Sigrún Davíðsdóttir's Icelog

Landsbanki Luxembourg: the investigated and non-investigated issues

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The long-winding saga of the Landsbanki Luxembourg equity release loans is now in a French court in Paris, i.e. the alleged mis-selling. However, as the oral hearings brought out so clearly, other angles of this case have been ignored, i.e. the bank’s potential mismanagement of clients’ funds and the very questionable handling of the Landsbanki Luxembourg administrator. These last two issues have left so many clients frustrated and at their wit’s end.

A court case at the Palais de Justice, part of the spectacular Palais de la Cité on the Îsle de la Cité in the heart of Paris, is a grand spectacle to behold. Or at least that was my impression last week as I sat through two afternoons of oral hearing in the penal case against Landsbanki Luxembourg bankers and Landsbanki’s chairman Björgólfur Guðmundsson, the only one of the accused who was not present.

Apart from the three judges and the prosecutor there were the thirty or so lawyers fluttering around in their black cloaks with white bands around the neck. The lawyers were defence lawyers for those charged, lawyers for some of the witnesses and then there were lawyers related to civil cases connected to this case.

The case, brought by a prosecutor after an investigation led by Justice Renaud van Ruymbeke, centres on alleged mis-selling of equity release loans, as explained in an earlier Icelog. Oral hearings are scheduled until May 24, but the hearings were taking longer than expected and extra days to be added. The judgement can be expected in autumn.

French borrowers got contract in English, foreigners in French

The involvement of the very famous French singer Enrico Macias in the Landsbanki Luxembourg case has secured the attention of the French media; Macias took out an equity release loan of around €35m and his losses amount to €9m.* On the first day of the oral hearings, 2 May, Macias sat in court surrounded by his black-cloaked lawyers. On the second day of the hearings when Macias was questioned I counted nine lawyers apparently part of his entourage.

Macias was questioned back and forth for ca. three hours, no mercy there for this elderly gentleman, by the very astute and sharp judge. Only at one point, when one of the defence lawyers had probed Macias’ story did the singer lose his patience, crying out he had lost his wife and his house because of this bank. The judge reminded him that the charges were serious and the nine men accused had the right to defend themselves.

When Macias’ contract was brought up during the questioning an interpreter was called to assist. It turned out that Macias’ contract was in English. Some of the foreign borrowers were in court – German, English, American etc. It turns out that the foreign equity release borrowers all seem to have a contract in French. One told me he had asked for a contract in English and been told he would get it later; he didn’t.

Intriguingly, there seems to be a pattern here as I heard when I spoke to other borrowers: Landsbanki Luxembourg gave the foreign borrowers, i.e. non-French, a contract in French but the French borrowers, like Macias, got a contract in English.

“Produit autofinancé”

Much of the questioning centred on the fact that Landsbanki Luxembourg promised the borrowers the loans were “auto-financed.” To take an example: if the loan in total was for example €1m, the borrower got 20-30% paid out in cash and the bank invested the rest, stating the investment would pay for the loan. Ergo, Landsbanki promised the borrowers they would get a certain amount of cash for free, so to speak.

The judge asked the various witnesses time and again if that had not sounded to too good to be true to get a loan for free. As Macias and others pointed out the explanations given by the bankers and the brokers selling the loans seemed convincing. After all, these borrowers were not professionals in finance.

This line of questioning rests on the charges of alleged mis-selling. Other questions related to information given, who was present when the contracts were signed, validity of signatures etc.

The dirty deals in Luxembourg

The operations of the Icelandic banks have been carefully scrutinised in Iceland, first in the SIC report, published in April 2010 and later in the various criminal cases where Icelandic bankers and some of their closest collaborators have been prosecuted in Iceland.

There is one common denominator in all the worst cases of criminal conduct and/questionable dealings: they were conducted in and through Luxembourg.

All of this and all of these cases are well known to authorities in Luxembourg: Luxembourg authorities have assisted the investigations of the Icelandic Special Prosecutor, i.e. enabled the Prosecutor to gather information and documents in house searches in Luxembourg.

These cases exposing the role of Luxembourg in criminal conduct are all Icelandic but the conduct is not uniquely Icelandic. I would imagine that many financial crooks of this world have equally made use of Luxembourg enablers, i.e. bankers, lawyers and accountants, in financial shenanigans and crimes.

The Landsbanki questions Luxembourg has ignored

As I have pointed out earlier, alleged mis-selling is not the only impertinent question regarding the Landsbanki Luxembourg operations. There are also unanswered questions related to management of clients’ fund by Landsbanki Luxembourg, i.e. the investment part of the equity release loans (and possibly other investments) and, how after the bank’s collapse in October 2008, the bank’s court appointed Luxembourg administrator Yvette Hamilius has fulfilled her role.

As to the management of funds, some borrowers have told me that after the collapse of Landsbanki Luxembourg they discovered that contrary to what they were told the bank had invested their funds in Landsbanki bonds and bonds of other Icelandic banks. This was even done when the clients had explicitly asked for non-risky investments. As far as is known, Luxembourg authorities have neither investigated this nor any of the Icelandic operations with one exception: one case regarding Kaupthing is being investigated in Luxembourg and might lead to charges.

The latter question refers to serious complaints by equity release borrowers as to how Hamilius has carried out her job. Figures and financial statements sent to the clients do not add up. Hamilius has given them mixed information as to what they owe the bank and kept them in the dark regarding the investment part of their loans. Icelog has seen various examples of this. Hamilius has allegedly refused to acknowledge them as creditors to the bank.

On the whole, her communication with the clients has been exceedingly poor, letters and calls ignored and she has been unwilling to meet with clients. One client, who did manage to get a meeting with her, was seriously told off for bringing his lawyer along even though he had earlier informed her the name of the person he would bring with him.

Hamilius, on the other hand, claims the clients are only trying to avoid paying their debt. She has tried to recover properties in Spain and France, even after the bankers were charged in France. One of many remarkable turns in this case (see here) was a press release issued Robert Biever Procureur Général d’Etat – nothing less than the Luxembourg State Prosecutor – in support of Hamilius in her warfare against the equity release clients.

The court case at the imposing Palais de Justice in Paris gives an interesting insight into the operations of Landsbanki Luxembourg. As to management of funds prior to the bank’s collapse and the administrator’s handling of her duties Luxembourg has, so far, only shown complete apathy.

*I picked these numbers during the hearings but French media has reported different figures so I can’t certify these are the correct figures.

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Written by Sigrún Davídsdóttir

May 11th, 2017 at 7:30 pm

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Macron and the power of ideas

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During the Cold War there was no lack of Western intellectuals prophesying the end of the Western world as the efficient Soviet bloc would unavoidably win over democracy. Now the pre-destined outcome is seen to be populism that will engulf Western democracy. Making democracy work certainly is no mean task but one way of understanding the victory of Emmanuel Macron in France is reason beating irrational fears. Or as Macron himself has said: you convince people “by speaking to their intelligence.”

What do you do if you want to become a political leader? Listen to angry voters airing ideas politicians for decades haven’t had the wisdom or courage to challenge, such as foreigners and Europe being the reason for all problems – or do you formulate ideas you feel are important and debate them?

The latter is what Emmanuel Macron did in France: instead of lapping up anti-Europe sentiments and xenophobia advocated by Marine le Pen and her National Front, echoed in Brexit and, on a wider scale, the Trump victory in the US, Macron took two ideas seemingly on the vain, free trade and Europe, and won.

How did he do it? As Macron explained in a Channel 4 interview: “By fighting. By convincing people, by speaking to their intelligence, by trying to build stronger arguments in order to present and highlight our project.”

Take a risk or die

A key moment in Les coulisses d’une victoire, (01:16:24) a documentary of Macron’s campaign, is when Macron, after an off-site meeting with some Whirlpool workers, is told that National Front leader Marine Le Pen has just visited the factory: she appeared, she told the workers they were fighting for France and then left after giving some selfie opportunities.

Now, Macron wants to go to the factory – one has to take risks, he says, jump into the battle. His team worries about security but he counters them saying that at present no place in the country is completely safe. “If you listen to the security guys you end up like Hollande,” Macron says. “You may be safe but you are dead.”

Yes, Macron may very well fail. He has only conquered his first hurdle; the second one is securing support in the parliamentary elections in June. The third and most difficult hurdle is governing for the next five years, fulfilling some of his promises.

The power of ideas

However, the refreshing air Macron has already brought into politics is the power of reason, the power of reasoning, the sense that ideas are powerful.

Much of the political discourse of the 1960s and the 1970s was coloured by the sense of predestination on the Left that the democratic West was doomed to fail and the Soviet Union would rule. That dictatorship, void of stimulating competition and sparkling innovation, does not foster growth did not enter this argument.

