Last week started with a TV interview where prime minister Sigmundur Davíð Gunnlaugsson spent the best of half an hour arguing with the journalist, much to the dismay of many TV watchers. Then there was a report on Iceland and the EU, which led to the government deciding to break off EU membership negotiations, in spite of earlier promises to vote on continued negotiations; a decision ex prime minister Þorsteinn Pálsson called the greatest political betrayal in Icelandic history. And lastly, it was also last week that the government, at the 12th hour, announced it was going to take time to set up a committee to ponder on changes, or not, at the Central Bank. This which means that the CBI will clearly not be taking any major decisions until new governor(s) are in place, which again must set some creditors thinking – and perhaps also some Icelanders.
For two days protesters have gathered outside the Icelandic Alþingi, parliament. It is not an angry mob, more like a crowd during an interval at a theatre waiting patiently for the second half. What started out as an awkward election promise is now a millstone around the neck of prime minister Sigmundur Davíð Gunnlaugsson but more seriously minister of finance and leader of Independence Bjarni Benediktsson. At the time, Benediktsson himself now against Icelandic membership of the European Union (but pro EU some years ago) but trying to avoid alienating pro-EU voters, eased out of anything final on the matter by promising a referendum on continuing the negotiations or not.
A history of broken promises
Both parties promised in no uncertain terms that they would not break off negotiations without a referendum but instead hold a referendum on whether to continue the membership negotiations. What the two parties had not foreseen was that there would be a clear majority for continuing.
Many voters now seem to feel that this promise has been broken in spite of the coalition parties offering various different version of actually-not-broken-promise. The government had said it would make up its mind on EU after a report it had promised already last autumn. Now that the report is out, a balanced overview of the negotiations and options, the government intends to skip earlier promise and instead break off the negotiations without any further ado. It even seemed to want to rush the matter through parliament last week, holding a parliamentary debate only a day after the 1000 pages report had been published thus giving MPs no time to study the report but it was forced to change its tempo and give more time.
This awkward promise of a referendum on continued negotiations now haunts the government. Benediktsson tries to spin it as being impossible to continue though he struggles to explain what should have changed since the promise was given. He did however say in a TV debate last night that he could “not completely” keep his promise.
This issue is particularly difficult for Benediktsson, less for Gunnlaugsson whose party is firmly against EU membership. Although opinion polls indicate that majority of Independence party voters are against EU membership the business elite, except for those with interests in the fishing industry, is for membership. This is turning into a major problem for the government. One Independence party member, Vilhjálmur Bjarnason, has said he will reflect the opinion of many party members and vote against breaking off the negotiation. The government’s majority is however still secure.
One who voices dismay in no uncertain terms is Benediktsson’s fellow party member ex prime minister Þorsteinn Pálsson who calls the change of course “the greatest political betrayal ever” in Icelandic politics. Pálsson is a respected commentator and many well-known Independence party members from the business community who side with him.
In addition, Iceland also now has its very own version of Sarah Palin. Last week, Progressive MP and chairman of the budgetary committee Vigdís Hauksdóttir stated during a radio debate: “There is famine in Europe now” and later said that Malta is “a self-governing zone within a larger country. It is not a country.” Before these remarkable statements her most memorable statement had been (during a TV interview on earlier promised action on the health service “at once” her party were in power) that the phrase “at once” was an “elastic concept” – a novel and highly creative interpretation that has now turned into a saying in Iceland.
CBI in limbo
By stepping in to make changes at the CBI the government has effectively kicked the CBI off the field of any major decisions regarding the estates of the collapsed banks and ultimately of the capital controls for some time, probably most of this year. This is seen a cause for worry in the business community tired of non-action on the capital controls. The bigger companies, often with foreign operations that ease the pain of the controls, find their way within the controls but smaller and medium sized companies are complaining loudly.
The first step towards changes is to set up a working group (no names yet) apparently to come up with suggestions as to what the changes should be. As pointed out earlier, it seems that the government was going to set all of this in motion at a later date but then realised, at the last moment, that by waiting it might have to pay the present governor Már Guðmundsson salary of the rest of his 5 year term, which would have been renewed automatically February 20 unless he had been notified. Which he then duly was, on that day. *
The situation now is of completely opacity as to the procedure. Also there is a complete lack of policy as to where the government is heading with the CBI. It is unclear who will come up with proposals, unclear what the government policy is (some indication that the FME, financial supervisory authority, might be put under the CBI as it was until 1998) and it is also unclear as to what the criteria will be for hiring a new governor and if there will be more than one governor. And obviously it is completely unclear as to how long all this will take and when new governor(s) might be in place.
Will the past replace the future?
Generally, countries where the government meddles in matters of the central bank do not fare well. Right now, it is not only the Icelandic government that is creating such headlines but also the governments in Hungary and Nigeria. Not exactly countries that Iceland has been comparing itself to over the years.
One of the more interesting remarks made by the prime minister in the TV interview a week ago was when he stated on CBI independence that “it would be good to have an independent central bank if we had a different government.”
The fact that the CBI had criticised the “correction” – debt write-down for borrowers who could afford their loans and consequently had not profited from earlier write-downs by the previous government – was obviously a matter of great irritation to the prime minister.
This ill-prepared intervention against the CBI has instigated a feeling in Iceland that the country is about to be steered back to the past where all public institutions and state-owned companies were carved up between the political powers. People were chosen to leading offices of power not according to merits but according to party affiliation. It came as a great surprise when Benediktsson recently appointed a young ex banker, Halla Sigrún Hjartardóttir. She has no previous experience of bank supervision but is an investor with rumoured connections to wheeling and dealing connected to the oil company Skeljungur. Not exactly a career similar to her opposite numbers in the neighbouring countries. The question is if this was only the first of similar nominations.
The question is if old politicians will now be put into power as once was the rule rather than the exception. Might ex prime minister Davíð Oddsson become the chairman of the board of Landsvirkjun? And will his successor as party leader and later prime minister Geir Haarde. So far, the rumours are utter speculations but they indicate a state of mind prepared to see the past turn into the future.
The past practices of the old banks live on (in hidden assets)
It remains to be seen if the strong feeling of the political past being projected into the future materialises. What clearly lives on from pre-collapse Iceland is the effect of the old banks’ operations, both its earlier practices and that most of the big borrowers still have access to considerable assets.
Post-crisis bankrupt companies with humongous debt and hardly any assets (left) shows how assets did migrate out of these companies to somewhere mostly out of sight and reach of administrators. Most of the well-known holding companies, supporting the ownership of the major shareholders of the banks have followed this pattern, i.a. Novator, Baugur, Exista, Fons etc. This alleged migration of wealth out of sight was facilitated by the banks’ lenient lending practices: the banks took all the risk, the favoured borrowers got covenant-light loans.
The clearest shift of risk took place during the winter of 2007 and 2008 when foreign banks, reacting to falling share price in the Icelandic banks, initiated margin calls affecting almost all of the big Icelandic bank shareholders who had placed their Icelandic bank shares as collaterals with foreign banks. The Icelandic banks, rather than seeing their shares flood the market evidently precipitating further falls in share price if not a total meltdown, stepped in and increased their lending to these shareholders. By Easter 2008, this shifting of risk and rapidly increased exposures was over and done with.
In only a few months these moves, well documented in the SIC report, hugely increased the Icelandic banks’ already considerable exposures to their largest shareholders and their business partners, in some cases going over legal limits (though in some cases the banks’ lending hovered under the legal limits by abstruse definition of “related parties”: i.a. Glitnir did not consider Jón Ásgeir Jóhannesson and his wife as related parties nor did Landsbanki classify Björgólfur Guðmundsson and his son Björgólfur Thor Björgólfsson as related parties).
Coming soon: transfer of wealth of historic magnitude
What is at stake in the coming months and years? The banks have amassed a great amount of assets that will be sold. Already, there is anecdotal evidence that the practice from the old banks, of issuing loans to favoured clients against shares with non-too punishing haircut, is abounding. After all, the banks do want to lend money and inside capital controls bad practices can fester.
