Not to worry: global warming will shrink it anyway

Iceland Loan Ruling Is Likely to Derail Bank Recovery, Fitch Ratings Says

Iceland’s financial crisis was exacerbated by banks that borrowed in currencies such as Japanese yen and Swiss francs to take advantage of lower interest rates, then repackaged them as kronur loans for clients. The krona has lost 39 percent against the yen and 30 percent against the franc since Sept. 15, 2008.

Iceland, the fifth- richest nation per capita as recently as 2007, faces litigation from creditors in the island’s banks, who sought to limit their losses last year by becoming shareholders

Iceland’s efforts to restore financial stability and scale back capital controls are at risk after a ruling last month made banks liable for foreign currency losses on some retail and corporate loans, Fitch Ratings said.

The June 16 decision by Iceland’s Supreme Court, which banned loans indexed to foreign exchange rates, may cost lenders as much as $4.3 billion, equivalent to one third of Iceland’s 2009 economic production, Finance Minister Steingrimur Sigfusson said earlier this month.

The ruling may force some banks to close as losses push capital adequacy ratios below the regulator’s 16 percent minimum requirement, said Financial Supervisory Authority Director Gunnar Andersen, in a July 9 interview.

The government, which is relying on a $4.6 billion IMF-led loan, says a second bank bailout would be a “severe blow” to its finances. Creditors, including Royal Bank of Scotland Group Plc and Credit Agricole Vita SpA, became shareholders in the banks after a state takeover in 2008.

“Banking crises are invariably protracted affairs that have the potential to inflict extensive damage on the sovereign’s balance sheet,” Fitch Senior Director Paul Rawkins said. “Iceland is proving no different from previous sovereign crises in this respect.”

Cold comfort?