Following the 2016 Brexit outcome in Great Britain and then the Trump victory, the general line of the commentariat, both in the established media and the social media, has benn that the West was destined for populist rule.

Speaking to people’s intelligence, not their ignorance

Macron has shown that fear of “the other,” xenophobia in all its gloom, fear of jobs leaving, jobs being taken by foreigners, fear of international trade agreements, European co-operation etc. can be encountered with reason and arguments for a better society. Closing borders does not create jobs. Pandering to ignorance and fear does not solve the underlying problems.

Macron has encountered these sentiments “by convincing people, by speaking to their intelligence, by trying to build stronger arguments” for the things he believes in, such as Europe and free trade.

With the Macron victory in France Front National and populism has neither been eradicated in France nor elsewhere. But after the elections in Austria, Netherlands and now France it can be argued that the populist element in Brexit and the election of Trump could be an aberration – is does not need to be an invincible trend.

Determinism and democracy

To claim that populism is unavoidable in our times of growing inequality is to believe in some sort of determinism: that certain conditions unavoidably lead to a certain outcome. But that is to negate the power of ideas, the power of reasoning and ultimately the power of democracy.

However, democracy certainly is vulnerable, exactly because it rests on ideas, on the power of ideas, on the need to have the energy to debate what one believes in. And democracy is also vulnerable to the distorting and corruptive force of money working for narrow special interests and not the general good. Alarmingly, this can possibly be happening in the US as Jane Mayer has so brilliantly documented and argued in her book Dark Money and as Angus Deaton concludes in The Great Escape. – Another saga but a very important one.

Not big data but big ideas

The thrust of opinions aired in much of the established media and the social media since Brexit and Trump is the belief that what has happened will continue, will increase and is unavoidable and unstoppable. Macron’s victory has shown that the rise and rise of populism is neither unavoidable nor unstoppable. It was not about clever use of big data but of big ideas and forceful arguments.

Contrary to what the UK Tories and to a certain degree Labour have done by towing the Ukip line or Francois Fillon trying to make a palatable version of Le Pen, Macron has shown that by taking a political risk, by throwing himself into the battle it is possible to win. – To believe in democracy is to believe in the power of ideas and to believe in the power of ideas is to believe in democracy.

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Written by Sigrún Davídsdóttir

May 11th, 2017 at 10:10 am

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Landsbanki Luxembourg managers and the bank’s chairman in French criminal court

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Equity release loans are a dangerous product to offer to all and sundry and that’s exactly what happened to those who took out such loans with Landsbanki Luxembourg – mostly elderly property owners in France and Spain. In addition, there are suspicions as to how the bank managed the investment part of the loans. In 2015 this  led to charges against Björgólfur Guðmundsson, Landsbanki’s chairman of the board and (together with his son Björgólfur Thor Björgólfsson) the bank’s main shareholder, as well as Gunnar Thoroddsen manager of Landsbanki Luxembourg and other employees. The case is coming up in a Paris Court now on Tuesday, scheduled to run through May.

Icelog has earlier reported on the sorry saga of the Landsbanki Luxembourg equity release loans. The borrowers, elderly non-Icelandic owners of properties in Spain and France, have been fighting the administrator of Landsbanki Luxembourg, Yvette Hamelius as well as trying to attract the attention of Luxembourg authorities to what the borrowers allege to be criminal offences committed by the bank prior to the collapse and lack of attention by the administrator.

As reported earlier on Icelog: The authorities in Luxembourg have shown a remarkable lack of interest in this case and certainly the borrowers have been utterly and completely shunned there. The most remarkable and incomprehensible move was when the Luxembourg state prosecutor, no less, Robert Biever Procureur Général d’Etat sided with the administrator as outlined here on Icelog. The prosecutor, without any investigation, doubted the motives of the borrowers, saying outright that they were simply trying to avoid to pay back their debt.

However, French authorities have taken the case seriously. After investigation, a French judge, Renaud van Ruymbeke, took on the case and then passed his findings on to a French prosecutor. In August 2015 Landsbanki managers, i.a. Gunnar Thoroddsen and Björgólfur Guðmundsson, as well as some foreign Landsbanki staff (see here) were charged with breeching the French penal code, risking both fines and up to five years in prison.

The case starts on Tueday. The oral hearings are, as far as I know, scheduled for 2, 3, 9, 10, 15, 16, 17, 22, 23 and 24 May at Tribunal de grande instance de Paris. I plan to report on the on-going proceedings.

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Written by Sigrún Davídsdóttir

April 30th, 2017 at 8:26 pm

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The ‘puffin plot’ – a saga of international bankers and Icelandic greed

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In a formal signing ceremony 16 January 2003 a group of Icelandic investors and the German bank Hauck & Aufhäuser purchased shares in a publicly-owned Icelandic bank. Paul Gatti represented the German bank, proudly airing the intension of being a long-term owner together with the Icelandic businessman Ólafur Ólafsson. What neither Gatti nor Ólafsson mentioned was that earlier that same day, at a meeting abroad, their representatives had signed a secret contract guaranteeing that the Icelandic bank Kaupthing, called ‘puffin’ in their emails, would finance the H&A purchase in Búnaðarbanki. A large share of the profit, 57,5 million USD, would accrue to Ólafsson via an offshore company, whereas 46,5 million USD was transferred to the offshore company Dekhill Advisors Limited, whose real owners remain unknown. Thus, Ólafsson and the H&A bankers fooled Icelandic authorities with the diligent help of advisors from Société General. – This 14 year old saga has surfaced now thanks to the Panama Papers. What emerges is a story of deception similar to the famous al Thani story, which incidentally sent Ólafsson and some of the Kaupthing managers involved in the ‘puffin plot’ to prison in 2015. Ólafsson is however still a wealthy businessman in Iceland.

The privatisation of the banking sector in Iceland started in 1998. By 2002 when the government announced it was ready to sell 45.8% in Búnaðarbanki, the agrarian bank, it announced that foreign investors would be a plus. When Ólafur Ólafsson, already a well-known businessman, had gathered a group of Icelandic investors, he informed the authorities that his group would include the a foreign investor.

At first, it seemed the French bank Société General would be a co-investor but that changed last minute. Instead of the large French bank came a small German bank no one had heard of, Hauck & Aufhäuser, represented by Peter Gatti, then a managing partner at H&A. But the ink of the purchase agreement had hardly dried when it was rumoured that H&A was only a front for Ólafsson.

Thirteen years later, a report by Reykjavík District judge Kjartan Björgvinsson, published in Iceland this week, confirms the rumours but the deception ran much deeper: through hidden agreements Ólafsson got his share in Búnaðarbanki more or less paid for by Kaupthing. Together with Kaupthing managers, two Société General advisers, an offshore expert in Luxembourg, Gatti and H&A legal adviser Martin Zeil, later a prominent FDP politician in Bayern, Ólafsson spun a web of lies and deceit. A few months after H&A pretended to buy into Búnaðarbanki the hidden agreements made an even greater sense when tiny Kaupthing bought the much larger Búnaðarbanki. Until Kaupthing collapsed in 2008 Ólafsson was Kaupthing’s second largest shareholder and, it can be argued, Kaupthing’s hidden mastermind.

The H&A deceit turned out to be only an exercise for a much more spectacular market manipulation. In the feverish atmosphere of September 2008, Ólafsson, following a similar pattern as in 2003, got a Qatari sheikh to borrow money from Kaupthing and pretend he bought 5.1% in Kaupthing as a proof of Kaupthing’s strength. Ólafsson was charged with market manipulation in 2015 and sentenced to 4 ½ years in prison, together with Kaupthing managers Sigurður Einarsson, Hreiðar Már Sigurðsson and Magnús Guðmundsson, all partners in Ólafsson’s H&A deceit.

Preparing the ‘puffin plot’

Two SocGen bankers, Michael Sautter and Ralf Darpe, worked closely with Ólafsson from autumn 2002 to prepare buying the 45.8% of Búnaðarbanki the Icelandic government intended to sell. Ólafsson gave the impression that SocGen would be the foreign co-investor with his holding company, Egla. Sautter, who had worked on bank privatisation in Israel and Greece, said in an interview with the Icelandic Morgunblaðið in September 2002 that strong core investors were better than a spread ownership, which was being discussed prior to the privatisation. In hindsight it’s easy to guess that the appearances of Ólafsson’s advisers were part of his orchestrated plot.

But something did not work out with SocGen: by mid December 2002 the bank withdrew from the joint venture with Ólafsson who asked for an extended deadline from the authorities to come up with new foreign co-investors. The SocGen bankers now offered to assist in finding a foreign investor and that’s how Ólafsson got introduced to H&A, Peter Gatti and Martin Zeil.