The most prized assets, already for sale, are the two new banks, Íslandsbanki and Arion, owned by foreign creditors. Most likely these assets are highly coveted by certain forces in Iceland where banks have always bastions of political power and centres of handing out assets to favoured clients.
How the foreign-owned ISK assets of the estates – not only if Glitnir and Kaupthing but also of Straumur and Icebank – will be dealt with decides to a certain degree the price tag on Íslandsbanki and Arion. Any government action, affecting the price, such as converting all foreign assets into ISK/paying foreign cash out in ISK will be of huge interest to Icelanders with money and ambition to buy into Íslandsbanki and Arion.
It is no understatement that the sale of Arion and Íslandsbanki will greatly affect the business climate in Iceland in the coming years and possibly decades. If these assets could be sold on the cheap, aided by pension funds willing to act as silent owners by the side of active investors, the past might indeed be the future, not only in politics but also in the business community.
And now, over to creditors and mobile and educated Icelanders
By the end of 2012 both Glitnir and Kaupthing had presented the CBI with drafts of composition. The matter is still unsolved. Most of last year was lost to election and then a run-in time for the new government. That year went by without any bringing any clarity as to the abolition of the capital controls and the steps needed to solve the problem of the foreign-owned ISK assets.
Now the CBI is in limbo. What will creditors do when faced with an uncertain future of the CBI and an uncertain effect on how to resolve the problem of the ISK assets in Iceland? The creditors have various possibilities. Do they deem the government to be hindering access to the estates’ fx assets? If so, they could try to sue the Icelandic state abroad, i.a. in London. Argentina is the scare example of a country that for years has been kept under pressure from creditors. Not necessarily the Icelandic saga any time soon.
Some drama might come later. Then, on the other hand there will not necessarily be any big drama: some of the creditors might just silently choose to sell their claims. In troubled times the buyers are investors looking to recover their claims by litigating every penny, or in this case, every króna.
Ireland is now back in the market though the country is by no means on a safe ground yet. When will Iceland be in the market to refinance its debt? Judging from the government’s tendency to prolong problems instead of solving them it might take a while. Even a long while.
For Icelanders locked inside capital controls there is yet another “if”: if Iceland will be further isolated from other countries the effect of the growing income difference of the mobile and well educated classes compared to the neighbouring countries might take its toll. As counts for much in Iceland the changes are very gradual. Lost opportunities or loss of work force who does not return to Iceland after studies abroad is difficult to calculate.
* In his letter to CBI employees, Guðmundsson noted that he should have been alerted before midnight February 19. However, he was apparently not notified until evening of February 20. It remains to be seen if this will pose a problem for the government: if Guðmundsson will/cannot reapply, i.e. he could possibly claim that he should be paid for the rest of his term. Judging from his previous dealings regarding his salary, where Guðmundsson maintained earlier promises had been broken – he lost a court case on this issue – Guðmundsson will no doubt explore his position were he to lose his job.
See below for recent three blogs on power and politics in Iceland. The latest blog on capital controls is here.Follow me on Twitter for running updates.
It turned out there was news – it just wasn’t out yet when I wrote the last blog on no changes. Már Guðmundsson has now sent an email to staff at CBI saying that he should have been informed by Wednesday about changes – otherwise his term would automatically be renewed. Well, he was informed that it now it is now “timely to review those amendments and other aspects of the Central Bank Act. It is also important to examine whether there is reason to make changes to the structure of the financial market and the Financial Supervisory Authority, in order to strengthen the collaboration between the Financial Supervisory Authority and the Central Bank and to clarify the division of tasks between the two institutions.”
Guðmundsson writes in his email that Bjarni Benediktsson minister of finance has told him this does not imply lack of trust. Further Guðmundsson writes he will consider reapplying when he sees the new arrangements put in place. “One must wait and see and it cannot be said in advance if such changes are for better or worse. There are words in favour of making use of the expertise of the CBI in the process ahead,” Guðmundsson writes in his email. – “The process” mentioned is now doubt the process of abolishing the capital controls.
Earlier, Gunnlaugsson has said there would be changes, Benediktsson has said there would not. Anyone who has been following the debate in Iceland for the last few months, especially for the last few days know that prime minister Sigmundur Davíð Gunnlaugsson has criticised the bank ferociously. Asked on Rúv on Wednesday, Benediktsson said nothing was yet decided: “As I say, if we do indeed suggest changes it will only be after careful scrutiny and we are not yet finished with any such scrutiny. That is all I have to say.”
What the government has done is to, literally, wait until the very last minute to announce… that now changes will be considered. One civil servant pointed out to me earlier this winter that if nothing had been announced by the end of January there would hardly be any changes since waiting until the last moment would make a bad impression of dithering and unclear policy.
It is said however that the ministry of finance has drafted new laws on the CBI, which stipulates three governors, like back in the days when the main political parties always had to have their people on the board. This would also mean a less independent central bank.
The CBI will soon publish a forecast of balance of payment. This is a key analysis in regard to abolishing the capital controls. The question is if this will now be done only after a new arrangement and new governor(s) appointed.
Whether this is the case or not it is difficult to see anything but a limbo for the bank for the next six months, even longer. Yet another working group, then there needs to be a new law, then there is the period for application and selection and then a new top management has to become familiar with the institution. It seems safe to say that nothing much will happen regarding the estates for the better part of the year.
This means uncertainty and unclarity for a long time, just when action and strong and trustworthy policy was needed. Ireland and Portugal are back in the market. Iceland seems to be turning into a crisis laggard after a promising start. More and more business leaders are airing frustration in Iceland locked into capital controls.
Politically it seems to indicate that the prime minister has asserted his power. The government may appear stronger, after yet another struggle to find its next step, but Iceland seems weaker: after most of last year been a year of inaction, in terms of the capital controls, due to first election and then a time of the government finding its feet (or not) most of this year will now be gone on the CBI process with the unavoidable infighting.
- – - – -
This is the press release from the ministry of finance:
Central Bank Act to be reviewed
This morning, at a Cabinet meeting, the Minister of Finance and Economic Affairs presented and introduced a memorandum on the review of the Act on the Central Bank of Iceland, no. 36/2001.
Some experience has been gained of the structure implemented with the amendments to the Central Bank Act passed in February 2009. In the opinion of the Minister of Finance and Economic Affairs, it is timely to review those amendments and other aspects of the Central Bank Act. It is also important to examine whether there is reason to make changes to the structure of the financial market and the Financial Supervisory Authority, in order to strengthen the collaboration between the Financial Supervisory Authority and the Central Bank and to clarify the division of tasks between the two institutions.
The Minister of Finance and Economic Affairs will appoint a work group to make an assessment of desirable changes. The group’s objective will be to reaffirm the Bank’s credibility and independence and enhance confidence in the Icelandic economy.
Concurrent with a decision to review the Act on the Central Bank of Iceland, the Governor of the Central Bank has been notified, with reference to Article 23, Paragraph 2 of the Act on the Rights and Obligations of Civil Servants, no. 70/1996, that it has been decided to advertise for applications for the position of Governor. This is done to give the authorities increased scope in relation to potential amendments to the Central Bank Act.
The Minister of Finance and Economic Affairs will appoint a work group to make an assessment of desirable changes. The group’s objective will be to reaffirm the Bank’s credibility and independence and enhance confidence in the Icelandic economy.
Concurrent with a decision to review the Act on the Central Bank of Iceland, the Governor of the Central Bank has been notified, with reference to Article 23, Paragraph 2 of the Act on the Rights and Obligations of Civil Servants, no. 70/1996, that it has been decided to advertise for applications for the position of Governor. This is done to give the authorities increased scope in relation to potential amendments to the Central Bank Act.
Update: Viðskiptablaðið reported earlier that if the governor’s term was renewed and he was then later fired he could claim salary for the remainder of his five years. This might have pushed the government to act in the last minutes. In his email, Guðmundsson says he should have been notified Wednesday evening at the latest. He was however apparently notified only last night. – This indicates the level of planning on behalf of the government.Follow me on Twitter for running updates.
