Icelandic bank says it cannot meet £1.5bn debt repayment schedule

New Landsbanki, said it will go bust if forced to stick to a steep repayment schedule, in euros, from the start of next year

New Landsbanki, the state-owned Icelandic bank forged in the midst of the 2008 Icesave scandal, has asked for more time to repay a £1.5bn bond that is threatening to destabilise Iceland's recovering economy.

At a meetingon Friday in London with creditors to the old bank, which include the British and Netherlands governments, Icelandic negotiators are understood to have said New Landsbanki will go bust if it is forced to stick to a steep repayment schedule, in euros, from the start of next year.

Moreover, the Central Bank of Iceland has said publicly the country cannot support the schedule. "The repayment profile ... is too heavy for the economy. The bonds will have to be extended or refinanced," it said.

New Landsbanki was formed five years ago by taking the Icelandic assets of the failed bank out of the administration process, in return issuing the bonds that are soon due to be repaid.

New Landsbanki is a solvent bank servicing Icelandic customers.

The highly charged meeting is thought to be the first time British and Dutch officials involved in the poisonous Icesave dispute have sat across the table from Icelandic government representatives since a European court ruled in January that Iceland was under no legal obligation to honour deposit guarantees promised to foreign Icesave savers.

The Efta court, which ensures compliance with EU law in Iceland, Norway and Liechtenstein, also ruled that politicians in Reykjavik had not been discriminatory when they enacted emergency laws safeguarding domestic deposits transferred to New Landsbanki but not those of overseas Icesave savers.

One Icelandic source with knowledge of Friday's meeting said: "It is an extremely, extremely sensitive situation." Ahead of the meeting, another well-placed source said: "I don't expect the Icelanders will get a very warm reception."

Concerns have been growing that Iceland might, yet again, turn on foreign creditors of its failed banks – not least because of the aggressive election rhetoric of Sigmundur David Gunnlaugsson, leader of the nationalist Progressive party, who swept to power in April at the helm of a centre-right coalition.

He wants to introduce pro-business tax cuts and offer debt relief to all Icelandic households. He has hinted that he could extract the money to fund these moves from foreign creditors in exchange for agreeing to exempt them from Iceland's increasingly tight capital controls. "We have a unique opportunity to be compensated for the loss incurred in recent years," he said on a blogpost in April. "That opportunity must not be lost!"

Gunnlaugsson's popularity owes much to his links with the InDefence grassroots campaign which blocked previous attempts to reach a settlement of the Icesave dispute, defeating proposals in national plebiscites, forcing the matter to the Efta court.

The decision of the court in January was a vindication of his position and a humiliating blow for the previous government which, under pressure from the EU, had sought to reach a settlement and avoid a courtroom confrontation, fearing it could destroy Iceland's international standing.

As priority claimants to the old Landsbanki estate, British and Dutch authorities, together with many UK local authorities and charities, have received 55% of their original claim, and administrators hope to make a full recovery for them. However, they have been told outstanding recoveries will take years to come through.

Moreover, if, as expected, capital controls remain in existence, payouts to creditors will effectively have to be signed off by the Icelandic government. "I expect these estates to be hanging over us for at least five to ten years," said one well-placed source.

January's court ruling effectively ended a four and a half year diplomatic and legal row over whether the Icelandic state could, or should, be compelled to stand behind the Icesave deposit guarantees.

The foreign governments and their deposit guarantee schemes had reluctantly become the largest creditors to the old Landsbanki, now known as LBI, in October 2008 after finance ministers for both the UK and the Netherlands directed that hundreds of thousands of retail savers with Icesave should be refunded in full using taxpayer funds.

So outraged was the then British chancellor, Alistair Darling, at what he saw as an illegal act, that he had used anti-terrorism powers to freeze the UK assets of Landsbanki for more than six months.

Prior to the crash, British and Dutch depositors had rushed to put their money in Icesave online accounts in 2007 and 2008, attracted by market-leading interest rates. On the Icesave website, UK savers had been told: "You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the UK."

Behind the scenes UK financial regulators had been pressing old Landsbanki to convert its branch operation in the UK, which had taken £4.3bn in Icesave deposits, into a full subsidiary business supervised by the Financial Service Authority.


Simon Bowers

The GuardianTramp

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