The privately held H&A came into being in 1998 when two private Frankfurt banks merged: 70% was owned by wealthy individuals, the rest held by BayernLB and two insurance companies.

Until last moment Ólafsson withheld who the foreign investor would be but assuring the authorities there would be one. And lo and behold, Peter Gatti showed up at the signing ceremony 16 January 2003, held in the afternoon in an old and elegant building in Reykjavík, formerly a public library. H&A bought the shares in Búnaðarbanki through Egla, Ólafsson’s holding company, which also meant that Ólafsson was in full control of the Búnaðarbanki shares.

At the ceremony in Reykjavík Gatti played the part of an enthusiastic investor, promising to bring contacts and knowledge to the Icelandic banking sector. To the media Ólafsson in his calmly assuring way praised the German bank, which would be valuable to Búnaðarbanki and Icelandic banking. “We chose the German bank,” he stated, “because they were the best for Búnaðarbanki and for our endeavours.”

The particular benefit for Búnaðarbanki never materialised but the arrangement certainly turned out to be extremely lucrative for Ólafsson and others involved. However, it wasn’t the agreement signed in Reykjavík but another one signed some hours earlier, far from Reykjavík, that did the trick.

The hidden agreements at the heart of the ‘puffin plot’

The other agreement, in two parts, signed far away from Reykjavík told a very different story than the show put on at the old library in Reykjavík.

That agreement came into being following hectic preparation by Guðmundur Hjaltason, who worked for Ólafsson, Sautter and Darpe, Gatti and Zeil, an offshore expert in Luxembourg Karim van den Ende and a group of Kaupthing bankers. The Kaupthing bankers were Sigurður Einarsson, Hreiðar Már Sigurðsson, Steingrímur Kárason, Bjarki Diego and Magnús Guðmundsson who have all been convicted of various fraud and sentenced to prison, and two others, Kristín Pétursdóttir, now an investor in Reykjavík and Eggert Hilmarsson, Kaupthing’s trusted lawyer in Luxembourg. Karim Van den Ende is a well known name in Iceland from his part in various dubious Kaupthing deals through his Luxembourg firm, KV Associates.

The drafts had been flying back and forth by email between the members this group. Three days before the signing ceremony Zeil was rather worried, as can be seen from an email published in the new report. One of his questions was:

Will or can Hauck & Aufhäuser be forced by Icelandic law to declare if it acts on its own behalf or as trustee or agent of a third party?

Zeil’s email, where he also asked for an independent legal opinion, caused a flurry of emails between the Kaupthing staff. Bjarki Diego concluded it would on the whole be best that “as few as possible would know about this.”

But how was the H&A investment presented at the H&A? According to Helmut Landwehr, a managing partner and board member at H&A at the time of the scam, who gave a statement to the Icelandic investigators the bank was never an investor in Iceland; H&A only held the shares for a client. Had there been an investment it would have needed to be approved by the H&A board. – This raises the question if Gatti said one thing in Iceland and another to his H&A colleagues, except of course for Zeil who operated with Gatti.

The offshored profits

The hidden agreement rested on offshore companies provided by van den Ende. Kaupthing set up an offshore company, Welling & Partners, that placed $35.5m, H&A’s part in the Búnaðarbanki share purchase, on an account with H&A, which then paid this sum to Icelandic authorities as a payment for its Búnaðarbanki purchase. In other words, H&A didn’t actually itself finance its purchase in the Icelandic bank; it was a front for Ólafsson. H&A was paid €1m for the service.

Then comes the really clever bit: H&A promised it would not sell to anyone but Welling & Partners – and it would sell its share at an agreed time for the same amount it had paid for it, $35.5m. When that time came, in 2005, the H&A share in Búnaðarbanki was worth quite a bit more, $104m to be precise.

Kaupthing then quietly bought the shares so as to release the profit – and here comes another interesting twist: this profit of over $100m went to two offshore companies: $57.5m to Marine Choice, owned by Ólafsson and $46.5m to a company called Dekhill Partners. Kaupthing then invested Ólafsson’s profit in various international companies.

In the new report the investigator points out that the owners of Dekhill Partners are nowhere named but strong indications point to Lýður and Ágúst Guðmundsson, Kaupthing’s largest shareholders who still own businesses in the UK and Iceland.

At some point in the process, which took around two years, the loans to Welling & Partners were not paid directly into Welling but channelled via other offshore companies. This is a common feature in the questionable deals in Icelandic banks, most likely done to hide from auditors and regulators big loans to companies with little or no assets to pledge.

Who profited from the ‘puffin plot’?

Ólafsson is born in 1957, holds a business degree from the University of Iceland and started early in business, first related to state-owned companies, most likely through family relations: his father was close to the Progressive party, the traditional agrarian party, and the coop movement. Ólafsson is known to have close ties to the Progressives and thought to be the party’s major sponsor, though mostly a hidden one.

Ólafsson was also close to Kaupthing from early on and was soon the bank’s second largest shareholder. The largest was Exista, owned by the Guðmundsson brothers.

There are other deals where Ólafsson has operated with foreigners who appeared as independent investors but at a closer scrutiny were only a front for Ólafsson and Kaupthing’s interests. The case that felled Ólafsson was the al Thani case: Mohammed Bin Khalifa al Thani announced in September 2008 a purchase of 5.1% in Kaupthing. The 0.1% over the 5% was important because it meant the purchase had to be flagged, made visible. To the Icelandic media Ólafsson announced the al Thani investment showed the great position and strength of Kaupthing.

In 2012, when the Special Prosecutor charged Sigurður Einarsson, Magnús Guðmundsson, Hreiðar Már Sigurðsson and Ólafsson for their part in the al Thani case it turned out that al Thani’s purchase was financed by Kaupthing and the lending fraudulent. Ólafsson was charged with market manipulation and sentenced in 2015 to 4 ½ years in prison. He had only been in prison for a brief period when laws were miraculously changed, shortening the period white-collar criminals need to spend in prison. Since his movements are restricted it drew some media attention when he crashed his helicopter (he escaped unharmed) shortly after leaving prison but he is electronically tagged and can’t leave the country until the prison sentence has passed.

The Guðmundsson brothers became closely connected to Kaupthing already in the late 1990s while Kaupthing was only a small private bank. Lýður, the younger brother was in 2014 sentenced to eight month in prison, five of which were suspended, for withholding information on trades in Exista, where he and his brother were the largest shareholders.

Both Ólafsson and the Guðmundsson brothers profited handsomely from their Kaupthing connections. Given Ólafsson’s role in the H&A alleged investment and later in the al Thani case it is safe to conclude that Ólafsson was a driving force in Kaupthing and could perhaps be called the bank’s mastermind.

In spite of being hit by Kaupthing’s collapse Ólafsson and the brothers are still fabulously wealthy with trophy assets in various countries. This may come as a surprise but a characteristic of the Icelandic way of banking was that loans to favoured clients had very light covenants and often insufficient pledges meaning the loans couldn’t be recovered, the underlying assets were protected from administrators and the banks would carry the losses. How much this applied to Ólafsson and Guðmundsson is hard to tell but yes, this was how the Icelandic banks treated certain clients like the banks’ largest shareholders and their close collaborators.

When Ólafsson was called to answer questions in the recent H&A investigation he refused to appear. After a legal challenge from the investigators and a Supreme Court ruling Ólafsson was obliged to show up. It turned out he didn’t remember very much.

Ólafsson engages a pr firm to take of his image. After the publication of the new report on the H&A purchase Ólafsson issued a statement. Far from addressing the issues at stake he said neither the state nor Icelanders had lost money on the purchase. Over the last months Ólafsson has waged a campaign against individual judges who dealt with his case, an unpleasant novelty in Iceland.

The Panama Papers added the bits needed to understand the H&A scam

In spite of Gatti’s presence at the signing ceremony in January 2003 the rumours continued, even more so as H&A was never very visible and then sold its share in Búnaðarbanki/Kaupthing. One person, Vilhjálmur Bjarnason, now an Independence party MP, did more than anyone to investigate the H&A purchase and keep the questions alive. Some years later, having scrutinised the H&A annual accounts he pointed out that the bank simply couldn’t have been the owner.

Much due to Bjarnason’s diligence the sale was twice investigated before 2010 by the Icelandic National Audit Office, which didn’t find anything suspicious. The investigation now has thoroughly confirmed Bjarnason’s doubts.

Both in earlier investigations and the recent H&A investigation Icelandic authorities have asked the German supervisors, Bundesanstalt für Finanzdienstleistungsaufschicht, BaFin, for information, a request that has never been granted. During the present investigation the investigators requested information on the H&A ownership in 2003. The BaFin answer was that it could only give that information to its Icelandic opposite number, the Icelandic FME. When FME made the request BaFin refused just the same – a shocking lack of German willingness to assist and hugely upsetting.