There is no news that Már Guðmundsson governor at the Central Bank of Iceland is not getting his contract renewed for the coming five years, counting from August 20. This must mean that he is indeed getting another term as a governor. All uncertainty erased? Or not?
Well, I would have thought this meant the CBI could concentrate on its non too trivial tasks. But prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson keep talking East and West when it comes to important issues. The prime minister is now saying that laws on the bank are being revised. Benediktsson has said there will be no changes. This week, Viðskiptablaðið published an article saying that yes, changes were being worked on, the law on the CBI would be changed and both Guðmundsson and his deputy Arnór Sighvatsson would both be ousted by this new law.
While I had understood that if Guðmundsson would keep his job no changes would be expected it now seems there is the third option: Guðmundsson could keep his job… until something else is decided, such as a totally new plan for the bank, with new people.
Some people within the Independence Party have not forgotten that the left government ousted the party’s former leader, Davið Oddsson. His successor was a Norwegian, only an interim solution until Guðmundsson was appointed in August 2009. This might explain why the party might be willing to oust Guðmundsson – it would be an act of revenge for the ignominy of seeing its leader hounded out.
However, such drastic changes at the CBI and having the bank as a lame duck now that many in Iceland would like to see decisive action regarding the capital controls would probably not look good seen from abroad; there will certainly be people at the ministry of finance who are acutely aware of this. After all, Guðmundsson is well respected and can hardly be seen as a problem, except to those who are upset with Guðmundsson and the bank for not agreeing with their policies.
Therefore, I still find it hard to believe – from the point of view of Icelandic real Politik – that there will be major changes at the CBI and Guðmundsson driven out. There is a clear political tension in the government and it seems the Independence party is proving quite strong in government. By strong, I mean that although the party is towing the Progressive party line, helping its coalition partner to at least make it look as if it’s keeping its promises it still has bent and formed these promises in such a way that it can live with them.
One thing that does strengthen the Independence party is that it feels at home in government. After all, the party feels it is born to rule Iceland; ruling is its raison d’être. Its ministers mostly relate to civil servants with ease whereas the Progressives have the same tendency as the UK Labour party had when it came to power: it assumed the civil servants were wedded to the previous government, felt quite paranoid and were certain that every single civil servant was trying its best to undermine the new ruling party. This also meant that Labour found it difficult to work with civil servants and make use of the great tool that a good ministry is.
From all of this I deduce that so long as the Independence party – which after all is in charge of the CBI – does not deem it necessary to throw the CBI into disarray, basically putting it out of function for half a year or more while new people were found etc, things will remain as they are.
There is now though a new variable of possible change. The quite remarkably strange performance of prime minister Gunnlaugsson in a TV interview last Sunday has again rekindled doubts from last autumn of the strength of the coalition government. These doubts died down after the plan for debt write-down was introduced in November – by both coalition party leaders. But with the chronic tension between the coalition parties and the rather erratic performance of the prime minister the doubts about the government’s life have surfaced again.
All of this might be wishful thinking by the Independence party. The opposition is weak. The social democrats are still shattered by its loss of power and the Left Green are not big enough to matter. Governing with one difficult party might be easier than leading a government with three parties. Even if the Independence party might want to get out of a government where it is not properly in charge it has no real alternatives. If it wants to stay in government it seems it has only one bet: to stay on good terms with the Progressives. So far, the junior government partner has been able to shape the main economic policies to its liking. But if the Progressives feel frustrated – which they might well feel, also because the party seems to find it difficult to come to grips with power-wielding – it might feel it needs to put it clear mark somewhere. And this somewhere might turn out to be the CBI.
Instead of seeing an end to uncertainty, as Guðmundsson is still at the helm of the CBI, the uncertainty is as great as ever and will be as long as the two coalition leaders keep on “speaking in two tongues.”*
* An Icelandic expression: to put forth conflicting views/statements.Follow me on Twitter for running updates.
Prime minister Sigmundur Davíð Gunnlaugsson is dominating news in Iceland. First, because last week he scolded the Central Bank of Iceland for wasting time on “unasked for” work, which caused a flood of rumours on imminent changes at the CBI (which then might postpone any concrete plans for the necessary steps regarding the capital controls). Then he spent a 30 minutes interview on a Sunday chat show arguing with the journalist what he had and had not said as the journalist tried to get an answer to the question everyone is asking: will there be changes at the CBI – either because governor Már Guðmundsson will not get another term or the government will add two governors at his side – or will Guðmundsson get another five year term? The outcome could give an indication, yet again, which of the two parties does actually lead the government. So far, it has been the Independence Party.
“I’m not denying it but I didn’t say it would happen.” This is the Delphic utterance prime minister Sigmundur Davíð Gunnlaugsson gave when asked if there would be any changes at the CBI following both the prime minister’s own harsh criticism of the bank last week. In the 27 minutes long interview (in Icelandic) the prime ministers time and again argued with the journalist, Gísli Marteinn Baldursson, accusing him of twisting his words when the journalist took great care to read the prime minister’s own words.
From the beginning of his term as a prime minister Sigmundur Davíð Gunnlaugsson has made sure to answer his critics. After only a few weeks in office he found time to write an article in Morgunblaðið where he lambasted journalists and the media that he felt did not do him and his party much justice.
This tone of irritation has come up regularly but this week, at the Annual Business Forum of the Icelandic Chamber of Commerce, his wrath was turned not to the media but to the Central Bank of Iceland. And not for the first time either. In November, the CBI chief economist aired worries, as others had done, that the, according to the prime minister, “most radical debt write-down in the world” would increase inflation. The prime minister, who had escalated his description of the coming debt-relief to this what turned out to be a hyperbole (the debt-relief broke no world records) called the bank’s approach “remarkable,” accusing it to be more devoted to politics than running the economy. Morgunblaðið, often the prime minister’s trusted ally, ran a disparaging front-page article on the economist and his words.
Last week, the CBI again incurred the prime minister’s wrath, expressed in a speech at the Annual Business Forum of the Icelandic Chamber of Commerce. That same day the CBI had published its Monetary Bulletin criticising, albeit very mildly, the debt relief (introduced by the prime minister and the minister of finance Bjarni Benediktsson last November). Almost all economists, except those linked directly to the government have been critical of the plan, i.a. for increasing inflation. Not unsurprisingly, the CBI saw the same dangers:
Measures to reduce households’ indexed debt will have some effect on the medium-term economic outlook. Other things being equal, they will stimulate private consumption and imports, and reduce national saving and the current account surplus, which will contribute to a weaker króna than would otherwise result.
This unleashed scathing comments from the prime minister, calling the review of the measures “unasked for,” criticising the bank for doing this instead of its balance of payment prognosis, which Gunnlaugsson said was long overdue. A measured spokesman for the CBI later pointed out that the review of the debt relief was i.a. a prerequisite for the balance of payment calculations.
The headline of the Business Forum was “Open for Business – Strengthening Iceland’s International Sector“ – in English since there were foreign guests present. At the end of his speech, the prime minister took it upon himself to answer this question, even in English in his speech in Icelandic by saying: “Yes, Iceland is open for business, but the store is not for sale.” – One commentator pointed out that this was a tasteless jibe at those who do not agree with him, meaning that they were willing “to sell” Iceland, a treasonous activity echoing Halldór Laxness’ Cold War novel The Atom Station.
It came as a huge disappointment for business leaders at the Forum that Gunnlaugsson’s speech was long on irritation and short on any vision for the future, a criticism repeatedly heard over the winter following the prime minister’s diverse appearances.
Gunnlaugsson’s harsh tone has been widely seen as an indication that governor Guðmundsson’s days in office were now numbered. Following the Forum speech news Eyjan, a news website (often well-informed on coalition politics) owned by a former Progressive politician Björn Ingi Hrafnsson, reported that Guðmundsson would be informed that he would not get another term and a new bill of law, now being written, would stipulate that there would now be three and not just one governor – or two “over-coats” as one commentator put it because Guðmundsson could reapply. This changed organisation at the CBI was widely seen as harking back to the bad old days when all major positions would be divided evenly between the political parties.
