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Iceland pre-and post-collapse

A revealing leak in Morgunblaðið

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A journalist at Morgunblaðið, Hörður Ægisson, has a remarkable access to mole/moles within the CBI and/or the civil service who provide him most lavishly with one leak after the other. Ægisson has earlier touched upon Project Slack, apparently the code name for the plan being hatched on the capital controls. Today, he not only mentions the plan by name but seems to copy and paste parts of it: interesting information on exit tax etc. with most interesting ramifications. The leak might be good news for creditors as it gives them the time to figure out a line of defense. But whether it will be used is another matter: it does not seem in line with the minister of finance vision of a simple route steering well away from legal risks.

One of the key concepts mentioned again and again to justify exit tax – i.e. the omnibus one on the whole of Iceland – is equality: exit tax should be equal for everyone, both foreign creditors and Icelandic businesses. This never sounded plausible; after all, those who want the state to make money out of lifting the controls aim at getting that money from the estates and foreign creditors, not from just everyone in Iceland. The leak in Morgunblaðið clarifies this strife for “equality.”

Morgunblaðið writes (p. 16 of print copy; my translation; emphasis in bold and additions in brackets are mine):

In other words, the (exit) tax is a declaration on behalf of Icelandic authorities that cross-border payments, for example due to possible exemptions for the estates (of the failed banks) accompanying a composition agreement, would be treated as is the case with other Icelandic entities. There would be no difference if the payment was in ISK or foreign currency. … Further, the aim is to find ways for domestic entities, both pension funds and businesses, to bring funds out of the country without having to pay the exit tax planned to be introduced as part of the plan of lifting capital controls.

So much for the declared intention of equality. This is a plan where there are foreign creditors on one hand, domestic entities on the other and some are more equal than others. I.e. first there is a general rule for everyone and then exemptions for some, who all happen to be Icelandic.

This does of course not come as any surprise. It has long been clear that a) the Progressive Party wants to channel funds, not only ISK but also FX, from the estates to the Treasury; b) if this channeling were an easy path to follow it would have been done as soon as the government came to power. – The path towards the funds has to be done under the sign of equality but in order for these measures only to hit the foreign creditors some special paths are needed. It is never easy to formulate “equality” that effectively is discriminatory; which explains why it is taking so long. And even more difficult since Bjarni Benediktsson minister of finance defined the route he wants to take: simple and avoiding legal risks.

Further, Morgunblaðið writes: “The estates’ foreign assets will not be treated separately, as creditors had planned, since they only own claims in ISK in Icelandic estates.”

It remains to be seen if this somewhat narrow definition matters or not. Following a Supreme Court ruling on November 10 (an unofficial English translation here) creditors can now ask for a payout in FX, even to the degree that the estates are free to buy FX to provide for a payout.

As to levying the exit tax (or “exit levy” – Morgunblaðið uses the term “levy,” as in the 2011 capital control plan, not “tax” as has been used lately) Morgunblaðið writes: “The exit levy will however cover offshore ISK owned by foreign entities (which is odd to mention because the definition of offshore ISK is “foreign-owned ISK” – does this indicate that there is no levy on offshore ISK owned by Icelandic entities through foreign bank accounts? Or is this just a manner of writing?) after they have been forced to convert their ISK, with a haircut, into FX bonds with maturity of more than 30 years. According to Morgunblaðið’s sources the proposal is to issue these bonds with fixed interest rates below 3%. It is likely that the sovereign would have to pay close to 50% higher interest rates by issuing comparable bonds in international markets.

Here it is of interest to note that these (foreign) offshore ISK owners would be subjected to haircut twice: first when they would be forced (how? By law?) to convert their ISK into FX bonds – and then when they take the bonds abroad.

Interestingly, long maturity is normally imposed to keep funds inside a country, i.e. to prevent it from leaving, when capital controls are lifted. This double-fencing in does, at first sight, not quite seem to add up.

Also, this only seems to fit offshore ISK holders in the original overhang, not the foreign-owned ISK in the estates but that might be my misunderstanding.

The worrying, or out-right scary, news for Icelanders is however that this plan seems built on the belief that with this plan Icelandic sovereign bonds will stay near to a junk/below-investment-grade level if the authors of this mighty plan calculate that 3% is a way for Iceland to get cheap interest rates. That is definitely bad news for Iceland and for Icelandic businesses, which to a great degree are dependent on the sovereign rating. After all, lifting the controls is meant to provide market access for Iceland and Icelandic businesses, not to keep them stuck under a new name in capital-control environment for another 30 years.

As Bjarni Benediktsson put it so well in a speech in October foreign investors tend to mistrust countries that need capital controls to survive.

The original overhang offshore ISK owners (now amounting to ISK307bn; 16% of GDP) are in for some changes if Morgunblaðið is in possession of the real plan: “Investment provisions of offshore ISK owners, who now hold ISK130bn in deposits and ISK170bn in sovereign bonds, will be tightened so they will have a choice either to participate in such a sovereign bond exchange or hold their ISK on non-interest bearing accounts in the CBI without any investment provisions. Offshore ISK owners who have invested in sovereign bonds will be forced into a bond exchange when their bonds mature. Foreign entities own ca. ISK80bn in state securities maturing in 2015 and 2016. The (exchange) bond, issued by the sovereign, is tradable but if investors wish to sell their bonds they will have to pay a 35% exit levy.”