The BaFin seems to see its role more as a defender of German banking reputation than facilitating scrutiny of German banks.

The Icelandic Special Investigative Commission, SIC, set up in December 2008 to investigate the banking collapse did investigate the H&A purchase, exposed the role played by the offshore companies but could not identify the owners of the offshore companies involved and thus could not see who really profited.

The Panama leak last year exposed the beneficial owners of the offshore companies. That leak didn’t just oust the then Icelandic prime minister Sigmundur Davíð Gunnlaugsson, incidentally a leader of the Progressive party at the time but also threw up names familiar to those who had looked at the H&A purchase earlier.

Last summer, the Parliament Ombudsman, Tryggvi Gunnarsson who was one of the three members of the SIC made public he had new information regarding the H&A purchase, which should be investigated. The Alþingi then appointed District judge Kjartan Björgvinsson to investigate the matter.

By combining data the SIC had at its disposal and Panama documents the investigators were able to piece together the story above. However, Dekhill Partners was not connected to Mossack Fonseca where the Panama Papers originated, which means that the name of the owners isn’t found black on white. However, circumstantial evidence points at the Gudmundsson brothers.

How relevant is this old saga of privatisation fourteen years ago?

The ‘puffin plot’ saga is still relevant because some of the protagonists are still influential in Iceland and more importantly there is another wave of bank privatisation coming in Iceland. The Icelandic state owns Íslandsbanki, 98.2% in Landsbanki and 13% in Arion.

Four foreign funds and banks – Attestor Capital, Taconic Capital, Och-Ziff and Goldman Sachs – recently bought shares in Arion, in total 29.18% of Arion. Kaupskil, the holding company replacing Kaupthing (holding the rest of Kaupthing assets, owned by Kaupthing creditors) now owns 57.9% in Arion and then there is the 13% owned by the Icelandic state.

The new owners in Arion hold their shares via offshore vehicles and now Icelanders feel they are again being taken for a ride by opaque offshorised companies with unclear ownership. In its latest Statement on Iceland the IMF warned of a weak financial regulators, FME, open to political pressure, particularly worrying with the coming privatisation in mind. The Fund also warned that investors like the new investors in Arion were not the ideal long-term owners.

The palpable fear in Iceland is that these new owners are a new front for Icelandic businessmen like H&A. Although that is, to my mind, a fanciful idea, it shows the level of distrust. Icelanders have however learnt there is a good reason to fear offshorised owners.

The task ahead in re-privatising the Icelandic banks won’t be easy. The H&A saga shows that foreign banks can’t necessarily be trusted to give sound advice. The new owners in Arion are not ideal. The thought of again seeing Icelandic businessmen buying sizeable chunks of the Icelandic banks is unsettling, also with Ólafsson’s scam with H&A in mind.

It’s no less worrying seeing Icelandic pension funds, that traditionally refrain from exerting shareholder power, joining forces with Icelandic businessmen who then fill the void left by the funds to exert power well beyond their own shareholding. Or or… it’s easy to imagine various versions of horror scenarios.

In short, the nightmare scenario would be a new version of the old banking system where owners like Ólafsson and their closest collaborators rose to become not only the largest shareholders but the largest borrowers with access to covenant-light non-recoverable loans. Out of the relatively small ‘puffin plot’ Ólafsson pocketed $57.5m. The numbers rose in the coming years and so did the level of opacity. Ólafsson is still one of the wealthiest Icelanders, owning a shipping company, large property portfolio as well as some of Iceland’s finest horses.

In 2008, five years after the banks were fully privatised the game was up for the Icelandic banks. The country was in a state of turmoil and it ended in tears for so many, for example the thousands of small investors who had put their savings into the shares of the banks; Kaupthing had close to 40.000 shareholders. It all ended in tears… except for the small group of large shareholders and other favoured clients that enjoyed the light-covenant loans, which sustained them, even beyond the demise of the banks that enriched them.

Obs.: the text has been updated with some corrections, i.a. the state share sold in 2003 was 45.8% and not 48.8% as stated earlier. 

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Written by Sigrún Davídsdóttir

March 30th, 2017 at 10:58 pm

Posted in Uncategorised

IMF (still) worried: political pressure on bank supervisors in Iceland

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It beggars belief: over eight years from a calamitous financial crash in Iceland, much to do with failed financial supervision, there is still reason to worry about financial supervision in Iceland. Or rather, there is again reason to worry now that the sheltering capital controls are for all intents and purposes abolished Iceland. All of this, according to the latest IMF Concluding Statement of the 2017 Article IV Mission on Iceland. To Icelog Ashok Vir Bhatia who led the IMF mission says that “worried” wouldn’t be the right word regarding the Icelandic financial supervision but there certainly was cause for concern, as the Statement reflects.

‘The economy of Iceland is doing very well,’ Ashok Vir Bhatia said to Icelog today. With growth of 7% of GDP Iceland is clearly doing well indeed. This rapid growth might be another cause for concern but according to Bhatia the growth seems sustainable.

In short, this is the IMF summary:

Iceland is stepping into a new era of financial openness. It should stride with confidence and care. The top priority must be a decisive strengthening of financial sector oversight. Risks associated with capital flows should be addressed by ensuring that macroeconomic policies, financial sector regulation and supervision, and macroprudential measures act in concert. Current strong growth rates—more than 7 percent last year—are driven by tourism and private consumption, not leverage. Nonetheless, overheating risks are evident. Króna appreciation is a dampening mechanism. Should further króna strength drive inflation prospects lower, there may be room for interest rate cuts. Fiscal policy should be tightened this year in response to demand pressures, but over the medium term there may be room for additional public spending on infrastructure, healthcare, and education.

What the IMF is worried about, is political pressure on Fjármálaeftirlitið, FME, the Icelandic supervisory authority. FME “is not sufficiently insulated from the political process.” The outline of political pressure is there to see. FME needs to go hat in hand to the Parliament every year to beg for a slice of the budget. The present chairman of the board, appointed by prime minister Bjarni Benediktsson during his time in office as a minister of finance, is a young ex-banker; difficult to imagine anyone with her CV in the same position with any regulator in the neighbouring countries.

In Iceland, the IMF Statement will be read with the people at FME in mind, how fit they are at their job. From the point of view of the IMF this criticism is about institutions, not people. If the institutional framework is robust, there is less scope for political pressure. As it is, the institutional frame isn’t as robust as it should be – and that’s what the IMF is emphasising here.

Banks and ownership is one thing to worry about now that things in Iceland will slowly be normalised, post controls. The fear is that the old normal – few big shareholders in each of the three largest banks, not only the largest owners but also the largest borrowers – will be normal again.

The recent purchase of creditors of Arion (via Kaupskil the holding company of Kaupthing) all through totally opaque offshore vehicles, has led to a furious debate in Iceland of fit and proper owners. Here the FME took a rather weak stance as to identifying beneficial owners, after all these new owners have been in Iceland for some years, not exactly new faces.

The new owners are Taconic Capital Advisors, Attestor Capital, Och-Ziff Capital Management Group and Goldman Sachs. Reading between the lines the IMF Statement indicates these are not necessarily ideal bank owners: ‘The recent purchase of the one privately owned pillar bank poses a test for Fjármálaeftirlitid. Financial stability considerations and fairness require that the mandatory fit and proper assessment be thorough, uncompromising, and evenhanded.’

The phenomenal, compared to other European countries, growth of the Icelandic economy is mainly due to tourism and as Bhatia points out to Icelog experience from other countries suggests that tourism doesn’t normally vanish over night. ‘The effect is not just temporary. Tourism is fundamentally good for the economy, a real blessing.’

In Iceland, the attitude towards the booming tourism has been that surely this is like the herring: it comes and goes and while it’s there it should just be exploited. This is answered in the new Statement: ‘Evidence from elsewhere suggests the shoal of tourists is not about to swim away abruptly: tourists are not herring.’ – The Statement emphasises the need for holistic tourism strategy.

A real friend is the one who doesn’t shy away from criticising – this old Icelandic saying comes to mind reading the latest IMF Statement on Iceland.

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Written by Sigrún Davídsdóttir

March 28th, 2017 at 8:08 pm

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Capital controls abolished – offer to offshore króna holders

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As Már Guðmundsson governor of the Icelandic Central Bank, CBI underlined at a press conference today ordinary Icelanders have not felt the capital controls for a long time. Today, the controls are lifted for not only individuals but also for companies and the pension funds. Earlier limits have been lifted – de facto the capital controls are coming to an end in Iceland, more than eight years after they were put in place end of November 2008.

