The prime minister of Iceland said any hedge fund planning to challenge the legal basis of a planned tax on failed bank assets should think again.

“If they wanted to make some kind of an example out of Iceland, to threaten people, then this wouldn’t be a good case for them,” Prime Minister Sigmundur David Gunnlaugsson said in an interview in Reykjavik on Monday. “This is founded on solid legal ground.”

Iceland has tried to ensure its treatment of creditors caught in an $85 billion banking default won’t drag the island through an Argentine-like period of litigation. The island’s 2008 financial meltdown wiped out its three biggest banks after the government said the $15 billion economy didn’t have the means to save them.

The economic collapse that followed forced Iceland to impose capital controls to stop investors from fleeing its markets.

The island’s approach to addressing the crisis won praise from Nobel laureates including Paul Krugman and institutions led by the International Monetary Fund. Iceland’s central bank estimates gross domestic product will grow 4.5 percent this year, well above the 1.5 percent the European Commission sees the euro zone expanding.

Gunnlaugsson’s administration on Monday unveiled an historic piece of legislation to unwind capital controls in place for almost seven years. But to make sure the measures don’t result in a capital exodus led by hedge funds, the island also imposed a one-time so-called stability tax of 39 percent.

Moot Point

Only winding-up committees that are able to reach a composition agreement approved by the central bank and finance ministry will be exempt. They have until the end of the year to do so, under the new legislation.

Whether hedge funds end up paying the tax or see their claims whittled down through a composition process may end up being largely moot. The government has indicated it expects to get as much as $5.1 billion from creditors in the failed banks before they exit the island.

Efforts to defend Iceland’s financial stability mean bank creditors probably need to leave at least 500 billion kronur ($3.8 billion) in the economy, Finance Minister Bjarni Benediktsson said in a separate interview on Monday.

He says it’s likely that “the actual stability payment will be lower than the levied stability tax.”

Potential Challenges

Asked how Iceland will respond to potential challenges to its stability tax, Gunnlaugsson said “that is something we’re prepared for,” in an interview with Bloomberg Television’s “Market Makers” on Monday. “We are very confident in the legislation we’ve just presented and have no doubts about its legal validity.”

So far, the winding-up committees of Kaupthing, Glitnir and LBI have all signaled they will seek composition accords.

Creditors that have bought claims against the failed banks include hedge funds Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP. The banks’ winding-up committees had urged the government to let them sidestep the capital controls, which they said would help settle claims faster.

Some hedge funds will try to “safeguard their interests quite strongly,” Gunnlaugsson said. “But it’s important to keep in mind that it’s in their interest to get a resolution. And this is exactly that, a resolution both for the Icelandic society and these investors. So I think the parties can be satisfied.”