It would be most interesting to know if Project Slack has already been blessed and signed by the foreign advisers or if this is “home-knitted,” to use an Icelandic idiom, i.e. if it is put together by Icelandic experts fulfilling the wish of the powers that are. My understanding is that the foreign advisers are indeed familiar with this project. The leak might hone their understanding of the political territory they are operating in.

In an interview with Viðskiptablaðið CBI governor Már Guðmundsson throws some cold water on speculation regarding an exit tax. In a most becoming governor-like Delphic utterance he points out that such a tax was already part of the 2011 plan but it is untimely to speculate what role it might play or how high it might be used. – Keeping in mind the original 2011 exit tax, targeted at foreign-owned ISK against the all-encompassing exit tax now discussed it is indeed appropriate to mention its role and eventual usage as something that needs to be pondered on.

Whoever named the project must be complemented for his (must be a “he” – no women working on this project) sense of irony given the myriad of connotations it can have: the slack legal framework, the slow-moving project etc.

Perhaps creditors know all of this already and have themselves acquired copies of Project Slack, just like Morgunblaðið. But if not, Morgunblaðið has done the creditors a huge big favour providing their lawyers with stuff with which to prepare for the eventualities listed above. Unless of course the slack project in the end neither fits the CBI, IMF, EU and Benediktsson’s sense of practicality and enforceability, not to mention irony.

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Written by Sigrún Davíðsdóttir

December 11th, 2014 at 9:31 am

Posted in Iceland

Lifting the capital controls: attacking the central ISK problem or dallying around it

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The depressing thing is that resolving the capital controls in Iceland might not be that tricky: there are some really sound ideas on lifting the capital controls and there is no lack of literature/IMF papers on similar situations in other countries. The problem is a political one: politicians have on one hand promised too much, on the other fear the responsibility of fateful decisions. Dallying around has already caused a costly delay for Iceland. But two significant steps have been taken recently: the Landsbankinn bonds agreement is finally in place and the Central Bank has announced its final foreign currency auction on February 10.

Finally, creditors – or rather the Winding-up Boards of the three failed banks and some of their advisers – got to meet the government’s so-called advisory group. An IMF-group, in Iceland now, was not at the meeting according to sources but had meetings with i.a. representatives of the creditors following the meeting yesterday. This is a meeting that will sprout many meetings but nothing more concrete for the time being.

The meeting was called for by the foreign advisers to hear the view of Winding-up Boards and creditors. With no plan presented it seems a bit of an exercise in trying to be seen doing something but as Lee Buchheit said to Rúv last night the foreign advisers thought it was time to hear from the Winding-up Boards before presenting their proposals. – And when could a plan be expected? Early next year, according to Buchheit. In the light of the past that seems an optimistic bid.

With the Landsbankinn bonds agreement in place Benediktsson has shown long-awaited determination though the press release curiously has six statements about what is not being done. Further, it is of great interest to see that the CBI auctions are now being brought to an end with a final auction on February 10. It is reasonable to think it will then take a couple of months to finalise plans, which means that in early spring some plan for dealing with the estates and easing capital controls might reasonably be expected; perhaps in the Icelandic tradition of giving summer presents on the first day of summer, celebrated annually on the third day of April.

However, an exercise in cleverness that does not resolve quickly and effectively the ISK assets, the core of the capital controls, will not be a happy solution for Iceland: most Icelandic business leaders agree that Iceland needs a speedy lifting of the capital controls, of course always with an eye on financial stability.

No conclusion – it wasn’t that kind of a meeting

Ever since Glitnir and Kaupthing presented their draft for a composition agreement to the CBI in 2012 creditors have been waiting to meet someone with authority to negotiate a deal. With foreign advisers at hand they had hoped the government would feel confident enough but so far it has not happen. Although nothing was decided today it was at least a day where it was acknowledged that the WuBs and creditors are a party to lifting the controls.

“No, it wasn’t that kind of a meeting,” Jóhannes Rúnar Jóhannesson from Kaupthing’s Winding-up Board said to Rúv when asked if an official plan of lifting capital controls had been presented. Steinunn Guðbjartsdóttir, Glitnir, said the meeting had been a positive step in the right direction. “I think we have to be optimistic. At least this has started and judging from what Icelandic authorities indicate they seem to be optimistic and steadfast in putting an end to this and start working towards lifting the capital controls,” Guðbjartsdóttir said.

Kaupthing’s main message, according to Jóhannesson, was that composition would be the best way forward for Kaupthing’s creditors but also for the Icelandic state, given that such an agreement would be final and abolish both uncertainty and risk. Being based on an agreement composition would be binding for all creditors. Jóhannesson also said that Kaupthing’s message to Icelandic authorities was that the WuB could offer to conclude Kaupthing’s resolution without challenging financial stability in Iceland. – This last thing is very much what the WuBs have been offering: a balance-of-payment, BoP, neutral resolution.

The possible measures

This was a meeting for the WuBs to make their voices heard and they had all worked hard to prepare for it. The WuBs were asked to explain how their proposals would support the aim of the government to secure financial stability. As mentioned above: the WuBs have all been working towards a balance-of-payment neutral resolution, which they aim at concluding through composition.