What remains in place is the following, according to the CBI press release:

i) derivatives trading for purposes other than hedging; ii) foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking; and iii) in certain instances, foreign-denominated lending by residents to non-residents. It is necessary to continue to restrict such transactions in order to prevent carry trade on the basis of investments not subject to special reserve requirements pursuant to Temporary Provision III of the Foreign Exchange Act and the Rules on Special Reserve Requirements on New Foreign Currency Inflows, no. 490/2016. Guidelines explaining the above-mentioned restrictions will be issued to accompany the Rules.

The measures announced today were mostly as could be expected. However, the unknown variable was what offshore króna holders would be offered. Last summer they were offered a rate of ISK190 a euro; the onshore rate was ca. ISK140 at the time. The four large funds holding most of the remaining offshore króna – Loomis Sayles, Autonomy, Eaton Vance and Discovery Capital Management – refused that offer and have since been locked into low interest rates with an uncertain date of exit.

Now the offer is quite a bit more attractive: ISK137.50 a euro; the onshore rate is today ISK115.41. Last year, the offshore króna holders were offering ISK160 a euro, quite a bit better had the government been willing to accept it last year.

The CBI has lowered its bar, presumably because getting rid of the offshore króna holdings is seen as a bonus for Iceland. The sums captured inside the capital controls now amount to ISK195bn, less than 10% of GDP. Settling this last important part of trapped offshore króna means that Iceland can now take a step out of the shadow of the 2008 banking collapse – a chapter is coming to an end.

Former prime minister and former leader of the Progressive party Sigmundur Davíð Gunnlaugsson, forced to resign because of his offshore holdings exposed in the Panama papers, wrote today on Facebook that now the vulture funds were being rewarded; the funds had known they could crush the Icelandic government and that’s what they have now done. Others will beg to differ.

According to governor Guðmundsson the amount of offshore króna exiting at the new offer is just under ISK90bn. As far as I’m aware three of the four large funds have agreed to the present offer, which remains in place for the coming two weeks. One fund is considering its options, which must include testing the legality of earlier measures, a route the funds had already embarked on.

In total the four funds hold ISK120bn, further ISK12bn are holdings in shares, which are not being sold (thus nothing volatile there) and ISK60bn are deposits owned by various investors (some of whom might well have forgotten about their holdings or who are for some reason unaware of being the lucky owners of some Icelandic króna).

This means that although ISK90bn is less than half of the remaining offshore króna it’s roughly 3/4 of the offshore króna that could potentially move (though the funds do indeed want to keep their Icelandic relatively high-interest króna assets but that’s another saga).

What now remains in place is hindrance on inflows – as I’ve said earlier some would call it another form of capital controls but I side with the CBI that already in 2012 announced the conditions after capital controls would not be like before November 2008. Iceland isn’t interested in being the destination of money flows looking for lucrative interest rates. Consequently, prudent measures are in place since last summer.

Benedikt Jóhannesson minister of finance called today “a day of gladness.” Given that the controls had already been eased it’s unlikely the Icelandic króna will move much tomorrow or the coming days. The pension funds have good reasons to be vary of moving abroad. Though foreign investments would be wise as means of hedging foreign markets of low interest rates and high asset prices are not inviting.

Iceland is booming – the economy grew by 7.2%(!) of GDP last year. No exaggeration that there are good times in Iceland but good times aren’t necessarily easy times in a small economy with its own currency. With capital controls out of the way Iceland there is one thing less to worry about, the rating agencies will see this as a favourable move that might soon be expressed in more favourable ratings, eventually meaning lower interest rates in Iceland – so as to end on an optimistic note.

PS Why was the government keen to act now re offshore króna holders? Well, first for the entirely obvious reasons that Iceland is doing very well with large foreign currency reserves (not entirely trivial to invest them sensibly) and consequently it’s difficult to claim that economic hardship bars solution. In addition, as the minister of finance mentioned today: the rating agencies have indicated that the rating might move up, with the benefits such as lower interest rates when the sovereign borrows, spilling over into lower interest rates in Iceland. Last, it seems that the International Monetary Fund, very patient so far, was starting to air its worries: Iceland couldn’t keep boxing in the offshore króna holders indefinitely.

Pix-BB

Pix-BJ

Pix-MarGudm.

From top prime minister Bjarni Benediktsson, minister of finance Benedikt Johannesson (the two ministers are closely related, both from one of the most prominent business families in Iceland) and Már Guðmundsson governor of the CBI. Screenshots from the press conference today – notice the painting behind the two ministers: by Jóhannes Kjarval (1882-1972) the most iconic Icelandic artist, whose favourite motive was Icelandic landscape, most notable the lava landscape like here.

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Written by Sigrún Davídsdóttir

March 12th, 2017 at 4:34 pm

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Will the last bit of capital controls soon be removed?

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Now that ordinary Icelanders can invest ISK100m abroad a year and buy one property abroad, life is returning back to normal after capital controls or at least for the 0.01% of Icelanders that will be able to make use of this new normal. This new CBI regime was put in place on the last day of 2016.

For all others, capital controls have for a long time not been anything people sensed in everyday life. The controls really were on capital, in the sense that Icelanders could not invest abroad, but they could buy goods and services, i.e. ordered stuff online and, mostly relevant for companies, paid for foreign services.

The almost only tangible remains of the capital controls regard the four large funds – Eaton Vance, Autonomy, Loomis Sayles and Discovery Capital Management – still locked inside the controls with their offshore króna (by definition króna owned by foreigners, i.e. króna owned by foreigners who potentially want to exchange it to foreign currency).

I’ve written extensively on this issue earlier, recently with a focus on the utterly misplaced ads regarding the policy of the Icelandic government (the policy can certainly be disputed but absolutely not in the way the ads chose to portray it; see here and here; more generally here). From over 40% of GDP end of November 2008, when the controls were put in place, the offshore króna amounted to ca. 10% of GDP towards the end of 2016 (see the CBI: Economy of Iceland 2016, p. 75-81.) The latest CBI data is from 13 January this year, showing the amount of offshore króna at ISK191bn, below 10% of GDP.

It now seems there have been high-level talks and as far as I can understand there is great willingness on both sides to find an agreement, which would most likely involve an exit rate somewhat less favourable than the present rate (meaning there would be some haircut for the funds, i.e. some loss) and also that they would exit over some period of time (they have earlier indicated that they are in no hurry to leave).

As before, the greatest risk here is political: will the opposition or parts of it, try to use this case to portray the government as dancing to the tune of greedy foreigners? Icelanders have had a share of the populism so prevalent in other parts of the world but Icelandic politics is by no means engulfed by it.

Arguments in this direction can’t be ruled out but the argument for solving the issue is that Iceland should be moving out of the long shadows of the 2008 collapse, the Central Bank has been buying up foreign currency in order to fetter the ever-stronger króna and this is a problem easier to solve now with the economy booming rather than at some point later in a more uncertain future.

Obs.: on 4 June 2016 the CBI announced a new instrument to “temper and affect the composition of capital inflows.” Some people call this a new form of capital controls. I don’t agree and see these measures, as does the CBI, as a set of prudence rules, announced as a possible course of action already in 2012. Over the last decades other countries have taken a similar course to prevent the inflow of capital that could in theory leave quickly.

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Written by Sigrún Davídsdóttir

March 10th, 2017 at 12:01 am

Posted in Uncategorised

A government born out of discontent and weak majority

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It took Bjarni Benediktsson leader of the Independence Party 73 days and three attempts to form a government with two small centre-right parties, Bright Future (Björt Framtíð) and the Reform Party (Viðreisn). The majority is the tiniest possible: one seat. And so is the enthusiasm for the new government, really tiny. New opinion poll shows that 25% is content with the government. The left opposition lost an opportunity to form a government, the voters of the two small coalition parties feel they were cheated into securing an Independence Party rule and the latter party is sour because the government seems weak and Southern Iceland that brought the party most votes got no minister(s). – Thus starts the life of a new government, with irritation and anger. Things can only get better or there will be early elections, again.

In the history of Icelandic politics since the founding of the republic in 1944 political instability hasn’t been dominant. Icelanders got through the 2008 banking collapse but shed the collapse government after a winter of protests, which felt more playful than threatening, hence the cute name of the ‘Pots and pans’ revolution. When the left government, voted to power in the spring of 2009, survived a whole parliament term of four years in spite of fierce infighting it seemed that Iceland was back to stability.

Even more so since the new centre right coalition led by the Progressive Party, with the Independence Party had a safe majority, 38 out of 63 seats. The Panama papers shattered that strength April 3 2016. The day after prime minister Sigmundur Davíð Gunnlaugsson stumbled through the now world famous interview and tried to lie his way out of the revealing questions Bjarni Benediktsson signalled the end of Gunnlaugsson’s government by refusing to back Gunnlaugsson. Two days after the interview Gunnlaugsson resigned, ending the politically weirdest 48 hours Icelanders had ever witnessed.

