crisis, in part because it put households' wellbeing before honouring bank creditors' claims. Iceland had delivered a "surprisingly" strong recovery, the International Monetary Fund said. It emerged from an IMF-backed program in August 2011 and is outgrowing most of Europe, which remains mired in a recession. Its economy expanded by 2.6 per cent last year and will rise by 2.3 per cent this year, the IMF estimates.

Iceland has passed a series of milestones on its path to economic resurrection. It won a court battle against Britain and the Netherlands in January, freeing it from as much as $US2.6 billion in damages for not honouring depositors' claims stemming from Landsbanki, prompting ratings agencies to raise their outlook ratings.

Steinunn Gudbjartsdottir, head of Glitnir's winding-up committee, said the bank has, together with Kaupthing, formed a taskforce to deal with the potential fallout of forced writedowns.