An exit tax is still being discussed.* The debate in Iceland has been un-nuanced: there is a huge difference if an exit tax is levied on the offshore ISK assets – as was part of the 2011 CBI plan for lifting the controls; same as i.a. Malaysia did with good results at the end of the 1990s, a classic solution in this situation – or on all funds (of course above a certain amount) leaving the country. Would this cover transactions/payouts between the WuBs’ foreign accounts to the creditors’ foreign accounts? No doubt, those who are constructing this plan would be of that opinion because it is first and foremost foreign funds prime minister Sigmundur Davíð Gunnlaugsson and those who agree with him are keen on securing.

Árni Páll Árnason leader of the social democrats who met with the advisers on Monday as part of the Alþingi Economic and trade committee on Monday pointed out after that meeting that the prime minister’s plan to catch funds from lifting the controls had always rung hollow. As far as he could see the aim of the plan-in-the-making was nothing like the prime minister had not only promised but claimed it was unavoidable that the state would accrue money out of the process of lifting the controls.

The goal here is a tax that would be non-discriminatory, not a trivial thing and yet create money flows to the Icelandic treasury. From the point of view of creditors such a tax is akin to an expropriation (especially if not based in national necessity as was the Emergency Act in 2008) and will no doubt be challenged.

The tax levied on the estates this year to fund the latest write-downs, the “Correction,” will as well be challenged. Then there is also another tax, ,,asset-handling tax” (“fjársýsluskattur”), hardly ever mentioned in the debate in Iceland but also greatly upsetting from the point of view of creditors. This tax is, according to them, levied on funds that arise only in the accounts, due to the effect on the asset status when i.a. claims that have been filed twice are corrected and other such measures, i.e. with no tangible funds.

Converting ISK assets into bond with long maturity – 30 years have been mentioned – is one classic solution to prevent funds from leaving the country. Creditors could then sell these bonds or keep them, meaning that for them ISK assets were tradeable. This seems to be part of the plan now in the making.

Solutions tailored to the ISK problem

The problem is that these are all general measures. It would be quicker and more to the point to simply negotiate with Glitnir and Kaupthing regarding their ISK assets, which after all is the core of the problem. The old ISK overhang, now ISK 307bn or just under 16% of GDP.

As the CBI pointed out in its latest Financial Stability report: A solution must be found for the estates’ ISK assets. This is the problem keeping the controls in place – and this is the problem that should be solved.

According to the CBI “settling the estates will have a negative impact on Iceland’s international investment position in the amount of just under 800 b.kr., or about 41% of GDP … The impact on the balance of payments is somewhat less, at 510 b.kr., or 26% of GDP, because a portion of the estates’ foreign-denominated domestic assets are backed directly or indirectly by foreign assets. Residents with foreign-denominated debts to the estates own substantial foreign assets that could be sold upon settlement. Furthermore, the estates’ foreign-denominated sight deposits are backed by foreign liquid assets, according to the Central Bank’s liquidity rules. The impact of the estates’ settlement on the balance of payments is virtually the same as their ISK assets. All of the above amounts will decline by 110 b.kr., or 6% of GDP, with the payment of bank taxes. (Emphasis is mine.)

In addition “Glitnir and LBI have now converted about 70% of the estates’ original asset portfolios to liquid funds, and Kaupthing has converted roughly 60%.”

The sentence in bold outlines how this part of the foreign-denominated debt could be resolved. The book value of the estates’ holdings in Arion Bank and Íslandsbanki accounts for ca. 77% of their domestic ISK-fixed assets. Roughly the whole of Kaupthing’s ISK problem is its holding in Arion. Glitnir has ca. ISK100bn in addition to its holding in Íslandsbanki. There are persistent rumours that Glitnir is close to finding foreign buyers to Íslandsbanki. Another way would simply be to list one or both banks abroad as well as in Iceland – the Norwegian stock exchange has been mentioned as an option.

Agreeing with the CBI the ISK problem needs to be solved. The easiest way to tackle it is by simply negotiating with creditors of the two estates. Swaps with the CBI’s ESÍ and other technical solutions could be used. But as long as the government is captured by its thoughts of making money out of the estates simple solutions are in the danger of being pushed aside for more complex and riskier plans.

Another reason for staying away from negotiations is the government’s fear of getting exposed to legal risk arising from an involvement. But that risk is, to my mind, already there as any exemption granted by the CBI needs the blessing of the minister of finance.

The economic environment: from inflation to deflation

In November Statistics Iceland forecast growth of 2.7% this year. Three weeks later it published new data showing a growth of 0.5% over the first nine months of the year with recession of 0.2% during the third quarter. All of this is way off the 3% widely forecasted at the beginning of the year. Inflation is now at 1%, historically low. As expected, the CBI lowered its rates today: the seven-day collateral lending was lowered from 5.75% to 5.25% (its press release throws some light on the economic situation of weaker growth than previously forecasted).

After living (rather too happily, it seems) with inflation (or the “ghost of inflation” as it is often called in Iceland, perhaps indicating that it is not taken very seriously: a ghost sounds less ominous, more ethereal, than the real thing) Iceland now seems headed for deflation though still too incredible to contemplate. Interestingly, this does not seem to register much. Strangely, compared to other countries, DEFLATION has not been printed in big letters or caused furious and worried debate. Oil price has fallen by 40% over a short time and such swings in commodity can very well aid deflation. People might have been waiting to see what the “Correction,” the debt write-down, would bring – these are the explanations economists have been coming up with.

