UPDATE 1-Iceland gets initial EFTA backing in U.S. funds feud

By Marc Jones and Daniel Dickson

The European Free Trade Association (EFTA) has given initial backing to Iceland’s government in a stand off with two U.S. funds over bonds Reykjavik froze as it moved towards lifting the country’s eight-year-old capital controls.

EFTA was responding to complaints by U.S. funds Eaton Vance and Autonomy that Iceland had discriminated against foreign funds when it locked bonds in ring-fenced accounts. The funds said the country’s actions were not “reasonable and proportionate”.

“Having taken account of the information on the facts of this case and the applicable EEA (European Economic Area) law, the Directorate cannot conclude that the Icelandic Government has erred in its application of Article 43 EEA,” the EFTA surveillance authority said in a document dated August 23 but only just made public.

“The Directorate intends to propose that the Authority close the case. The Authority may, however, revert to the matter should any relevant developments occur in EEA or EU law.”

If confirmed in a final ruling, it would represent a major setback for the funds who are hoping to get a better deal from Iceland than one offered earlier in the year that would have meant them taking losses of around 30 percent on their bonds.

Eaton Vance and Autonomy both declined to comment on the EFTA stance, but the fight is expected to continue after lawyers for the firms sent a 21 page list of follow up complaints to Brussels-based EFTA on Sept. 23.

Two other U.S.-based funds Loomis Sayles and Discovery Capital Management also own quarantined bonds, which combined between all the parties are worth $1.4 billion — equivalent to roughly 10 percent of the 330,000-people nation’s annual GDP.

An attempt by the Autonomy Capital to take the case through the Icelandic court system is also still ongoing and the funds say Reykjavik has refused numerous attempts to discuss the issue.

On its part, the government says it would be too risky to unfreeze the bonds at such a delicate stage of the capital controls removal process as there could be a destabilizing rush of money out the country.

It also says it is confident in its position but it is offering some hope to the funds. Ministers and the central bank have said the issue will be revisited early next year once restrictions have been lifted on local residents and companies.

Iceland’s foreign minister told Reuters last week that the next government will have to prioritize resolving the feud with the U.S. funds once national elections this month are over.

(Reporting by Marc Jones in London and Daniel Dickson in Stockholm, additional reporting by Ragnhildur Sigurdardottir in Reykjavik; Editing by Toby Chopra)

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