It was following this speech and the ensuing rumours that Gunnlaugsson was questioned about these issues on Sunday. The prime minister’s rather inelegant discourse could be understood to indicate that yes, he was in favour of an independent central bank but only when the bank agreed with his policy and that is what the journalist asked him about back and forth. Ungracefully, the prime minister tried irony and belittled the journalist, accusing him of political slant.
As the journalist ended the interview by thanking him, Gunnlaugsson’s last jolly words to the journalist were: “You didn’t do too badly and you proved that you are not speaking on behalf of the government.” The following moments of silence indicated how flabbergasted the journalist was.
The higher political meaning of things
What does all this mean for the coming months and the work towards abolishing the capital controls? The focus right now is on the CBI. According to law, the governor needs to be told six months before his terms ends if he is not up for renewal. If he does not hear anything from the government his term is automatically renewed. The date for this information to be presented to the governor is February 20. The CBI falls under the remit of the ministry of finance meaning that formally the fate of the governor is in the hands of minister of finance Bjarni Benediktsson.
Following the Eyjan report on changes at the CBI interestingly, Rúv (the state broadcaster) stated just the opposite, i.e. that there would be no changes and Guðmundsson’s term in office would be renewed. Both reports quoted sources within the government. Did the government change its mind – or are there really two conflicting views on this matter?
My feeling is that the two coalition leaders are not agreeing here: the Progressive leadership would desperately like to see Guðmundsson go – i.a. they did not like his negotiating stance on Icesave, do not trust the bank on finding the right solution to the capital controls (i.e. a solution that brings money to the state) and do not care too much that this would cause more than half a year of uncertainty and inactivity whereas the Independence leadership seems to think that Guðmundsson is the best for the job and drastic changes at the CBI might undermine financial stability and ultimately the economy.
If this is the right understanding then who is more likely to gain the upper hand? The fact that Benediktsson has the formal power adds to his weight in this matter. Also, it has been rather remarkable to watch how he has actually been able to steer things in the direction he wants. Around New Year one well-placed source told me that if Guðmundsson should be ousted it would have to be done at the latest by the end of January because waiting to the last minute would look bad. If Guðmundsson would not get a letter by the end of January it would mean that he would continue for the next five years.
I have earlier said that the course of the capital controls abolition will eventually be decided by the politics and much less by economics. The question is whose politics will prevail. Judging from the course so far it is more likely that Benediktsson’s view will be prevail. But this time might be the exception compared to Benediktsson’s earlier success in swaying the Progressives in his direction.
If there will be changes at the CBI this turns the bank into a lame duck until a new governor or governors would be appointed, earliest in October or November. Part of the discussion in Iceland re the capital controls is what the creditors would do if this and that happened, such as a postponement. Actually, the creditors would not need to make much noise. They could just sell swiftly and silently. Those who then buy the claims are those who hover around further down the line, who are litigation-happy and prepared to sue everyone they see in their way, including governments. This is no fear mongering, just the normal course of events when resolution of failed companies stalls.
The government sees itself very much with the estates under its control. Also this might swiftly change. If the feeling strengthens among creditors that the government is in fact effectuating expropriation by not allowing the creditors to get their foreign assets, which do not touch the Icelandic balance of payment, creditors might venture into suing the government abroad.
There are many “ifs” in the present situation. Connecting the dots will require more political understanding than a skillful understanding of economics. And it is not for the politically faint-hearted.Follow me on Twitter for running updates.
Those who have been sentenced to prison following the Icelandic banking collapse have all stayed at a small open prison in the awesomely beautiful Snæfellsnes, close to the glacier famous from Jules Verne’s book, Journey to the Centre of the Earth. This prison, Kvíabryggja, is an old farm and under the auspices of its director, the inhabitants at Kvíabryggja are now farming again.
What is the prison like where Icelandic sentenced bankers do their time? It is an open prison, less than three hours drive from Reykjavík, on the strikingly beautiful Snæfellsnes, with the glacier on its tip, visible from the capital on a good day. Kvíabryggja used to be a farm before it was turned to a prison in 1954, intended for men who had not paid child maintenance. Since1963 it has been used to house prisoners who have not been previously convicted or who are unlikely to abuse the relative freedom at Kvíabryggja where there are no bars and no fences. The prison has a staff of eight and can house 22 prisoners.
Until after the crisis, few high-flyers had ever been sent to prison in Iceland. In 2001 a former member of Parliament for the Independence Party Árni Johnsen was sentenced to two years in prison. He had been the head of a committee overseeing refurbishing of the National Theatre and had (ab)used the opportunity to help himself to material and workers for his own house. Johnsen never showed much remorse but he ended up in Kvíabryggja. Shocked to see how poor the mattresses were he used his contacts to secure a donation of new mattresses for the prison, allegedly a huge improvement on the living conditions at Kvíabryggja.
This winter, there are at least two ex-bankers at Kvíabryggja, Jón Þorsteinn Jónsson and Ragnar Z Guðjónsson, sentenced in the so-called Byr or Exeter case. Apart from playing golf – Kvíabryggja has a golf course, built by the prisoners; Icelanders are quite good at playing golf in winter – there is now also farming to occupy the prisoners: the prison keeps 130 sheep over the winter, in addition to chicken and ducks and all facilities are now used to their maximum.
The animal farming at Kvíabryggja began in 2010 and was the idea of the prison director Birgir Guðmundsson. Last autumn was the first time that there was a major slaughtering of sheep: 100 lambs were slaughtered and the meat now provides for 2-3 meals a week, consequently lowering the prison’s food bill. Lamb is a stable part of the Icelandic cuisine and by far the most consumed meat in Iceland so the consumption of lamb at Kvíabryggja is not unusal. In addition, 25 ducks were slaughtered for Christmas.
Five to six prisoners are now in charge of keeping the animals at Kvíabryggja and more in autumn and spring. According to Guðmundsson it is difficult for the prisoners to get work, which means that the farming comes handy. New type of prisoners bring new occupation and possibilities: one white-collar criminal who has stayed there gave other prisoners basic courses in law and accounting.
Other prisons should study Kvíabryggja’s way to sustainability via farming. (Partly based on this Rúv story about farming at Kvíabryggja.)Follow me on Twitter for running updates.
Those who understood the Eurozone correctly were those who understood that politics mattered more than economics. It might very well be the same in Iceland: in order to understand the course of events regarding capital controls, foreign-owned ISK assets and the estates of the failed banks, politics might weigh more than the economics. And as in Europe the political weight might bode messy course.
To continue with the Eurozone analogy: the (at first hidden, later more overt) agenda of all action taken by the EU was to prevent any bank in the Eurozone failing. It was deemed to be bad for the reputation of the young currency area and in the Realpolitik it counted that the strong German and French governments were adamant in sheltering their own banks from unwise lending to the debt-ridden periphery. Both these agendas were politically driven and those who understood the political dominance over sound economic thinking got their predictions right: no euro-exit, good public money thrown in to reward bad lending.
In Iceland, there might also be an agenda, other than just abolishing the capital controls without jeopardising financial stability: the Progressive Party and its leader, prime minister Sigmundur Davíð Gunnlaugsson has time and again, since the election campaign early last year and after it came to power, stated that there will unavoidably be money for the state coffers when the bank estates will be dealt with in order to abolish the controls (see more on facts and figures in an earlier Icelog).
The Independence Party, led by minister of finance Bjarni Benediktsson, has appeared to be less focused on abolition as a way to enrich Iceland. Recently though he has faintly echoed Gunnlaugsson’s view that doing it quickly, via bankruptcy rather than the more long-term composition the creditors are keen on, might be a sensible way. It is not clear though if he really believes it or is just putting pressure on the creditors.