A deflationary environment is of course a wholly different thing than a growing economy and would pose some real challenges in lifting the capital controls. After all, the conditions for lifting have been most favourable, both in Iceland and abroad.

Iceland’s economy, being a small one, often shows great big swings for little reasons. However, the deflationary tendency is a novelty. It remains to be seen if this is a trend or just a bleep.

An IMF-group was in Iceland yesterday to follow things though not present at the meeting. Both the IMF and the EU are monitoring the situation and a solution without their blessing is unthinkable.

What can unhappy creditors do?

The short answer is: plenty. Still too early to speculate, and hopefully there will not be much reason to, but the hedge funds and other claimants would not have been doing their job if they did not have plan A-Z at hand. Law suits abroad is a common route, plenty of scope there for speculation.

Or something as simple as to short Icelandic sovereign bonds.

Again, remains to be seen. A topic for another day but all of this is clearly been worked on by those whose job it is to steward claims in the estates of the three banks.

The government’s foreign advisers live and breath this environment and there will be nothing there they have not encountered before in other parts of the world. The advisers will be aware of the reputational risks for Iceland (and for themselves).

It is – of course – all about politics but not only in Iceland

There are now three things that indicate the growing political strength of Bjarni Benediktsson. The Landsbankinn bonds agreement went through, as did the ISK400bn payment to the priority creditors. This is allegedly what Benediktsson wanted to do all along, unsuccessfully until recently.

This might indicate an upper hand over the prime minister who was allegedly vehemently opposed to the deal though there was no plan in sight as to how to then save Landsbankinn from default in the foreseeable future.

But it was not only Benediktsson’s growing strength that helped finalise the agreement. According to various sources the Icelandic government sensed great pressure from abroad, first and foremost from the British government, eager to recuperate its Icesave expense but also from the European Union. “Quite severe pressure,” one source said. US officials were putting a lot of pressure on the government earlier this year but do not seem to have shown much interest lately.

If this foreign pressure has been a decisive factor the Landsbankinn move might be more due to the pressure than Benediktsson’s strength. The sticks and carrots were not needed for the LBI, the old bank, but for the government, which allegedly got more sticks than carrots from abroad to accept the agreement.

But there is also another movement: the CBI is resuming its currency auctions, which have been stalled for the last many months. There have been various explanation as to why but whatever the reason was the auctions have now been revived – definitely an important step. Being the final auction it will complete this stage of the plan from 2011.

After the whole sorry affair of getting rid of Hanna Birna Kristjánsdóttir minister of interior Benediktsson appointed a new one, Ólöf Nordal. She is not an MP and was a most unexpected choice. gave Benediktsson the possibility to show the capacity to finding an unexpected solution. It however did take him over a week, though Kristjánsdóttir’s resignation certainly did not surprise. It has generally been taken as a sign of Benediktsson’s strength but others think that in the long run this affair will weaken Benediktsson because it shows he has no faith in his Parliamentary group. He might discover at his peril that few bear grudges like belittled MPs.

Rather tomorrow than today

“Morgen Morgen nur nicht heute, sagen alle faule Leute, (tomorrow and not today, say lazy people)” is a German saying. In the case of Iceland it is not so much about being lazy as being fearful in front of the task of taking decisions that will set the course for Iceland in the coming years; and a political disharmony within the government.

There is an on-going action towards lifting the capital controls. Important steps have been taken but they have been taken rather on the back-foot than with a forward surge and energy. The difficult issues are still unsolved: to lift the controls with the lifting itself as the reward – or lifting by trying to get hold of foreign assets of the estates; two different routes demanding different approaches.

With the long preparation, dealing with the ISK assets is the most direct and shortest route towards lifting the controls. The creditors have a full understanding of the situation, also the political situation. Though they will evidently fight fiercely for every króna in the estates there is no doubt also a sense of reality among them what is likely to be within reach, also because a BoP neutral solution is needed as far as possible. If the Icelandic government could muster the courage, aided by their foreign advisers, to take an aim at the core problem it is perfectly achievable to lift the capital controls in the foreseeable future. Again, this is a problem of politics, not economics – and that does not make it any easier to tackle.

*To clarify: in the 2011 capital control plan the exit tax, called “exit levy,” was presented as last-step in the plan to lift the controls: “Finally, the remaining owners of offshore krónur will be offered the chance to sell their ISK deposits for foreign exchange, subject to an exit levy, or to swap króna‐denominated Treasury bonds for eurobonds issued by the Treasury. It is difficult to state when this phase will be concluded; this will be determined by the interplay of internal and external factors.” – As has been emphasized above and earlier on Icelog: what is now being discussed is a very different beast: exit tax on all funds (above a certain amount, no doubt a matter of severe discussion among the advisers) leaving the island, creditors, pension funds and all and sundry. The offshore ISK exit tax targets the core problem, the omnibus exit tax does not: offshore ISK owners, within the estates and those from the old overhang (now ca. 16% of GDP) could well wait, which means that there is nothing to ensure the offshore ISK problem will be solved. – For this reason I find it difficult to imagine that the IMF and the EU would accept the omnibus version of the exit tax though nothing is ever certain in this world.

Update: among the questions WuBs were asked about was why they preferred composition to bankruptcy proceedings – and also their opinion on inserting some sort of a sunset clause into the process (retroactive law?)

