The creditors of the defaulted Icelandic banks had large claims on the banks and are entitled to all the assets of the banks. Many of the claims have been bought by hedge funds around the world, at a discount, because it was not certain how much these assets were worth, or what the recovery rate of banks would be.
There are strict capital controls in place in Iceland and the claim holders cannot easily get their money out of the economy. The Central Bank of Iceland has allowed the claim holders to exchange some of their money from ISK to a foreign currency, by using foreign currency auctions. But the exchange rate that the claim holders receive is considerably worse than the exchange rate on the registered "market". Worse in the sense that they get less foreign currency for their ISK than they would otherwise get.
Mr. Benediktsson says that by using these foreign currency auctions the Central Bank of Iceland is in effect writing off part of the claims. He also said that this method should be used to a much larger extent, and he was not happy about that the claims were bought by hedge funds only so they could profit from it.
"We have to look at these assets and say that we see that the portfolio cannot simply leave the country and go to the creditors using the official registered exchange rate. We should use a totally different exchange rate, much lower exchange rate, which is equivalent to writing off a large part of the claims. It does not work for Icelanders that, only because these parties have acquired large claims on the defaulted banks, we should prolong the capital controls. In the grasp of some controls, both households and the whole industry." said Bjarni Benediktsson.
The Independence Party has the biggest support in Iceland, around 35-40% support according to recent polls. The party will likely form the next government, but parliamentary elections will be held on April 27th 2013, or in about two months.
Dr. Jon Steinsson, an Icelandic accociate professor of economics at Columbia University, wrote a short blog about these statements from the chairman. Dr. Steinsson said for example: "What is the difference between buying claims on the fallen banks for profit, and investing in an aluminium factory for profit?"
Dr. Steinsson added: "Is this the kind of society we want to create in Iceland? A society where Bjarni Benediktsson decides what capitalists are good and should be protected, and what capitalsts are bad and should be 'written off' ? You cannot say in one sentance 'Iceland is a constitutional country'. And then say in the next one 'These claims should largely be written off'. "
Loosely translated by News of Iceland