UPDATE 2-Iceland backed over bond freeze, U.S. funds vow to fight on

By Daniel Dickson and Marc Jones
| STOCKHOLM/LONDON

The European Free Trade Association (EFTA) on Wednesday rejected complaints by two U.S.-based funds against Reykjavik’s freezing of $1.4 billion of their bonds as it readied to lift its eight-year-long capital controls.

Two of the funds involved, Autonomy Capital and Eaton Vance, vowed to fight on and “pursue all avenues”, threatening to extend an already prickly standoff with Iceland that has developed over the last year.

Iceland, which has had capital controls in place since 2008 when a banking collapse brought its economy to its knees, froze the funds’ bonds in a special low-interest account in May.

The move was designed to avoid a sudden rush of money out of the country as it started the delicate process of removing the controls but has angered the funds that claim it was unnecessary.

“Icelandic laws on treatment of offshore krona assets are in compliance with the EEA Agreement,” the EFTA Surveillance Authority (ESA) said in a statement.

“Although the Icelandic economy is now stronger, there is still a possibility that the lifting of capital controls would destabilise capital flows, causing renewed difficulties with the balance of payments,” said ESA, which monitors compliance by the EFTA states Iceland, Liechtenstein and Norway with the law of the European Economic Area (EEA).

The ESA decision is a setback for the funds, which also include Loomis Sayles and Discovery Capital Management, that had hoped to get a better deal from Iceland than had been offered in an auction buy-up of the assets this year.

Autonomy and Eaton Vance’s lawyer Kevin Roberts of Morrison & Foerster told Reuters that the decision was not unexpected and does not change anything in terms of the funds’ view.

“The Icelandic government continues to unnecessarily maintain capital controls that intentionally discriminate against foreign investors,” he said.

“We will continue to pursue all avenues to resolve the issue unless the government of Iceland decides to justly resolve capital controls for all investors.”

The ESA decision came after a preliminary ruling last month suggested closing the case and was welcomed by Iceland’s foreign minister Lilja Alfredsdottir.

“This result is a conclusive confirmation that the Icelandic authorities handled the abolishment of the capital controls in the right manner. It recognises that we were in full right to take to measures which ensured stability,” she said.

Central bank Governor Mar Gudmundsson told Reuters the country would try to find a new deal with the funds once it has looked at removing the remaining capital controls, which still restrict some businesses and high earners, early next year.

“What that means in terms of exchange rates at which different assets escape from the capital controls depends on conditions at the time,” Gudmundsson said. “It might be better, it might be worse,” for the funds in terms of the rate, he added.

(Reporting by Daniel Dickson; Editing by Tom Heneghan)

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