After a political limbo from spring 2016 to autumn came the October 29 election and 73 days later a new government. None of this signals strength. The new government starts its life with bets against it enduring a full term.

EU: both a raison d’etre and a non-issue

The main reason for former Independence Party voters or right-leaning social democrats to vote for Reform (it seems mainly to have taken voters from the latter, many pro-EU voters had already left the IP in the last two elections) was to secure an action regarding an Icelandic EU membership. Reform was founded by angry IP voters who felt the grand old party had been less than grand in going back on its promise of a referendum.

But this raison d’etre for Reform has now turned into a non-issue, both because many Icelanders want to see how Brexit fares and also because EU is not a pressing issue for booming Iceland.

The Reform party: born out of pro-EU sentiments

The broken promise, which spurned some political enthusiasts into action, was a promise that IP leader Bjarni Benediktsson gave before the 2013 elections. In 2009, the social democrats, buoyed by their election victory and the prime minister post, fulfilled their long-standing promise of applying for EU membership. The Left Greens, their coalition partner, was against membership but the social democrats didn’t take no for an answer.

Up to the 2013 elections IP’s Benediktsson, whose party is split on EU, said holding a referendum asking voters if they wanted to continue membership negotiations was the best way to test voters’ EU sentiments. When in government with the Progressives, who had in principle supported such a vote though the party is fiercely anti-EU, Benediktsson suddenly saw nothing but a ‘political impossibility’ in holding such a vote as both coalition parties were against EU membership.

This caused huge outrage and protests for weeks – there has never been a clear majority in opinion polls to join the EU but this time, there was a huge majority for finalising a membership agreement and then vote on it. This anger spurred pro-EU former Independent party-member Benedikt Jóhannesson to form Reform. The Icelandic name, ‘Viðreisn,’ means ‘Revival’ rather than ‘Reform.’ In Icelandic politics the word refers to a period in Icelandic history, end of the 1950s and 1960s, when IP was in government with the social democrats, seen as a time of prosperity and growth in Iceland.

Now: Icelandic EU membership – let’s forget it

After being so wedded to an EU membership many feel that Jóhannesson and BF’s leader Óttarr Proppé have turned very meek in front of the IP’s EU antipathy. All there is left of a promise of a referendum is this: ‘The government parties agree that if the subject of a referendum on accession negotiations with the European Union is raised in the Althingi, the issue will be put to a vote and finalised towards the end of the electoral period. The government parties may have different opinions on this matter and will respect each other’s views.’

This indicates that well, maybe the matter won’t be raised and then there will be no referendum. However, Reform’s MP Jón Steindór Valdimarsson, a prominent advocate for Icelandic EU membership, has stated that people can rest assured: EU membership will be brought up in the Alþingi. And also, that the parties have agreed to disagree when a referendum will be brought to a vote.

EU membership is not a hot topic in Iceland but the anger still simmers against the last government’s blatant change-of-plan. This means that this very feeble promise on the issue is seen as an abject failure by the two small parties to stick to their EU focus; effectively that the IP bulldozed over them.

‘System change’

One of the most prominent words before the election last October was ‘system change’ – in short, the new parties – i.e. Reform, Bright Future and the Pirates – advocated ‘system change’ whereas the ‘four-party’ as the old parties are called in Icelandic – IP, the Progressives, the social democrats and Left Green – sounded less enthusiastic.

The word mostly referred to fundamental changes in how to allot fishery quotas and farming subsidies, i.e. policies concerning the two old sectors in the Icelandic economy. Two sectors still shaped by the political climate of earlier decades though their part of the economy has dwindled – now, tourism is both the largest sector and the growth sector.

Reform advocated what it called ‘the market approach’ to both these old sectors. Fishing quotas should to a certain degree be auctioned off in order to increase the national profit of fisheries, i.e. levies and taxes, akin how the Faroese have done.

This ambition has been whittled down in the new government’s ‘Platform:’ “The government considers that the benefits of the catch quota system are important for continuing creation of value in the fishing industry. Attention will be given to the benefits of basing the system on long-term agreements rather than allocations without time limits; at the same time, other possible choices will be examined, such as market-linking, a special profit-based fee or other methods to better ensure that payment for access to this common resource will be proportional to the gains derived from it. The long-term security of operations in the sector and economic stability in the rural areas must be ensured.”

Those who advocate changed agricultural policy, away from subsidies to a more consumer-friendly, less protective agriculture, with more import of foreign agricultural produce find this statement very weak: “The allocation of import quotas must be revised and the premise for the dairy industry’s derogations from competition law must be analysed and suitable amendments made.”

The government may surely surprise Icelanders but so far, there is little to indicate that the new parties will be allowed to make a strong departure to the way the IP has run the basic industries for decades.

Feeble vision on tourism

The previous Progressive-led government lost three precious years where the fastest growing most cash-giving industry, tourism, blossomed but without any policy guidelines as to what sort of tourism Iceland wants to pursue. The previous government seemed to be beholden to the interests of certain companies: it couldn’t solve the problem of identifying the most pressing infrastructure projects nor was it able to decide on a levy-structure in tourism. Truly a phenomenal omission.

The new government is worryingly vague on its aims for tourism in Iceland, only two sentences on it in its ‘Platform:’ The importance of tourism as an occupational sector is to be  reflected in the administration’s tasks and long-term policy-making. In the years to come, emphasis will be placed on projects that will be conducive to harmonised management of tourism, research and reliable gathering of data, increased profitability of the sector, the spread of tourists to all parts of the country, and rationalised levying of fees, e.g. in the form of parking fees.

Is parking fees the only grand idea of funding? Then that’s worryingly limited and unambitious.

At the same time Iceland is clearly becoming immensely dependent on tourism. With hotels sprouting everywhere there are whispers in the banking sector that further lending to tourism-related projects should be severely conservative.

The truly revolutionary turn: no more polluting heavy industries

Many Icelanders are worried that the aspect of clean and pure nature is hugely compromised by several recent heavy-polluting industries around Iceland in addition to the old ones. Hidden in the three-paragraphs on ‘Environment and Natural Resources’ there is this sentence: ‘There will be no new concessionary investment agreements for the building of polluting heavy industry.’

This may not seem much but in the Icelandic context this is truly revolutionary: a sharp turn from decades of striving to attract heavy polluting industries to Iceland, often with investment agreement granting some form of governmental favours. It can’t be emphasised too much what a turnaround this is – yes, truly revolutionary.

Clear right-leaning policy with a social slant

Although the government advocates responsible housekeeping and financial stability there is also some focus on social matters. Benedikt Jóhannesson has mentioned that Iceland is competing with its Nordic neighbours in holding on to young Icelanders, of getting them to return home from studying abroad or keeping them at home instead of moving abroad.

Jóhannesson has very correctly identified this problem: Icelanders do indeed compare their standard of living to their Nordic neighbours – and Iceland falls short in many aspects.

One policy advocated by the new government is to adapt Icelandic study loans to the system in the other Nordic countries: ‘A scholarship system based on the Nordic model will be adopted and lending from the Student Loan Fund will be based on full cost of living support and incentives for academic progress. Consideration will be given to the social role of the Fund. – This seems a more costly option then the present student loan system and the extra funds needed haven’t been specified as far as I know.

Immigrants are less skilled than Icelanders who emigrate

One potential danger is the above: the mismatch in outflow and inflow of people. The booming tourism needs a lot of low-skilled work, now largely provided by foreign workers whereas educated or highly skilled Icelanders have been tempted to emigrate or don’t return after studying abroad but choose to find work after finishing their studies.

In the 2015 OECD Economic Survey of Iceland this problem is spelled out: ‘The current boom is based to some extent on the rapid development of the tourism sector. With one million visitors in 2014, this is welcome, but it tends to create relatively low-skilled low-wage jobs and comes with limited opportunities for productivity growth. Against the draw of migrants to the booming low-skill jobs, the Icelandic economy is experiencing outmigration of high-skilled people. Furthermore, unemployment amongst university graduates is rising, suggesting mismatch. As such, and despite the economic recovery, Iceland remains in transition away from a largely resource-dependent development model, but a new growth model that also draws on the strong human capital stock in Iceland has yet to emerge.’

This wasn’t at all welcome news in Iceland and it was clear that some politicians are in denial about this mismatch. Icelanders, especially politicians, like to portray Iceland as a country with highly skilled workforce. At a closer look, comparing higher education in Iceland to the neighbouring countries, this isn’t really true. And the above paragraph proved an unpalatable course (as I sensed when reporting for Rúv I brought this up: there was some attempt from political quarters to rubbish the OECD data.)