It seems increasingly clear that the abolition of the capital controls, which needs an action plan on dealing with the foreign-owned ISK assets of the estates, might well be more dependant on political solutions than purely finding a way to secure financial stability. Both parties will want as much of the credit for a plan to abolish the controls – but the Progressive party seems also keen to create a situation where it will be seen as having won over the foreign creditors. The Progressive narrative is that it secured an Icelandic victory in the Icesave case (though the Icesave problems are alive and kicking in the unsolved Landsbanki bonds) – and now it is going to secure a victory over other foreigners, the creditors.
The necessary solutions will be conjured up in the tense political sphere between the two parties.
What, when and how?
There is probably no one in Iceland who is as yet able to answer the question what exactly is needed to resolve issues preventing the abolition of the capital controls, when action will be taken and how it will all be brought about.
Because of the Progressive’s earlier promises the government’s agenda might not be only to abolish the controls and to secure financial stability but to make sure the state profits from it. Compared to other countries fighting to abolish controls, such as Cyprus, this is a novel situation and makes it a whole lot more difficult.
How much does the government want from the process of abolition? It clearly wants at least ISK120bn since that is what it is claiming in tax from the estates of Landsbanki, Glitnir and Kaupthing, albeit over the next four years. But judging from sources close to the government it seems that a whole lot more is desired – probably all the ISK assets of the two estates (Landsbanki is in a different place due to its creditors and the bonds between old and new Landsbanki) and a slice, let’s say 10-15% of the fx assets.
If this really is the goal then this is the “what” needed to solve the controls conundrum, from the point of view of the government.
When action will be taken is unclear. On a Rúv TV talk show (in Icelandic) February 9 Benediktsson once again said that the abolition could start this year, it would not happen over night but over some years and it all depended on if there could be some harmonisation of expectations. Recently he also said it might be seen as unfair to Icelanders that the creditors were the first ones to get out with their money.
There is now a working group at work on behalf of the government on issues related to the capital controls. It first seemed it would finish its taks in February but now March or April seems more realistic. The group consists of both bankers and lawyers (led by much respected banker, Sigurbjörn Þorkelsson living in London). The group is not expected to come up with one solution but various scenarios. If their indirect remit is to show that the only viable way out of the controls is that the creditors hand over both all ISK assets and a slice of the fx then that will surely be part of their solution.
Then there is the CBI working on current account forecast, which ideally should underpin a payment forecast – how much fx will there be for paying out creditors in the coming years? The next CBI Monetary Bulletin will be out now on February 12, clearly an important event. The last CBI currency auction was deemed to have gone well for the bank and the bank has been unexpectedly active in the currency market (see here a short overview from Íslandsbanki).
It will be interesting to see if the CBI stats appeal to the government and the working group or if they will seek other ways to underpin their own plan, whenever it emerges.
The goal will determinate the road to the goal. The thing to look for is if it will be a neat solution, nested within present rules and regulations or will it be an all-Icelandic messy solution, depending on special legislation.
Difficult decisions in tense political climate
Icelandic political pundits have noticed, from early on in the life of the coalition that the two party leaders rarely are in tandem on important issues. The first great big test of the government was the execution of the Progressives’ promise on extensive debt relief. That promise was defused by the Independence Party, which cut it down from vaguely promised ISK300bn to ISK80bn – and instead of funds coming from the resolution of the estates it will be financed by banking tax, albeit partly from the estates.
However, the promise could be said to have been kept. Thus the Progressives strengthened their reputation as a party to be trusted and the leadership of the Independence Party could feel quietly satisfied that it had delivered the promise in a way it deemed viable.
The second test was another Progressive promise, abolishing indexed loans. A committee delivered a split report – majority came up with several solutions to change loans but in no way supporting the Progressive view it should be chucked out fast; a minority report suggested the loans should and could be abolished right away. (The Icelandic debate on indexed loans is truly weird from a foreign point of view: the problem rather seems the chronic inflation rather than the loans per se but that is not reflected in the debate.) Again the Progressives could say this promise was now all on track though what exactly is the track is not clear whereas the Independence Party said little other than there was now material to study.
The outcome so far is that the Progressives have kept their promises. Although it has been done with cutting off a toe here and a heal there to make it all fit the party seems to have managed to stay its course. The Independence leadership can be quietly content that it has indeed managed to steer the toe- and heel-cutting to suit its own policies. So far so good for Benediktsson.
Some Independence supporters are feeling uneasy that the party has staked its own existence on carrying out Progressive promises that were far from the Independence line. The point of view of the Independence leadership might well be that the promises better be gotten out of the way as soon as possible in order to avoid distraction in focusing on other matters. Such as the capital controls.
In spite of smooth executions so far there seems to be quite some tension between the two parties, also regarding the capital controls. No matter the rhetoric the course so far it has been decided by the Independence party. This might indicate that Benediktsson really decides on the important issues regarding the economy. But the future is not always like the past.
Both coalition parties need to get the most out of their time in government. The Independence party because it is used to be in government; a leader who does not again firmly position the party for another term is politically dead. The Progressives need to turn their tide tangibly in order to escape what seemed to be their imminent future up until the Icesave ruling: that they would keep on hovering around 12% of votes.
Young politicians in an atmosphere of former times
The Left government put effort into breaking out of the old political mould i.a. by nominating people on merit more than for party allegiance. It seemed for a while that this was an answer to the call of the time. However, although the two coalition leaders are young their attitude seems to hark back to the olden times.
The biggest test when it comes to nominating people for leading positions is the governorship of the CBI; it expires in autumn. The position needs to be advertised six months in advance, i.e. by February 20. One rumour was that it would look bad to do it at the last moment so had nothing been done by end of January it was a sign that Már Guðmundsson would be reappointed.
Now the rumour mill is in overdrive. The Progressives are said to be hell-bent on getting rid of Guðmundsson. Allegedly they cannot forgive him for wanting to negotiate on Icesave and in addition the party would like to be able to influence the bank’s position on major matters, such as the capital controls. So much for the independence of the central bank.
However, the problem for the Progressives is that Guðmundsson is widely respected, not only in Iceland but even more importantly abroad. He has the high standing and trust that a governor of a central bank needs in order to be taken seriously and in order for a country to be taken seriously in terms of monetary policy. It seems highly unlikely, if not impossible, that the Progressives can come up with anyone anywhere near Guðmundsson’s format.
The Independence leadership has been said to be more bent towards keeping Guðmundsson, also in order to encourage trust and stability. One version has it that the government might keep Guðmundsson but make some other changes, i.a. add a vice-governor, favourable to the Progressives or change the present one, Arnór Sighvatsson, also well respected.
The new magazine Kjarninn wrote last week that the Progressives wanted to appoint a banker at MP bank, Sigurður Hannesson, for the CBI job. Hannesson is head of private wealth management and has, to say the very least, a CV that differs radically from the CV of central bankers in the neighbouring countries. But he is very close to Gunnlaugsson.
Kjarning also wrote that Benediktsson was in charge of this appointment and his idea was to appoint Ólöf Nordal, a lawyer who has just left parliament to follow her husband to Switzerland. Kjarninn pointed out that her credentials were that she practically grew up in the CBI where her father was a governor. It is not clear from the context if Kjarninn was serious about her merits but yes, yet an altogether different CV from central bankers in the Western world.
Should Guðmundsson not get reappointed the whole capital control conundrum will get postponed… until late this year. Should Guðmundsson get ousted for someone of much more inferior professional standing it bodes a return to the Icelandic past of clientilismo and political patronage. And that bodes ill for everything – also the abolition of capital controls – and everyone in Iceland, except of course those with the right connections.
The paradox of political (non-)intervention
It is not altogether a uniquely Icelandic situation that the government refuses to negotiate with creditors claiming it has nothing to do with winding up of failed private banks. This is often the case with semi-sovereign debt situations. However, the situation in Iceland is tricky because with the approval of all MPs parliament voted last year that the government should indeed be part of the estate equation.
This was what happened when parliament approved a change of the currency law stipulating that the CBI can only give exemption to the law, above certain sums (which firmly includes the estates) with the blessing of the minister of finance, after he has presented it to the parliament (which does not need to approve it but well, a minister is unlikely to go against the parliament on this issue.)