Further: I was asked what I thought the exit tax would be. It seems impossible to answer this question in a rational way. First: the estates aim at a BoP neutral solution – as Lord Eatwell suggested in his advice to Glitnir. Kaupthing is talking about the same. Second: what is the tax being used for? To raise money for the state? Then it is impossible to calculate the tax unless knowing how much the government is seeking to raise. Or, tax to solve the problem of the ISK? As far as I can see an omnibus exit tax does not solve the ISK problem, see above. – That said, the number must consistently mentioned is 45% but again, will it be a transparent tax/levy, i.e. with a clear aim/timeframe, as successfully used in Malaysia; or a non-transparent one with no clear aim/timeframe.

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Written by Sigrún Davíðsdóttir

December 10th, 2014 at 9:48 am

Posted in Iceland

Plan (early) next year

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So far, no clear news of the meeting with Winding-up Boards today but it now seems clear that the meeting today was only an informative meeting for the foreign advisers to hear the opinions of the Winding-up Boards on the relevant issues. In the words of a source advising creditors it was a “non-meeting.”

In an interview with Rúv Lee Buchheit, adviser to the Icelandic government on capital controls, said the preparatory work was hopefully about to end. Being this far into preparing a plan he said it was right to hear the opinions of the Winding-up Boards before the advisers would refine their plan and make recommendations to the steering committee. It was perfectly feasible to do something early next year, according to Buchheit.

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Written by Sigrún Davíðsdóttir

December 9th, 2014 at 6:22 pm

Posted in Iceland

Plan (of some sort) presented to parliamentary committee and Winding-up Boards

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Monday, some of the foreign advisers to the Icelandic government on capital controls met with the Parliament’s Economy and trade committee, apparently to present an outline of a plan towards lifting the capital controls. Tomorrow there is a meeting with the Winding-up Boards of the three failed banks.

The plan presented to the committee is so far confidential but in an interview with Stöð 2 Árni Páll Árnason leader of the social democrats said that without breaching the confidentiality he could say that the plan presented was a long way from the ISK300bn windfall for the Icelandic state that prime minister Sigmundur Davíð Gunnlaugsson promised during the election campaign last year. A promise that was always a hollow one, according to Árnason. “It also seems clear that the people’s pension funds will be last in the queue when the capital controls are lifted and the interest of the creditors have priority. It’s now reasonable to ask: what’s the cost of this delay?”

Árnason’s reaction, in addition to rumors from various sources indicate that the plan is still to a certain degree unformed. It is not yet clear if an exit tax on all capital flows from Iceland is being presented as part of it. This tax, in addition to other taxes already imposed on the estates, is likely to be challenged by creditors; it would then lead to the legal wrangling Bjarni Benediktsson minister of finance has said he would want to avoid.

Glenn Kim, who has lead the government’s working group, is in Iceland for the meetings, as is Cleary’s Lee Buchheit. On the other side there are foreign advisers for the Winding-up Board, i.a. from Blackstone. Considering this small world of hedge funds and their legal advisers it seems likely that the foreign advisers have some understanding of the creditors’ point of view and the fact that the creditors will feel that a plan on lifting the controls is long overdue.

There is still no sign of the government’s two leaders being in agreement as to how to proceed. However, with the Landsbanki bonds agreement now having been confirmed a decisive step forward has been taken. The government will now feel the pressure to continue along the same route. Tomorrow might certainly bring some surprises. Yet, remarkable few seem to count on the plan being the sort of solution the country is waiting for. More cost to Iceland from the capital controls might still accrue.

*Update: in addition to the issues above creditors might be offered to convert their ISK cash into long-term bonds, a classic way to resolve the problems at stake.

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Written by Sigrún Davíðsdóttir

December 9th, 2014 at 12:08 am

Posted in Iceland

Small or big steps?

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The Winding-up boards of the banks have been waiting to be called to a meeting with the committee overseeing the lifting of the capital controls – and now an invitation has landed on their tables for a meeting next Tuesday. Remains to be seen what the message is.

In the meantime, there is the extension of the Landsbanki bond agreement and a payment of ISK400bn to priority claimants in Landsbanki, announced yesterday, all explained here. The agreement has been changed from what it was originally but at least decisions have been taken and the Brits have had some happy tidings.

The question is if something more will follow, hen’s or horse’s steps.

Bjarni Benediktsson has heaped time pressure on himself (allegedly trying to push the PM to good deeds) by continuously referring to a plan in spe by the end of the year. With domestic politics in mind, he might feel that Icelanders need some taken care of, i.e. some control easing for domestic entities rather than foreign creditors. Without solving the problem of the offshore ISK any domestic move can be little but some window-dressing.

So far, the fundamental rift between the two government leaders hasn’t been fixed – that the PM hopes to gain funds out of lifting controls while Benediktsson is, I believe, “just” trying to lift the controls. As long as they don’t look in the same direction it is difficult to believe in the big steps necessary to lift the controls.

It certainly is a victory for Benediktsson that he has finally – after months (depends if one counts from May or later) been able to do what he apparently wanted all along: extend the Landsbanki bonds (albeit by changing the agreement but not in a materially different way). Better late than never. Incidentally, this happened on a day where he appointed a new minister of interior, Ólöf Nordal, thereby making a popular choice for everyone except his parliamentary group, which in the long time might turn problematic. The group will certainly not feel they owe him any favour.