Therefore it’s particularly refreshing to hear Jóhannesson mention this fact – that Iceland is indeed in many ways struggling to maintain skilled people and people with higher education. Whether something sensible comes out of it remains to be seen but acknowledging the problem is a promising first step.

Will the government last the full parliamentary term?

It’s too early to tell, so far so eventless. Or well, not quite. As a minister of finance Bjarni Benediktsson reacted to the Panama leak – which cost Sigmundur Davíð Gunnlaugsson both his prime minister post and leadership of his party, the Progressives and showed that also Benediktsson had offshore connections – by setting up a taskforce in mid June to estimate Icelandic assets offshore and the loss to the Treasury caused by the Icelandic offshorisation.

The taskforce handed in its report on September 13 and gave a presentation to Benediktsson on October 5. On October 10 Benediktsson said in Alþingi the report would be published in the next few days but nothing happened. It wasn’t until January 6 that the report was unceremoniously published on the ministry’s website and sent to the Alþingi economy and trade committee – after some journalists and politicians had said they would demand access by using the Icelandic Freedom of Information act.

When questioned Benediktsson brusquely denied there had been any cover-up, the report had simply come too late to be discussed in the outgoing parliament. A day later, Benediktsson was forced to retract his words and apologise: there had indeed be enough time to present it before the elections. Notably, elections called because of offshorisation. – Benediktson, now prime minister, has recently refused to discuss the report with the Alþingi economy and trade committee but says he will discuss its finding when the report will be debated in Alþingi.

This wasn’t a glorious end to Benediktsson’s time as minister of finance and the beginning of his reign as prime ministers. His opponents talk of his attempted cover-up, others that this is his typical lack of attention to details, a certain carelessness and sloppiness.

Governing in good times – not as easy as it seems

Politicians in power in times of crisis and hardship may at times dream of the sweetness of power in good times. In Icelandic we say that it takes strong bones to survive prosperity. That’s exactly the challenges facing Iceland for the time being.

The GDP growth last year was around 4%, unemployment is 4%, building cranes crowed the Reykjavík city scape, the Central Bank is facing losses because of the foreign currency it’s hording to keep the króna, now record strong, from being even stronger – all of this both signs of prosperity and challenges. Right now, fishermen have been striking since mid December, no end in sight. They are both demanding substantial wage increases, which the fishing industries refuse to meet and that the government reinstalls earlier tax deductions, flatly denied by minister of finance Jóhannesson.

In spite of good times in Iceland there is a permanent political chill over the island for the time being. It remains to be seen if the new government finds the way to melt the chill without ending up with an overheated and out-of-control economy – a far too familiar phenomenon in the prone-to-bumpy-ride Icelandic economy.

There are eleven ministers and eight ministries in the new Icelandic government – from the Independence Party (6): party leader and prime minister Bjarni Benediktsson, Kristján Þór Júlíusson minister of Education, Science and Culture, Þórdís Kolbrún Reykfjörð Gylfadóttir minister of Tourism, Industries and Innovation (Ministry of Industries and Innovation), Guðlaugur Þór Þórðarson minister of foreign affairs, Sigríður Ásthildur Andersen minister of Justice (Ministry of the Interior), Jón Gunnarsson minister of Transport and Local Government (Ministry of the Interior); Reform Party (3): party leader and minister of Finance Benedikt Jóhannsson, Þorsteinn Víglundsson minister of Social Affairs and Gender Equality (Ministry of Welfare), Þorgerður Katrín Gunnarsdóttir minister of Fisheries and Agriculture (Ministry of Industries and Innovation); Bright Future (2): party leader Óttarr Proppé minister of Health (Ministry of Welfare), Björt Ólafsdóttir minister for the Environment and Natural Resources. – Only ministries with two ministers are mentioned above. The government has announced that it plans to split the Ministry of the Interior into Ministry of Justice and Ministry of Transport and Local Government, which means there will soon be nine ministries. – I have earlier used the name “Revival” for Viðreisn without noticing that on its English website “The Reform Party” is the name used. 

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Written by Sigrún Davídsdóttir

January 25th, 2017 at 4:35 pm

Posted in Uncategorised

How is this possible, Greece?

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The Greek ELSTAT saga has taken yet another turn, which should be a cause for grave concern in any European country: a unanimous acquittal by three judges of the Greek Appeals Court in the case of former head of ELSTAT Andreas Georgiou has been annulled. This was announced Sunday December 18 – the case  was up in court December 6 – but no documents have been published so far, another worrying aspect.

The acquittal was the fourth attempt to acquit Gergiou – and this is now the fourth attempt to  thwart the course of Greek justice and revive the unfounded charges against him. The intriguing thing to note here is that the acquittal was annulled by a prosecutor at the First Instance Court, who in September brought a whole new case regarding the debt and deficit statistics from 2010 and ELSTAT staff role here, this time not only accusing ELSTAT staff of wrongdoing but also staff from Eurostat and the IMF; a case still versing in the Greek justice system.

All of this rotates around the fact that ELSTAT, and now Eurostat and IMF staff, is being prosecuted for producing correct statistics after more than a decade of fraudulent  reporting by Greek authorities.

It beggars belief that the justice system in Greece seems to be wholly under the power of political forces who try as best they can to avoid owning up to earlier misdeeds. In spite of acquittals, those who corrected the fraudulent statistics are being prosecuted relentlessly while nothing is done to explain what  went on during the time of the fraudulent reporting. It should also be noted that in order to stop the ELSTAT prosecutions completely, four other cases related to this one, need to be stopped.

The ELSTAT staff is here reliving the horrors of the Lernaen Hydra in Greek mythology. Georgiou and his colleagues have had international support but that doesn’t deter Greek authorities from something that certainly looks like a total abuse of justice. How is it possible to time and again take up a case where those charged have already been acquitted?

Icelog has followed the ELSTAT saga, see here for earlier blogs, explaining the facts of this sad saga.

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Written by Sigrún Davídsdóttir

December 19th, 2016 at 5:20 pm

Posted in Uncategorised

Has Iceland learnt anything from the 2008 banking crash?

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With its 2600 pages report into the banking collapse no nation has better study material to learn from than Iceland. However, with some recent sales in Landsbankinn and uncertainties regarding the sales of the new banks, Icelanders have good reasons to wonder what lessons have indeed been learnt from the 2008 banking collapse. If little or nothing has been learnt it’s worrying that two or three banks will soon be for sale in Iceland.

“During the election campaign I would have liked to hear the candidates form a clear and concise lessons from the 2008 banking collapse,” said one Icelandic voter to me recently. He’s right – there was little or no reference to the banking collapse during the election campaign in October.

The unwillingness to formulate lessons is worrying. So many who needed to learn lessons: bankers, lawyers, accountants, politicians and the media, in addition to every single Icelander.

Also, some recent events would not have happened had any lessons been learnt from this remarkable short time of fully privatised banking, from the beginning of 2003 to October 6 2008. There is a boom in Iceland, reminding many of the heady year 2007 but this time based inter alia tourism and not on casino banking. However, old lessons need to be remembered in order to navigate the good times.

Landsbankinn: six loss-making sales 2010-2016

Landsbankinn was taken over by the Icelandic state in 2011. The largest creditors, the deposit guarantee schemes in Britain and the Netherlands, were unwilling to be associated with the Landsbankinn estate, contrary to creditors in Kaupthing and Glitnir. Consequently, the Icelandic state came to own the new bank, Landsbankinn.

Over the years certain asset sales by Landsbankinn have attracted some attention but each and every time the bank has defended its action. In certain cases it has admitted mistakes but always with the refrain that now lessons have been learnt, time to move on.

Earlier this year, the Icelandic State Financial Investments (Bankasýsla), ISFI, published a report on one of these sales, the one causing the greatest concern – of Landsbanki’s share in a credit card issuer, Borgun. Landsbankinn had undervalued its Borgun share by billions of króna, creating a huge gain for the buyers.

Landsbankinn chose the buyers, nor bidding process etc., this was not a transparent sale. It so happens that some of the buyers happen to be closely related to Bjarni Benediktsson leader of the Independence party and minister of finance. No one is publicly accusing Benediktsson for having influenced the sale.

ISFI concluded that Landsbankinn should have known about the real value of the company and should only have sold via a transparent process, not by handpicking the buyers, some of whom are managers in Borgun. Part of the hidden value was Borgun’s share in Visa Europe, sold in November 2015 after the bank sold its Borgun share. Landsbankinn managers claim they were unaware of the potential windfall that could arise from such a sale.

Following the ISFI report the majority of the Landsbankinn board resigned but not the bank’s CEO, Steinþór Pálsson.

Landsbankinn’s close connections with the Icelandic Enterprise Investment Fund

Now in November the Icelandic National Audit Office, at the behest of the Parliament, investigated six sales by Landsbankinn, conducted in the years 2010 to 2016. It identified six sales, one of them being the Borgun sale, where it concluded that the state’s rules of ownership and asset sale had been broken as well as the bank’s own rules.

