Hedge Funds Face Exit Tax as Iceland Central Bank Mulls Plan

By Omar R. Valdimarsson

Photographer: Price Chambers/Bloomberg

Mar Gudmundsson, governor of the Central Bank of Iceland, said the island, which faces... Read More

Hedge funds and other creditors with claims against Iceland’s failed banks face an exit tax as the island looks for ways to unwind capital controls without hurting the economy.
The government targets having a plan it can present by year-end that would map out how Iceland will scale back currency controls currently blocking about $6.6 billion from exiting the island. The framework will build on analysis conducted by the central bank and external advisers, including JPMorgan Chase & Co. (JPM)
“Some sort of exit tax in some form will be some part of the removal of capital controls,” central bank Governor Mar Gudmundsson said yesterday in an interview in
Reykjavik. “How large, and what role or what percentage, is not timely to discuss.”
Newspaper Morgunbladid, whose editor-in-chief is Gudmundsson’s predecessor, David Oddsson, reported this week that a tax for investors trying to leave Iceland may be set at 35 percent. It didn’t say how it got the information and Gudmundsson declined to confirm the figure.
An exit tax at that level would be fought by the administrators of the failed banks, according to Johannes Runar Johannsson, a member of Kaupthing Bank hf’s winding-up committee.

Bank Objections

“That’s clearly something that we would object to,” Johannsson said yesterday in an interview. “There’s a thin line between justifiable taxation and expropriation of assets. I think a 35 percent exit tax is much closer to an expropriation of assets than a lawful taxation.”
Creditors that have bought claims against Iceland’s failed banks include hedge funds Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP. The winding-up committees that represent investors have urged the government to let them sidestep the currency controls to end the payment dispute.
“We have not yet received a substantive response from the authorities,” Johannsson said. “We expect that they will approach us in the near term.”
Since Iceland’s three biggest banks defaulted on $85 billion in 2008, the island has struggled to resurrect its $15 billion economy. Though its recovery program initially involved leaving bank bondholders in the lurch, the island is now prodding the estates of its failed lenders to settle creditor claims without disrupting its balance of payments.

Winning Praise

Iceland’s approach has won praise from economists including Nobel Laureate Paul Krugman and organizations such as the International Monetary Fund. Removing the controls would mark a final milestone in efforts to rebuild Iceland’s economy.
The cost of insuring against an Icelandic default has plunged from a high of 1,473 basis points at the height of the financial crisis in October 2008 to 149 basis points this week, using five-year credit-default swaps. That’s about on par with the government of Italy, according to data compiled by Bloomberg.
Gudmundsson said the island, which faces a potential capital outflow equivalent to about 40 percent of its gross domestic product once currency controls are lifted, can’t be forced into committing to deadlines for the process to start.
“The sooner the better, but we can’t hurry so much that it hurts the quality of the work,” he said. “So it will come when it comes.”