Bondholders challenge councils and FSCS over Icelandic cash

Bondholders owed £2.5bn following the Icelandic banking crisis have begun a legal challenge against the 'priority status' given to local authorities and the Financial Services Compensation Scheme (FSCS) to get their money back from Landsbanki.

Under current arrangements, bondholders, including hedge funds Arrowgrass, GLG and Varde, will get nothing and the UK public bodies will get almost all of their money back when Landsbanki's assets are fully liquidated.

However, in a test case starting today in the Supreme Court of Iceland, bondholders are arguing everyone should get around a third of their money back, the Telegraph reports.

The FSCS borrowed money from the Treasury to bail out 200,000 savers who had money in collapsed bank Icesave, owned by Landsbanki, and is owed £4.2bn.

Meanwhile, local authorities lost around £1bn when Landsbanki, Glitnir and Kaupthing failed in October 2008, and are still trying to claw most of this back.

An earlier suit in a lower court gave priority status to the UK councils and, although the test case is related just to Landsbanki, it would have implications for future judgments to be made about creditors of Glitnir and Kaupthing.