Iceland debt relief plans won't threaten budget surplus

By Balazs Koranyi

OSLO (Reuters) - Iceland's planned household debt relief cannot jeopardize next year's budget surplus and the government may make another cautious return to international bond markets in 2014, Finance Minister Bjarni Benediktsson said on Thursday.

Debt relief has been a key plank in the government's programme since taking power in May due to the impact on families and growth of the inflation-indexed mortgages that were popular before its banking and economic collapse five years ago.

The state has already paid down part of the huge debt burden in several rounds of relief that have helped push the state's own debt up to a dangerously high 85 percent of national output.

But ratings agency Fitch warned this month that any slowing in fiscal consolidation, including any major relief programme, could lead to a cut in Iceland's sovereign rating - which it has managed to keep at an investment grade throughout five grim years of restructuring and capital controls.

"It's important that we would not introduce burdensome ideas for the treasury which would put us again in red numbers, that's very important and I feel there's consensus on that," Benediktsson said on the sidelines of a Nordic finance ministers' meeting in Oslo.

He said proposals for the new relief could be put to cabinet before the end of the year.

Next year's budget anticipates a modest, 500 million crown ($4.2 million) surplus after an expected 31.1 billion deficit this year and Benediktsson said that his original proposal, dating before a coalition deal between his Independence Party and Prime Minister Sigmundur Gunnlaugsson Progressives, relied on various incentives over 3-5 years instead of actual writedowns.

But he added that the 2014 budget proposal did not include figures for debt relief and estimating costs is not possible until a concrete proposal is made.

The household debt - now 108 percent of GDP compared to around 130 percent in 2009 - is just one part of an extended financial juggling act Iceland is conducting after the 2008 crisis left its financial sector with a mountain of debts to foreign creditors and forced it to halt the free flow of funds out of the country.

Iceland has borrowed fitfully on international debt markets as a result and will only return to a normal spread of bond and other credit issuance when it lifts the controls.

But Benediktsson said that it would ideally come on the market again in 2014, primarily to maintain its presence.

"We are pretty well financed but I think it's important that we go out on a regular basis," he said. "It would be preferable if we did it in 2014 but it hasn't been decided."

(Reporting by Balazs Koranyi; editing by Patrick Graham)