In November a year ago when Benediktsson managed to drastically tame the PM’s wishes re the “Correction” as the plan was first presented, I thought this signaled that Benediktsson was gaining the upper hand in the relationship with his coalition party. I was dismally wrong that time; no drastic steps followed. Now that Benediktsson has taken steps re Landsbanki, after all this time, doesn’t necessarily mean he is gaining the upper hand.

The last paragraph in the press release from the Ministry of Finance is interesting:

The settlement of priority claims marks a major step forward in the winding-up proceedings of the failed banks and will assist the Government in implementing a comprehensive capital account liberalisation strategy. 

So is there now the long-awaited strategy? Not sure yet, more needs to be seen.

Another interesting new move – Heiðar Már Guðjónsson has now demanded at Reykjavík District Court that Glitnir be put into bankruptcy proceedings; another interesting twist.

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Written by Sigrún Davíðsdóttir

December 5th, 2014 at 11:01 am

Posted in Iceland

Something about to happen regarding the capital controls?

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The Icelandic media is full of news of an apparently imminent exit tax though on what exactly is less clear. I’ve dealt with it before – it is a major difference if this will be solely on the ISK assets of the bank estates or if this will be, as the plan seems to be, on all capital movements in and out of Iceland. If an all-inclusive exit tax, there still needs to be some settlement regarding the ISK assets of the estates, notably Glitnir and Kaupthing.

In spite of optimistic words from minister of finance Bjarni Benediktsson on a plan before end of the year on lifting controls and a sentence in prime minister Sigmundur Davíð Gunnlaugsson’s speech at Progressive Party meeting on Saturday I still have the feeling not much is happening when it comes down to concrete, realistic on-paper decisions. My sense is that there is more legal writ-rattling among creditors as to possible court cases than there is plan-shuffling among Icelandic authorities.

I have wondered earlier that an exit tax might be the New Year crackers this year. But there is also an Icelandic tradition for giving summer presents on third Thursday of April every year. If nothing to fill the  New Year crackers then perhaps something for a summer present when the days start to get longer in Iceland.

More on all of this in greater detail later.

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Written by Sigrún Davíðsdóttir

November 25th, 2014 at 7:37 pm

Posted in Iceland

Three ex-Landsbanki bankers sentenced in market manipulation case – updated

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Three ex-Landsbanki bankers have been sentenced (in Icelandic) at Reykjavík County Court in an extensive market manipulation case. The bankers were charged with manipulating Landsbanki share price almost a year up to the collapse of Landsbankinn October 7 2008. The action was judged to have influenced the share price of the bank, i.e. slowed its fall and prevented the shares falling in price. Consequently, price movements were not properly reflected and the share price appeared stronger than it would have been without the intervention.

Landsbanki ex-CEO Sigurjón Árnason was sentenced to a 12 months imprisonment, of which nine months are suspended. Two others, Júlíus Steinar Heiðarsson and Ívar Guðjónsson both working on the bank’s proprietary trading desk, were sentenced to nine months imprisonment, six of which are suspended. The fourth charged, Sindri Sveinsson, was acquitted.

*The judgement is not yet on the Court’s website but will be attached here when published. – Published here.

Updated: an addition now that I have read the judgment (Nov 23 2014):

The OSP brought the case following charges to the OSP made by the FME in October 2010. The original charges were against 18 ex-Landsbanki employees for market manipulation since May 2003 (nothing less) until the collapse of the bank in October 2008.

This means that according to the regulator, Landsbanki shares were actually manipulated for over five years.

In the end, the OSP charged 4 ex-Landsbanki managers for market manipulation from beginning of November 2007 until the last day Landsbanki shares were traded on the Icelandic Stock Exchange October 3 2008.

The sentences are far more lenient than the prosecutor had asked for. The judges (three in all) thought there were two mitigating circumstances: the deeds took place at a time of great turbulence in the markets and the bankers might be seen as having tried to save the bank (as they had claimed themselves) – and the deeds took place in 2008, i.e. a long time ago.

Re the first, buying the bank’s shares and risking the bank’s own capital is not the standard reaction (or even a creative one) in turbulent times and credit crunch.

Re the long time: financial crimes are rarely visible with bare eyes. Staff at the Icelandic Stock Exchange did indeed notice some of the actions taken and reported them to the FME, which resulted in an FME investigation and charges later on.

Interestingly, the day after the Landsbanki judgment three British businessmen were convicted for fraud in a case brought by the SFO. The fraud took place in 2007 and 2008, as in the Landsbanki case. The case was referred to the SFO, which opened an investigation in August 2009. One of those convicted is Chris Ronnie, known in Iceland as a client of Kaupthing.

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Written by Sigrún Davíðsdóttir

November 19th, 2014 at 10:25 am

Posted in Iceland

Extended LBI deadline – and caged-in creditors?

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The LBI has now extended its deadline “for completion of the extension and amendment of the Landsbankinn bonds to December 31, 2014. The new deadline has been determined in further consideration of the Central Bank‘s previous correspondence to LBI by which it had indicated that a final answer regarding LBI´s conditions precedent could be available no later than the end of the year.”