The report also points out that some of Landsbankinn’s own staff would have been aware of the potential windfall in Borgun. In a similar sale in another card issuer, Valitor, the sales agreement included a clause giving the bank share in similar gains after the sale.

Landsbankinn CEO Pálsson said he saw no reason to resign since lessons from these sales had already been learnt. However, nine days after the publication of this report Landsbankinn announced that Pálsson would step down with immediate effect.

Interestingly, four of the less-than-rigorous sales involved the Iceland Enterprise Investment Fund (Framtakssjóður), IEIF, set up in 2010 by several Icelandic pension funds. In the first questionable Landsbankinn sale, in 2011, the bank sold a portfolio of assets directly to the IEIF without seeking other buyers. The portfolio was later shown to have been sold at an unreasonably low price.

In relation to the sale Landsbankinn became the IEIF’s biggest owner. The Financial Surveillance Authority, FME, later stipulated that the bank could not hold a IEIF stake above 20%. In 2014 the bank then sold part of its share in the IEIF to the Fund itself, again at an unreasonably low price. In two sales, 2011 and 2014, Landsbankinn sold shares in Promens, producer of plastic containers for the fishing industry, again to the Fund.

As the Audit Office points out all the questionable sales have had two characteristics: a remarkably low price and Landsbankinn has not searched for the highest bidder but conducted a closed sale to a buyer chosen by the bank.

No one is accused of wrongdoing but it smacks of closed circuits of cosy relationships, a chronic disease in the Icelandic business community.

Landsbankinn and the blemished reputation

Landsbankinn claims it has in total sold around 6.000 assets via a transparent process. That may be true but the Audit Office report indicates that the bank chooses at times to be less than transparent, especially when it’s been dealing with the IEIF.

The bank’s management has time and again stated the importance of improving the bank’s reputation – after all, the 2008 collapse utterly bereft Icelandic banking of its reputation. This strife is the topic of statements and stipulations but so far, deeds have not followed words. The Audit Office concludes that inspite of its attempts the bank’s reputation has been blemished by the questionable sales.

How the banks were owned before the collapse

During the years of privatisation of the Icelandic banks, from 1998 to end of 2002, it quickly became clear that wealthy individuals were vying to be large shareholders in the banks. There was some talk of a spread ownership but in the end the thrust was towards having few individuals as main shareholders in the three banks.

Landsbankinn was bought by father and son, Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson who during the 1990s got wealthy in the Soviet Union. A fact that gave rise to articles in the magazine Euromoney in 2002, before the Landsbankinn deal was concluded.

Kaupthing’s largest owners were, intriguingly, businessmen who got wealthy through deals largely funded by Kaupthing. The largest shareholder, Exista, was owned by two brothers, Ágúst og Lýður Guðmundsson and the second largest was Ólafur Ólafsson. The brothers own one of Britain’s largest producers of chilled ready-made food, Bakkavör. Ágúst got a suspended sentence in a collapsed-related criminal case. Ólafsson, together with Kaupthing managers, was sentenced to 4 ½ years in prison in the so-called al Thani case.

Glitnir had a less clear-cut owner profile to begin with. The family of Bjarni Benediktsson were large shareholders in the bank (then called Íslandsbanki, as the new bank is now called) but as the SIC report recounts the Landsbankinn father and son had built up a large stake in the bank. The FME kept pestering the father and son about these shares, the authority claimed the two were not authorised to own, later sold to the Benediktsson’s family and others.

In spring of 2007 Jón Ásgeir Jóhannesson, who had insistently but unsuccessfully tried to buy a bank in 1998, gathered a group to buy around 40% in Glitnir. Involved were Baugur and FL Group, both owned or largely owned by Jóhannesson. One of his partners was Pálmi Haraldsson, a long-time co-investor with Jóhannesson. This graph (from the SIC report) shows Glitnir’s lending to Fons and other Haraldsson’s related companies: the cliff of debt rises after these businessmen bought Glitnir. It could also be called Icelandic banking in a nutshell:

screenshot-2016-12-09-16-17-37

Biggest shareholders = biggest borrowers

The graph above is Icelandic banking a nutshell. It characterises what the word “ownership” meant for the largest shareholders: they were also the banks’ largest borrowers, as well as borrowing in the other two banks. The shareholding of the largest groups in each of the banks was around and above 40% during most of the short run – the six years – of privatised banks.

Here some excerpts from the SIC report about the borrowing of the largest shareholders:

The largest owners of all the big banks had abnormally easy access to credit at the banks they owned, apparently in their capacity as owners. The examination conducted by the SIC of the largest exposures at Glitnir, Kaupthing Bank, Landsbankinn and Straumur-Burðarás revealed that in all of the banks, their principal owners were among the largest borrowers.

At Glitnir Bank hf. the largest borrowers were Baugur Group hf. and companies affiliated to Baugur. The accelerated pace of Glitnir’s growth in lending to this group just after mid-year 2007 is of particular interest. At that time, a new Board of Directors had been elected for Glitnir since parties affiliated with Baugur and FL Group had significantly increased their stake in the bank. When the bank collapsed, its outstanding loans to Baugur and affiliated companies amounted to over ISK 250 billion (a little less than EUR 2 billion). This amount was equal to 70% of the bank’s equity base.

The largest shareholder of Kaupthing Bank, Exista hf., was also the bank’s second largest debtor. The largest debtor was Robert Tchenguiz, a shareholder and board member of Exista. When the bank collapsed, Exista’s outstanding debt to Kaupthing Bank amounted to well over ISK 200 billion.

When Landsbankinn collapsed, Björgólfur Thor Björgólfsson and companies affiliated to him were the bank’s largest debtors. Björgólfur Guðmundsson was the bank’s third largest debtor. In total, their obligations to the bank amounted to well over ISK 200 billion. This amount was higher than Landsbankinn Group’s equity.

Mr. Thor Björgólfsson was also the largest shareholder of Straumur-Burðarás and chairman of the Board of Directors of that bank. Mr. Björgólfur Thor Björgólfsson and Mr. Björgólfur Guðmundsson were both, along with affiliated parties, among the largest debtors of the bank and together they constituted the bank’s largest group of borrowers.

The owners of the banks received substantial facilities through the banks’ subsidiaries that operated money market funds. An investigation into the investments of money market funds under the aegis of the management companies of the big banks revealed that the funds invested a great deal in securities connected to the owners of the banks. It is difficult to see how chance alone could have been the reason behind those investment decisions.

During a hearing, an owner of one of the banks (Björgólfur Guðmundsson), who also had been a board member of the bank, said he believed that the bank “had been very happy to have [him] as a borrower”. Generally speaking, bank employees are not in a good position to assess objectively whether the bank’s owner is a good borrower or not.

De facto, the Icelandic banks were “lenders of last resort” for their largest shareholders: when foreign banks called in their loans in 2007 and 2008 the Icelandic banks to a large extent bailed their largest shareholders out with massive loans.

Needless to say, systemically important banks in most European countries are owned by funds and investors, not few large shareholders who are also the banks’ most ardent borrowers. Icelandic banks will hopefully never return to this kind of lending again.

Separating investment banking and retail banking

As very clearly laid out in the SIC report the banks did not only turn their largest shareholders into their largest debtors but the banks’ own investments were usually heavily tied to the interests of their largest shareholders. Therefor, it’s staggering that now eight years after the collapse and three governments later a Bill separating investment banking and retail banking has not yet been passed in the Icelandic Parliament.

This means that most likely the new banks – Landsbankinn, Arion and Íslandsbanki – will be sold without any such limitation on their banking operations.

It is indeed difficult to see that there could be a market in Iceland for three banks. There is speculation that there will be foreign buyers but sadly, the history of foreign investment in Iceland is not a glorious one. Iceland is not an easy country to operate in as heavily biased as it is towards cosy relationships so as not to say cronyism.

Another way to attract foreign buyers is to offer shares for sale at foreign stock exchanges; Norway has been mentioned. Clearly a good option but I’ll believe it when I see it.

Judging from the short span of privatised banks in Iceland it’s also a worrying thought that the banks will again be owned by large shareholders, holding 30-50%.

The fact that state-owned Landsbankinn could over six years conduct six questionable sales with no consequence until much later, raises questions about lessons learnt. And the fact that this potentially simple risk-limiting exercise of splitting up investment and retail banking hasn’t yet been carried out by the Icelandic Parliament makes one again wonder about the lessons learnt. And yet, Iceland has the most thorough report in recent times in the world to learn from.

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Written by Sigrún Davídsdóttir

December 9th, 2016 at 4:20 pm

Posted in Uncategorised