Therefore, there is this paradox that the government – or the minister in charge – denies to negotiate an agreement that cannot pass through the CBI without his political blessing.
This situation greatly frustrates creditors. They feel they are trying to do everything right, talking to the CBI, trying to figure out what write down is needed (obviously, from their point of view as small as possible) by studying the current account, studying what assets can be used to negotiate on (such as assets owned by the CBI holding company, ESÍ etc), stretching out payments and in general trying to figure out all variables that can be used in negotiations.
But so far, this is just a monologue – there is no one who wants to sit down on the other side of the table. And yet the government clearly indicates it does want certain things from the creditors – it is just not going to tell them what it wants and no, not negotiate with them. The creditors have to figure it out themselves and reach a conclusion that satisfies the government.
This is seemingly an impossible way to go about things. And it is even more impossible if the government wants not only to find a solution that safeguards financial stability and takes into account the current account balance over the coming years but, in addition, wants to secure money for the treasury.
But one day the government will, in some way, make its position clear. Until then, when, how and what are only things to be guessed. And as we know from the Eurozone crisis: figuring out the economics is easy – guessing the politics is a lot more difficult.Follow me on Twitter for running updates.
The Dutch Central Bank and the British Financial Services Compensation Scheme have brought a case against the Icelandic deposit guarantee fund, TIF, at the Reykjavík District Court, Héraðsdómur Reykjavíkur. The Dutch and the British seek a confirmation that TIF was liable for the EU minimum guarantee of €20.000 (which when currency exchange etc is taken in to account amounts to €20.877 for Iceland) and/or TIF should pay out, with interest, in total ISK556bn, €3.55bn. The Dutch are claiming ISK104bn, €660m and the UK ISK452bn, €2.88bn. The case was brought to court already at end of November last year but has only surfaced now in a press release from TIF.
But was the Icesave not finished when the EFTA Court ruled on January 28 last year that Iceland did not need to pay? No, not necessarily. What the court ruled was the Icelandic state was not responsible for guaranteeing the fund. But that does not exclude that the fund was liable and that is what the two countries now want to get a ruling on.
The deposit holders of Icesave have been compensated by their respective governments. The two governments are getting a refund from the estate of old Landsbanki and have already recovered around half of the sum. However, the fact that Iceland refused to end the case with an agreement means that the Dutch and the British governments keep on seeking ways to secure a decision on the payment and the legal status regarding the deposit guarantee fund, TIF, in Iceland. Also, the Landsbanki estate is not paying interests, which is being sought here. Or this is how I understand this latest Dutch UK action.
For those who feel to revise on Icesave here are some earlier Icelogs on this topic: the EFTA Court decision; the ESA case, after the oral hearing; key issues regarding the ESA Icesave case; some reactions to the EFTA Court decision.
*Here is the statement sent out by the FSCS on November 4 2008 (sorry, in the first version it said 2014), indicating how compensation would be paid out for Icesave deposit holders. As can be seen the FSCS fully expected the payment for the first €20.877 to come from Iceland after the FSCS paid it out.Follow me on Twitter for running updates.
So far, there is no solution in sight in matters that need to be solved in order to abolish capital controls in Iceland. The government blames creditor of the estates of Glitnir and Kaupthing but unresolved dispute in Landsbanki matters as well though hardly ever mentioned. The government seems to play a waiting game, perhaps to make creditors more forthcoming. Ministers maintain the government cannot interfere in a process of private companies and yet they seem to be contemplating interfering via laws, which would directly expose the government to being sued by creditors. The creditors mostly remain silent but might have more cards up their sleeves than the government seems to believe.
“It seems they’ve (creditors) been waiting to see whether the government would somehow step into the process. But this is not a project for the government. The only role of the government here is to assess whether they come up with a solution which allows for the lifting of the controls,” prime minister Sigmundur Davíð Gunnlaugsson recently said to Bloomberg. He has also stated that “I’m unaware of them having found any solution” which would allow the banks to complete creditor settlements. In September Gunnlaugsson said the controls could be lifted “in foreseeable future” if the creditors were “willing to assist us.”
And here is the creditors’ view, as expressed by Steinunn Guðbjartsdóttir head of Glitnir’s winding-up board: “It’s definitely not Glitnir that’s delaying the process when it comes to completing creditor settlements. Our proposals have simply not been answered, making it impossible for us to move forward.”*
In problem keeping the capital controls in place is the fact that foreigners own more ISK assets than can possibly be converted into foreign currency in the foreseeable future – a problem contained by the capital controls. Hence, the problem of foreign-owned ISK has to be resolved before the controls can be abolished. It will not happen over night, will no doubt take some years to abolish them in stages. However, it will be a decisive step when the ISK assets of the old banks – Kaupthing, Glitnir and Landsbanki – have been resolved
Who is waiting for whom – and what is everyone waiting for? How should these seemingly conflicting statements be interpreted? Here is an attempt at interpretation, as well as sizing up the problem and the possible solutions.
1 By late 2012 both Glitnir and Kaupthing had presented their drafts for composition of the two estates. The Central Bank, CBI, which needs to accept a composition agreement due to the capital controls, rebutted the Glitnir draft but has not replied to a new draft from Glitnir sent a new in November. Kaupthing has had no answer.
2 The CBI can only give its permission if the minister of finance, Bjarni Benediktsson, accepts the proposal, after presenting it to the parliament economy and trade committee.
3 When Gunnlaugsson claims he is unaware of any solution he is of course aware of the drafts – but his words need to be understood in the right context: he doesn’t recognise the solutions put forth by the estates as acceptable.
4 By saying that controls can be lifted when creditors “are willing to assist us” the prime minister seems to mean that when creditors have accepted what the government wants them to accept the government will accept their proposal.
5 The government has clearly indicated that it cannot enter into negotiations with creditors of private companies so how this “assisting” by the creditors should come about is not clear. Nor is it clear how the creditor should be informed as to what exactly is needed to solve issues now blocking a CBI agreement to composition.
6 There are those who warn that by engaging with the creditors the government might make itself liable to being sued, thus creating an unforeseen risk. At the same time, the government seems to be contemplating a legal intervention, which would clearly make it an actor in the game.
7 Further, it is not possible to prevent risk by not engaging since creditors could – and most likely will – at some point lose patience and seek ways to litigate abroad. The worst scenario would be a version of the Argentinian situation where every sum in foreign currency that Iceland pays to fulfil foreign obligation will be litigated.
Below are some points of importance in order to understand the issues at stake.
Two ways to resolve the Glitnir and Kaupthing estates: negotiate – or not
In principle, there are two ways to solve the dilemma of the two estates, i.e. how to proceed with the winding up and eventually pay out what is due to the creditors:
A) Agreement with the creditors, based on composition.
B) Bankruptcy proceedings, meaning i.a. that assets have to be sold within a fairly short time span with less creditor control than with the abovementioned route.
By presenting drafts for composition for both Kaupthing and Glitnir the creditors of these two banks (to a large extent the same creditors, ca. half are institutional bondholders owning bonds of the two banks before the collapse and then hedge funds and others dealing in distressed assets who bought the bonds after the collapse). Composition means that the estates are run as holding companies, owned by creditors, who by selling assets when circumstances are favourable recover over time what there is to recover from the estates.
Recovery from bankruptcy proceedings will most likely be less, which is one reason why the creditors oppose it. Also it means they have less control over the course of events.
Under normal circumstances a government doesn’t engage with bankrupt private companies. In Iceland, the capital controls and laws passed last spring, just before the dissolution of parliament up to the election, changed all of that. At stake are first and foremost the ISK assets of Glitnir and Kaupthing – and the majority is tied up in the new banks, Íslandsbanki and Arion, respectively owned by the estates.
