The Work

February 10, 2010 7:04 PM

Cleary Gottlieb Advising Iceland in Ongoing Icesave Dispute

Posted by Brian Baxter

UPDATE: Mar. 8, 10:14 a.m. Voters in Iceland have rejected an Icesave repayment plan.

On a day when The Am Law Daily's New York HQ faced the big (but not so) bad mid-Atlantic blizzard, we thought it fitting to share some news out of Iceland.

On Tuesday the government of Iceland announced it had hired Cleary Gottlieb Steen & Hamilton to advise on a new round of negotiations with the U.K. and Netherlands over losses suffered by Iceland's banks. Donald Johnston, the founding partner of Canadian firm Heenan Blaikie and former secretary-general of the Organization for Economic Co-operation and Development (OECD), is also advising Iceland's government.

Cleary corporate partner Lee Buchheit, an expert on sovereign debt management, international transactions, and project finance, is leading the firm's team on the matter. Buchheit and four other attorneys from the firm previously advised the Iraqi government on how to shed its massive $120 billion debt load accrued under former president Saddam Hussein, according to sibling publication The National Law Journal. The New York-based Buchheit has also has handled sovereign debt restructurings for Russia and Argentina.

Iceland is facing a similar challenge. A little more than a year ago, the country’s economy went into a deep freeze as the nation's over-leveraged banks collapsed in the midst of the global banking crisis. The Am Law Daily spoke with one sleep-deprived Icelandic lawyer at the time and several firms were tapped to advise on the process of nationalizing the north Atlantic island nation’s three largest banks.

The demise of the country's banking sector jeopardized the savings of foreign depositors and led the British government to take the controversial step of invoking antiterror legislation to freeze the U.K. assets of Landsbanki, Iceland's second-largest bank. Roughly 300,000 depositors in the U.K. and another 100,000 in the Netherlands had accounts with Landsbanki’s online banking arm, Icesave.

The British and Dutch governments compensated depositors' losses and then in turn sought reimbursement from Iceland under provisions in European Union law. The three sovereigns reached an agreement last summer called the Icesave bill, which would repay nearly $6 billion to the U.K. and the Netherlands, but leave Iceland deeply in debt.

The U.K. Treasury was advised on the agreement by Slaughter and May finance partner Andrew McLean in London, while the Dutch government turned to finance partner Jan Marten van Dijk from De Brauw Blackstone Westbroek in Amsterdam, according to a report by The Lawyer.

Iceland looked to Ashurst international finance chair Nigel Ward, Mishcon de Reya insolvency partner Mike Stubbs, and Maitland Chambers insolvency litigator Matthew Collings for legal advice before its parliament passed the Icesave bill in December, The Lawyer reports, noting that all three firms saw their roles conclude last year as the legislation’s passage transitioned to a political issue. (Questions are now also being raised about how much the country spent for the firms' legal advice.)

But Iceland’s odyssey in international banking was far from over. A local grassroots organization called InDefence steadily drummed up popular support against the repayment plan, arguing that it would saddle each of the country’s 300,000 citizens with $20,000 in debt. In early January, Iceland’s president vetoed the Icesave bill. Its fate will now be decided in a national referendum on March 6 and the battle lines are already being drawn.

“The British and Dutch are engaged in economic warfare against Iceland,” InDefence said in a press release issued Wednesday. “We demand a reasonable Icesave agreement to avoid national bankruptcy.”

If the Icesave bill is rejected, Iceland’s diplomatic relations with its European neighbors could be adversely affected and an economic rescue package by the International Monetary Fund and other Nordic nations could be scuttled.

That’s why the government has turned to Buchheit and Johnston for advice as it races to restart negotiations with the British and Dutch ahead of the scheduled referendum. The country’s minister of finance, Steingrímur Sigfússon, met with both lawyers in Iceland on Wednesday to discuss political and legal strategy. Buchheit will lead any negotiating team, Iceland Review reports, while Johnston’s role as a consultant is still being worked out.

Still, faith that Iceland will meet its financial obligations appears to be waning in the international arena.

A recent study conducted by British firm Norton Rose found that three-quarters of financial institutions with stakes in Iceland believe the country is failing to comply with its laws by making retroactive legislative changes as part of its plan to recapitalize its banking sector.

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