LBI seems to be acknowledging the CBI cannot be pushed to answer earlier although allegedly minister of finance Bjarni Benediktsson was all set to answer earlier but was stopped in his tracks by prime minister Sigmundur Davíð Gunnlaugsson. Or so the rumour goes. The agreement is between Landsbankinn, the new bank owned by the state and the LBI. It seems odd to think that Landsbankinn would have agreed to something its owner would be wholly opposed to but well, who knows (except those in charge)?

In Morgunblaðið today, it is assumed that an exit tax of 35% will only hit creditors of the three bank estates though it is, according to the paper, still unclear if this tax will apply to priority claimants of the LBI, i.e. notably the UK deposit guarantee scheme. There is no mention if this tax will be transparent, i.e. with a preset timeline etc.

An exit tax will contain the problem of ISK but now solve it and the authorities will have little control over how it turns out. With an exit tax the estates will literally be boxed in. Then Iceland is close to a situation described by CBI governor Már Guðmundsson in the following way at a meeting last year: assume the estates are caged in; when new investors come to Iceland they see this cage and ask who is in there; the answer is: foreigners who invested in Iceland last time around.

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Written by Sigrún Davíðsdóttir

November 18th, 2014 at 10:02 am

Posted in Iceland

Is exit tax on both ISK and FX in the Icelandic Christmas crackers this year?

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If minister of finance Bjarni Benediktsson sticks to his well-publicised intension of moving towards lifting the capital controls before the end of the year a plan must be imminent; some of the foreign advisers have been visiting. One strategy being examined is exit tax on both ISK and FX. Such an exit tax will not solve the offshore króna problem and might prolong the capital controls under a different name. A new judgement by the Icelandic Supreme Court may well have effected the certainty of those pleading for the “ISK-isation” of the failed banks’ estates. Central to the coming plan is whether the government is content with lifting the controls – or if it wants to gain funds for the state coffers as well. As before, the politics count more than the economics.

As soon as they were in office both prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson said they would work towards quickly lifting the capital controls. In office since early summer 2013 the two leaders do not have much concrete to show for their oft-repeated words.

To those close to the process the reason for the sluggish pace is clear: the two ministers have diametrically opposing ideas. Gunnlaugsson has not been saying much recently on the controls but has earlier championed the idea of enriching the state with money from the foreign creditors he invariably calls “vulture funds.” Benediktsson’s speech in October indicated a willingness to avoid legal uncertainties.

An exit tax is a classic solution to capital controls as Malaysia demonstrated in the 1990s. It is also part of the three-step liberalisation strategy set out in 2011 and in its original form intended for offshore ISK. Now however the feeling is that the Icelandic government is planning an exit tax on all funds leaving the island, ISK or FX. And the percentage? Anything less than 30-35% is hardly credible given that the difference between the ISK on- and offshore rate is now 17%; as much as 50% has also been mentioned. Whether this strategy would be based on a transparent plan is not clear.

The rumour in the Icelandic echo chamber is that a plan, some plan, might be presented by the end of November and the exit tax will be a part of that plan. What else it might contain is not yet clear.

Exit tax – in theory not a new idea

As mentioned in the most recent IMF report on Iceland the 2011 capital controls liberalisation strategy included FX auctions, as the CBI has been doing and then further two steps, Eurobond swap and exit tax, not yet implemented.

This exit tax is in line with measures taken in other countries with capital controls: in order to temper outflows, which the controls were put in place to contain, there is a tax. The transparent way is to announce at the outset both the percentage and a schedule for lowering it. If things go well the easing can be accelerated as turned out to be the case in Malaysia: the plan was implemented in less time than foreseen at the beginning. Those holding the problematic currency can then choose if they want a tax haircut or if they wait; other capital movements are not affected.

However, the rumour is that the Icelandic government is planning an entirely different version of the classic exit tax, i.e. a tax on all movement of capital out of the country, whether offshore ISK or FX. This prolongs the controls in all but name. In theory everyone is equally (badly) off, which solves the problem the government is actually very worried about: equality between creditors and others.

In particular the government does not want to be seen as aiding greedy foreign creditors to exit while Icelandic individuals and entities are still locked inside controls. Unfortunately this is partly a misconceived argument – Iceland as a whole stands to gain quite immensely by lifting the controls. This should be the focus of the government, not the possible gain of the creditors. Whether the lifting happens some months later is of a much lesser importance than Iceland getting out of controls. The Icelandic gain of lifting the controls is escaping the controls.

Interestingly, this timing problem could indeed be solved in a fairly simple way: if a composition agreement for Glitnir and Kaupthing is reached it will take at least 4-6 months to work out the details. With an agreement in place this time could be used to open up exit avenues for Icelanders.

Acting so as not to act

An exit tax on all flows seems to be a (not so?) clever way of avoiding a decision on the, for the government, thorny issue of composition or bankruptcy proceedings for the estates of Glitnir and Kaupthing (and for Landsbanki further into the future). The message to the creditors is then that they can decide whatever they want – composition or bankruptcy, no problem, make your own choice. Beyond the estates there is the exit tax.

An exit tax on all outflows does not necessarily solve the offshore ISK problem – the underlying cause for the capital controls – and it does not solve the problem of that particular part of the foreign-owned ISK in Glitnir and Kaupthing: Íslandsbanki and Arion.