The amount of ISK assets of the two estates totals ISK417bn but differs greatly. Kaupthing’s ISK assets are ISK141bn, whereof Arion’s valuation amounts to ISK116bn. Glitnir owns a good deal more of ISK or ISK276bn, whereof Íslandsbanki is valued at ISK132. Kaupthing owns 87% of Arion; Glitnir owns 95% of Íslandsbanki. The rest of both banks is owned by the Icelandic state.
If the two banks could be sold for foreign currency the Kaupthing ISK problem would be more or less solved. Glitnir has a tougher task. The creditors seem to have some faith in this being possible; others find that hard to believe but it will ultimately all depend on the price.
Who will buy Iceland or rather, the two banks Íslandsbanki and Arion?
Those who buy these two banks will wield great power in the Icelandic business community and in Iceland in general. First, when the idea was floated in the late 1990s that Landsbanki would be privatised the intention of the Davíð Oddsson government (conservative) was spread ownership.
That policy evaporated when the bank was sold to father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson. Eventually, the three big banks – Landsbanki, Kaupthing and Íslandsbanki (later named Glitnir; the new bank has reverted to the old name) were owned and dominated by large shareholders who incidentally were not only the respective bank’s largest shareholders but their largest borrower. No wonder that ownership of the two banks, now for sale, awakes disturbing thoughts.
Who will buy the banks? Foreign investors with no previous ties to Iceland, Icelanders with money abroad, clients (Icelandic or foreign) who got mountains of loans on favourable terms from the Icelandic banks before the collapse? Or the Icelandic pension funds? There is no lack of guesses.
One thing that will clearly affect the price is how the estates will be resolved. With bankruptcy the assets would have to be sold quickly, most likely knocking the price down should two banks be sold simultaneously in Lilliputian Iceland. Conspiracy theorists might feel that if the government eventually acts in a way that lowers the price of the banks – and some investors with intriguing ties to the past banks or with the government parties (or both) – it will be no coincidence.
The official “abolition manager” that never was – and the working group without a chairman
In August, it was announced that “next week” the prime minister would appoint “an abolition manager” to oversee the process of abolishing the capital controls. But nothing happened. According to rumours the two party leaders could not agree on who should be appointed. And no one was ever appointed.
In November, a working group of four was mentioned but by the beginning of the New Year it had grown to six. There is to be no chairman (too difficult to decide on?) but a former banker, Sigurbjörn Þorkelsson is in charge though without the title. He was thought to be the one favoured by Benediktsson as an “abolition manger.” The others are two engineers, Jón Birgir Jónsson (a banker in London) and Jón Helgi Egilsson, lawyers Eiríkur Svavarsson and Reimar Pétursson as well as Ragnar Árnasson professor of economics. This group is now said to be working fast and furiously on mapping out various scenarios for the government.
In principle, no one knows what the government’s policy is in the matters of the two estates; the two party leaders have not specified how they would like to see the bank estates dissolved. Benediktsson has however said that bankruptcy law do not stipulate that composition can be negotiated forever, hinting at some change in the bankruptcy law and possibly that he would prefer rout B).
His comment could also be understood to indicate that the government was prepared to or preparing to intervene in the bankruptcy process with a bill aimed at the estates. That will be a tricky undertaking because, like in most Western countries, assets of estates are protected by laws on property rights. Creditors will obviously challenge anything that smacks of infringement on such rights.
A legal intervention – or any government intervention – will be a u-turn from the government’s present stance on declared and staunch non-engagement. It might well open up a Pandora’s box of possible legal action against the government, not only in Iceland but also abroad.
Neither A) nor B): the “krona-path”
In addition to A) and B) there is another path, which is often mentioned in the debate in Iceland but apparently not always well understood.
According to Icelandic bankruptcy law, the value of a failed company is calculated in ISK, which means that whatever fx it owns is converted into ISK, as well as all claims. This does not mean that that the assets themselves are converted; the conversion is for auditing purposes only.
The assets of the three banks are as follows (in ISK)
ISK Fx Domestic fx assets
Glitnir 276bn 614bn 35bn
Kaupthing 141bn 570bn 62bn
Landsbanki 51bn 405bn 385bn
There are those who argue – and both Gunnlaugsson and Benediktsson have touched upon this – that the estates should be considered as pure ISK assets meaning that they should also pay creditors only in ISK. This would then create an almighty ISK overhang the moment this was paid out, increasing the already far too big a reserve of ISK owned by foreigners (which after all is what the capital controls are reining in).
How could the creation of a humungous overhang, in addition to the already insurmountably large one, be a solution? Because this would be a way for the state to get a slice of the fx assets, which should then be converted back into fx, but at a much less favourable rate; another possible execution is some sort of exit levy.
A recent ruling of the Icelandic Supreme Court has been mentioned as an argument for the “krona-path”: on September 24 2013 the Court ruled in a case (in Icelandic) linked to the Landsbanki estate. The thrust of the case was that when Landsbanki paid preferred creditors, on December 2 2011 and May 24 2012, the bank used the currency rate on April 22 2009, the day the bank entered into bankruptcy proceedings.** The creditors challenged Landsbanki’s decision, lost in Reykjavík District Court but won in the Supreme Court. Consequently, it is now clear that the currency rate on the day of payment counts.
Those who adhere to the “krona-route” have interpreted this court decision to mean that an estate should pay out in ISK – whereas the decision, according to many lawyers, only says that an estate can pay out in ISK but, most importantly, does not need to. One Icelandic lawyer (not working for creditors) mentioned to me that converting fx assets into ISK in order to pay the creditors could well be seen as expropriation, again exposing the government to being sued by creditors. Since most of the fx assets are outside of Iceland, creditors claiming to be an offer for expropriation could sue the Icelandic state abroad, most likely in London.
Another cause for legal action on behalf of the creditors against the government might be if at some point they feel that by inaction the government is preventing them from accessing their undisputed assets: the fx assets. After all, the fx assets are the property of failed private companies, unrelated to the government as repeatedly emphasised by the government.
The action taken in autumn 2008 with the “Emergency Act” and capital controls was taken under exceptional circumstances. Although the lack of foreign currency poses problems there is no emergency, comparable to October 2008, to justify any exceptional measures. On the contrary, there is time to negotiate terms and conditions.
What the capital controls contain
Ultimately, the government seems to favour not so much a route as a goal: a goal that brings as much to the public coffers as possible.
During the election campaign last spring prime minister Gunnlaugsson repeatedly claimed it was “unavoidable” that in dissolving the estates money would be due for the Icelandic state. As with so many other things, he never specified how exactly this should/would happen but seemed to indicate the “krona-route”: that converting fx assets should/would/needed to be converted into ISK thereby securing great wealth to the state coffers.
An aside here is that most Icelandic economists heartily agree that channelling mountains of ISK into the economy would be an almighty economic disaster. Ideally, any such windfall should be taken aside, if not actually burned. But for some reason, this argument is hardly ever uttered aloud in Iceland.
Before guessing how much is enough for the government, let us revise on how much ISK assets the capital controls contain. As mentioned above, the ISK assets of Glitnir and Kaupthing amount to ISK417 bn. The “glacier bonds” – essentially invested in carry trades in the years before the collapse – now amount to ISK340bn. Since this is money owned by a diverse group there is no one to negotiate with.
Further, these assets might partly be “patient” money, not waiting to run out of Iceland where interest rates are still attractive. There is also intriguing evidence that ca. half of the “glacier bonds” is owned by… Icelanders who bought it at a knock-down price after the collapse (which might be why this is not much talked about any longer as a problem, all the focus being on the “vulture” hedge funds” as they are often referred to in the Icelandic public debate). The last batch of foreign-owned ISK is the Landsbanki bond, debt of new Landsbanki to the old Landsbanki, now ISK247bn.
In total, the ISK assets contained by the capital controls are close to ISK1000bn. However, dividend in the new banks, which is not paid out, piles up so the problem is not diminishing but increasing. And then there are the classic collateral damages of controls such as less investment and corruption.
How much is enough – and the narrative to support it
Then there is the question: how much is enough for the government? How much, measured in krona, is the value of the “willingness to assist,” from the point of view of the government? Ultimately, it depends on how the government views the estates: as a problem to solve – or a rich fishing ground.