The recent judgment by the Supreme Court in the case of Kaupthing v Aresbank SA (in Icelandic; here an unofficial English translation) did not come as a surprise for those who had interpreted Icelandic state and creditors v Landsbanki Supreme Court judgement from September 2013 along the lines now clarified. For those working for the “ISK-isation” of the estates this judgment is no happy tidings. Not only can the estates pay out in FX if they or creditors so wish: the estates can go out into the market and buy FX in order to pay out; quite a feisty judgment as judgements come.

Will the government act at all?

The government is no doubt working on a plan but will it actually have the courage to act? Interestingly, some hardened political observers in Iceland do believe that in spite of all the rhetoric the government will actually not be able to make the necessary decisions. They think the government will simply limp through its four years continuously finding some reasons for in-action on the controls.

Rationally, I have to say I find it difficult to believe this could be the case not least with Benediktsson’s oft repeated intention to act before the end of the year. On the other hand this government has shown some spectacular abilities for inaction or leaving things open (appointing a new CBI governor; a debt relief yes but very different from the original intentions; Landsbanki bonds agreement etc.). With this in mind it is easy to believe that the difficult issues regarding the controls will prove to difficult to solve.

Most strikingly, the government – or, to be more precise, the minister of finance and the prime minister – has not been able to act so far on the Landsbanki bonds agreement and the ISK226bn, €1.45bn, remaining for Landsbanki to pay LBI. If agreed on it will most likely be with some further restrictions for general creditors than in present agreement (though they will not get paid until the estate either goes into bankruptcy proceedings or there is a composition agreement; i.e. the agreement sets on precedence since priority creditors have been paid out in Glitnir and Kaupthing). The next deadline (the fifth) is Monday 17 November.

Regarding Landsbanki the delicate act is how to treat the main priority claimant, the UK deposit guarantee scheme. Economic Secretary to the Treasury Andrea Leadsom allegedly did not mince her words when talking to Benediktsson on his visit to London in autumn. He thought he was coming for a collegial meeting over drinks but instead got an almighty dressing down from the fearsome Leadsom. There are even rumours that the Secretary was waiving a legal writ already penned. All of this is rumours rumours and nothing more.

Political tremors

I have earlier pointed out that so far the prime minister has had an upper hand since he apparently stopped Benediktsson from agreeing to the Landsbanki bonds agreement. Now that Gunnlaugsson’s grand promise on debt relief is being carried out, to no great happiness of many Independence Party MPs, Benediktsson needs to strengthen his grip on lifting the controls his way if he wants to maintain his political credibility. The question whispered is “When will Benediktsson man up?”

Coalition certainly is built on compromises but since the controls are part of Benediktsson’s portfolio anything that smacks of the Progressives steering the controls policy will make Benediktsson look weak, very weak indeed. If he is forced on a path fundamentally different from the one he has outlined it will seriously harm his political credibility.

Interestingly, the political focus is firmly kept on the losses the creditors suffer from the waiting game as if none of this mattered for the interests of Icelanders themselves. The legal risks are hardly ever mentioned nor the fact that threatened Landsbankinn is indeed the state’s largest single asset, amounting to 12% of the state’s assets. Benediktsson talks about starting to sell shares in Landsbankinn next year and yet never mentions the connection between the bonds agreement and the possibility of a sale. This rather skewed picture is rarely challenged also because very few people, also politicians, have any firm understanding of the underlying facts.

A political wrestle is also taking place over the 2015 Budget. Benediktsson wants to increase VAT on food from 7% to 12%, a principal change towards simplification from Benediktsson’s point of view and therefore of fundamental importance for his strategy. Progressive Party MPs are against. The intriguing question is if the prime minister will side with his finance minister or his party. Again, any change here reflecting badly on Benediktsson’s political strength will undermine him. (Those who think ex-prime minister Davíð Oddsson still is a political force to reckon with will notice that Oddsson, in Morgunblaðið, has come out against the VAT increase yet again siding with the Progressive party and not with the leader of his own party.) Benediktsson can take some comfort in the fact that the Progressives have plunged in opinion polls whereas his own party is strengthened.

Cyprus implemented capital controls last year. Aimed at hindering outflows from banks the Cyprus controls are intrinsically different from the Icelandic ones. As in Iceland the controls were meant to be in place only for a few months. Cyprus is now far into lifting the controls, has indeed already eased them quite a bit contrary to Iceland where they have gradually been tightened. Cyprus might possibly have lifted them altogether by the end of the year.

Six years into controls Iceland seems far from lifting them – though this year the Christmas crackers might contain unexpected surprises. It remains to be seen who will then have a crackin’ good time.

*I have often gone through the underlying economic problems of the controls; also well explained in the CBI Stability Reports over the years. The last one, published in autumn, clearly underlines the cost and damaging of the controls. – The government’s basic information, in English, on the debt relief is here. (Correction: in the first published text it said the government had been in power since early 2014; that should of course be early 2013 as it now says.)

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Written by Sigrún Davíðsdóttir

November 16th, 2014 at 12:50 am

Posted in Iceland

New Supreme Court ruling: estates can pay out in fx

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On November 10 Icelandic Supreme Court ruled in a case Kaupthing vs Ares Bank. This ruling takes further an argument put forth in earlier ruling from September last year. The new ruling not only states that estates can pay out in fx but can actually go into the market and buy fx. Here is a piece I did for Rúv last night (all links in Icelandic). More on this later…

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Written by Sigrún Davíðsdóttir

November 12th, 2014 at 10:23 am

Posted in Iceland