Consequently, there are two possible answers:
1 Enough to run a sustainable economy where a balance of payment will ultimately decide the course of payment of ISK assets. This is a calculation the CBI is working on. Leaving aside the “glacier bonds,” the problem is the Glitnir and Kaupthing assets as well as the Landsbanki bond, in total ISK665bn. This is not an insurmountable sum, the creditors know they will not get the whole amount, are willing to negotiate (if they can find anyone to talk to) and there are state-owned assets (in the CBI holding company, ESI), which could be part of the solution. – If this procedure is followed there is however nothing for the government to lay its hands on because ultimately this is not a process, where the government is involved except to secure financial stability as spelled out by the CBI.
2 Considering how prime minister Gunnlaugsson has spoken – and indeed promised Icelanders – he and his party clearly do indeed see the estates as a fishing ground, ready to be exploited. Finance minister Benediktsson has never uttered anything in this direction and there are indications, i.a. from the appointment of an abolition director that the two party leaders do not see eye to eye in this matter. It is by now a well-established pattern in the political debate that the prime minister says X and then a few days later the finance minister says Y on the same matter. From sources close to the two coalition parties, I hear that the ultimate goal should be all of the ISK assets of the two estates and a slice of the fx assets – otherwise, the financial stability of Iceland is threatened. I am not claiming this is what the two party leaders have in mind, only that this is consistently heard from sources close to the two leaders. – The path would probably be some version of the “krona-path” and a legal intervention.
Both ministers have consistently said that the new banking levy, also on the estates (quite unorthodox to tax debt; will most likely be challenged by the estates; another saga for another day) is only natural because of the cost the banking collapse caused the Icelandic society (though how the new banks, founded after the collapse, could have caused harm is a bit of a mystery). This narrative might also well be used to argue for a “catch” from the estates (though again, this spreading of the original sin could be debated).
The tax, calculated to cost the three estates ISK120bn over four years, is an interesting sum because it indicates to the creditors that this is at least the sum wanted by the government. This sum could then be the starting point in a negotiation though, if the rumours I keep hearing, this would be very far from what the government has in mind.
The fact that Iceland won the case that the EFTA Surveillance Authority, ESA, brought against Iceland because of Icesave, emboldened the leadership of the Progressive Party. The fact that Icesave was not resolved with the British and the Dutch had two drastic consequences: it moved the ownership of Landsbanki over to the state meaning that the state, at least indirectly, guarantees a bank – and in addition burdens the state through the Landbanki bond. This is not part of the “Iceland won Icesave-saga,” as commonly told in Iceland.
In the Icelandic debate on the estates and the creditors it can at times sound as if it is decidedly un-Icelandic not to seek a “windfall” from the creditors. To be on the side of the rule of law in this matter does not seem enough. No doubt, the tone will become harsher at the hour of decision.
Contrary to natural catastrophes such as earthquakes and eruptions, the catastrophes stemming from wrong political decisions unfold over a long time. The consequences will be felt long after the term of this government comes to an end.
* Glitnir Winding-up Board has today made an unexpected move: it has hired MP Bank’s Corporate Finance Division as a financial advisor in finalising a composition agreement, to “independently review and evaluate solutions to that end.” Especially ALMC (former Straumur Bank, already through composition, now operationg under a new name, ALMC), which seemed to be sure it was going to act as Glitnir’s advisor. The intriguing part of this assignment is that a close friend and advisor to prime minister Gunnlaugsson, Sigurður Hannesson is head of private banking at MP and the CEO of MP, Sigurður Atli Jónsson, is the prime minister’s brother in law. Whether this intimacy will simplify Glitnir’s task in guessing what is enough to negotiate composition remains to be seen.
**The legal procedures are described here, p. 6, for Kaupthing; the same counts for Landsbanki and Glitnir.Follow me on Twitter for running updates.
“… when it comes to unified European financial sector it only works for banks, facilitating cross-border operations. For clients and consumer protection this sector has as many holes as a Swiss cheese. A food for thought: if cross-border operations only work for banks and not for clients they should not be allowed.”
As often mentioned earlier on Icelog a group of Landsbanki Luxembourg clients have been trying to attract the attention of Luxembourg authorities as to the nature of the bank’s operations and to the handling of the bank’s administrator of their cases. Contrary to Icelandic authorities and the Landsbanki winding-up board, busy investigating the bank in Iceland and charging/suing its managers, Luxembourg – the tiny country dwarfed by its towering financial sector – has shown no appetite for any such undertaking.
Now there are two new and very different developments which might be of interest for the Landsbanki clients, all of whom are foreigners, mostly elderly people, with properties in France and Spain. Labour MP Huw Irranca-Davies has drawn attention to the Rotschild bank, which also sold equity release products, causing default and loss of property, to a similar group of clients. And creditors in the long failed Luxembourg bank, Bank of Credit and Commerce International, BCCI also, like the Landsbanki Luxembourg clients, think that Luxembourg authorities are difficult to deal with.
MP Irranca-Davies raised the equity release issue in a House of Commons debate and had some harsh words for the Rotschilds: “… you have badly deviated from your core values, badly served your brand and reputation, badly served people who regarded themselves as your clients – not the clients of some intermediaries as they claim – and who are now facing penury after investing in products which your name, Rothschilds, your integrity, your values were used as a key selling point.”
Interestingly, conservative Treasure minister offered to raise the matter with counterparts in Spain and Guernsey. Should he do that someone should tell him not to leave out the Landsbanki Luxembourg cases since they also concern equity release loans.
One aspect of the equity release loans is that they have been sold by banks not operating in the country where the products have been sold. Rothschild, Landsbanki and several Scandinavian banks, all active in this business, sold the products to people in Spain and France, not from their operations there but from their Luxembourg operations. An interesting aspect, which has created a sort of vacuum around these operations: when the clients felt they had things to complain about Luxembourg authorities have not really listened as the products were not sold there; and authorities in France and Spain have so far not really taken the issue seriously since the banks were operating abroad.
This case has shown that when it comes to unified European financial sector it only works for banks, facilitating cross-border operations. For clients and consumer protection this sector has as many holes as a Swiss cheese. A food for thought: if cross-border operations only work for banks and not for clients they should not be allowed.
For anyone following the world of finance for some decades BCCI is a familar name. The bank was operating – yes, in Luxembourg for two decades from the 1970s. Founded in Luxembourg in 1972 by a Pakistani financier, Agha Hasan Abedi, it eventually failed in 1991 after financial regulators in several countries feared it was badly regulated.
It took years to get the Luxembourgians to act but when they did it turned out that its operations were not only mundane lending and borrowing but money laundering and other criminal activities. One interesting aspect, in light of development in the three failed Icelandic banks is that the BCCI administrator, Deloitte, sued the bank’s auditor, Ernst & Young. The case never came to court but was settled for $175m in 1998.
All of this has turned into a long saga, which quite remarkably is still ongoing. The latest is that some of its creditors are now fighting authorities in Luxembourg, claiming it is blocking money from creditors. Though the BCCI creditors certainly with deeper pockets than the Landsbanki clients, they are no less upset and do not intend to drop their case any time soon. One of them is dr. Adil Elias, whose story has earlier been told by the WSJ.
Quite intriguingly the two gropus – the Landsbanki Luxembourg victims and the BCCI creditors – have one thing in common: both had cases ruled on right up to Christmas in Luxembourg and in both cases those complaining lost. Maybe a coincidence – or this is the time Luxembourg courts feel is the best time to rule on “unruly” bank clients ready to take on Luxembourg authorities.
*See an earlier Icelog on this issue, with links to older coverage on Icelog.Follow me on Twitter for running updates.
Wishing you all an inspiring and inspired year. Here is the sunrise in Reykjavík today, just before the hour of sunrise at 11.18, on the first day of 2014.
And here is the first sunset in Reykjavík on the first day of 2014, some time after the hour of sunrise, at 15.43.Follow me on Twitter for running updates.