Jeremy Corbyn has come into the political summer like a red storm rising. No political neophyte and not charismatic in the flashy way (but well, neither are his three opponents) he sweeps up support with his slightly dour, dry reasoning embracing the word “socialism.” His message, like it or loath, has that one thing the other three lack: a coherent narrative that fits him like his beard. – His political assets stand all the more out compared to what his three contenders offer: a homeopathic blend of old New Labour and patchwork politics.
Who would have thought in early summer that electing a Labour leader would reveal a political yearning for something new by a surging support for the oldest candidate? With three wholly presentable political thoroughbreds the candidate from the “loony left” was intended as a red-hot chilli to enliven a bland concoction. But chilli is a tricky ingredient and can easily dominate a dish.
Over the last few years voters in some European countries have flocked around challengers to old party-political structures: there is the Cinque Stelle in Italy, Podemos in Spain, Syriza in Greece, the Pirate Party in Iceland and to a certain degree UKIP – new, or relatively new parties that suddenly capture the voters’ political imagination.
Contrary to these new political splashes it is interesting that Jeremy Corbyn, voted into Parliament in 1983, as were Tony Blair and Gordon Brown, is neither new in politics nor aspiring to lead a new party. Only rarely does an old hand challenging the party’s ruling elite gather the votes needed to get elected as a leader. Yes, there is the effect of Labour’s new voting rules but this does not explain the Corbyn-mania.
Two political phenomena – Tony Blair’s surge in the election 1997, which lasted until tainted by the Iraqi invasion and Nick Clegg’s unexpected popularity in 2010 – can both partly be explained by the fact that the two were political newcomers. But Corbyn is no political newcomer and neither his politics nor his rhetoric is new.
Adapted to our times his words echo the sixties and seventies when Corbyn was young and a great part of his supporters not even born. Corbyn’s newness is however something that has slowly been seeping out of politics for the last two decades: coherent conviction and a sense of mission – i.e. vision embedded in a political narrative.
Typically of the politicians of their generation Andy Burnham, Yvette Cooper and Liz Kendall are efficient, presentable and no doubt capable. But their message lacks coherence; they have no political narrative.
This lack of narrative is partly Labour’s problem but Corbyn has filled the gaping gap with his own narrative, rooted in his political story whereas his three contenders present a patchwork of headlines assembled from pollsters and focus groups with the help of political advisers. Compared to Corbyn’s red cloak, so eminently his own, the three struggle to carry their patchwork cloaks convincingly.
But why has it come to this sad state of patchwork politics?
Vision can’t be out of political fashion – politics IS vision
New Labour did not invent this adage that vision is dead, long live politics. But the Labour party reinvented and owned by Tony Blair, Peter Mandelson and Alastair Campbell certainly made this their over-arching political idea. Following scandals and the disintegration of the Tory government politics was a dirty word. The New Labour message was nothing as dirty as politics and vision but all about doing the right thing and managing well.
Ever since Labour has told voters that politics is about finding better solutions to manage the economy, the NHS, education and everything else. Oh, so wrong. Politics is not like running a company and the state is not like a company. If so, politicians like Andy Burnham, Liz Kendall and Yvette Cooper would be all the political rage. But they clearly are not.
Worshipping the managerial approach is the essence of the New Labour legacy. Since New Labour was so successful the New Labour vision-less managerial-style politics is still being remixed and reheated by the Burnham-Cooper-Kendall generation that grew up flush with its success. The three candidates are the latest blend, by now wholly diluted – a homeopathic solution of the original New Labour ideas.
But in times of Occupy and anger over rising inequality Labour voters are saying “thanks, but no thank you” to the weak blend the managerial no-vision. They want something new and potent. Against this background Corbyn rises and shines. The irony is that the new is now an elderly and battered socialist with a political soul.
Political language reeking of death and the making of patchwork politics
Under normal circumstances politicians like Burnham, Cooper and Kendall would not be compared to Corbyn but simply to other politicians more or less similar to themselves: thoroughly media-trained, only rarely at loss for an answer because every possible and impossible question has been thrown at them by media-coaches behind closed doors hours on end.
All three have Oxbridge credentials, Corbyn doesn’t. They entered professional politics as advisers soon after university and though young have lived and breathed politics and media training.
Large doses of undigested media training creates a political language reeking of death – death, because no living normal person speaks a language where the simple words “yes” and “no” have largely been banished. Where answers are long enough to make everyone forget the question that the politician doesn’t want to give a straight answer to. Where quirky words are never used but mostly only sanitised words in sentences with vacuous meaning. And no wit please, we are serious politicians (except Boris Johnson).
Corbyn certainly has a touch of media training about him but at least it hasn’t beaten the soul and spirit out of him, as it seems to have done with his contenders. Possibly because they were younger when they were subjected to the training, now seemingly permeating their grey matter.
In addition to the institutionalised media training there is the institutionalised content-building. An expert who participated in policy discussions to help a young politician (none of the three) formulate political ideas told me that whenever the participants dwelled on a topic the adviser orchestrating the whole séance stopped the discussion and told the participants to stick to the headlines. Ultimately an utterly frustrating and uninteresting experience, my source said.
This is how patchwork politics are made – no wonder politicians struggle to give it a convincing tone.
Politics in the times of personality politics
Labour’s loss in spring has i.a. been blamed on Ed Miliband’s leftism. However, in the age of personality politics maybe Labour voters sensed in Miliband the same as in the three of his generation who now offer to replace him: that he was too bland, too unconvincing because he had lost his political soul and offered only patchwork politics.
Corbyn’s supporters have not necessarily studied his thoughts on People’s Quantitative Easing and other issues but they clearly embrace him as a politician they would like to see lead the Labour party and eventually the country.
Those fearing a Corbyn leadership have tried various ways to undermine him: there are the allegedly dubious people like Hamas terrorists and Holocaust deniers he has engaged with during his many years in politics. Is it wise that Corbyn the socialist should replace a candidate thought to be too far to the left? I’ve heard it whispered he might even be posh, a cardinal sin in British politics. And so on.
None of this, however, is likely to drive his supporters away. In times of personality politics – when many voters choose leaders more for who the politician is and the combination of personality and politics matters more than single issues – any such criticism will shake the supporters no more than a splash of water on a goose.
How Corbyn the unruly whip-denier will fare as a leader is another matter. But what the Corbyn-mania shows is that yes, people are interested in politics, vision and narrative matter; patchwork politics dressed up in a dead language fail to engage with the political enthusiasm out there. – The shortcomings of patchwork politicians are all too apparent when they share the stage with a politician whose politics fits his personality like his grey beard.
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Why the Troika and the EU member states find it so difficult to trust Greece
The word “trust” has been mentioned time and again in reports on the tortuous negotiations on Greece. One reason is the persistent deceit in reporting on debt and deficit statistics, including lying about an off market swap with Goldman Sachs: not a one-off deceit but a political interference through concerted action among several public institutions for more then ten years.
As late as in the July 12 Euro Summit statement “safeguarding of the full legal independence of ELSTAT” was stated as a required measure. Worryingly, Andreas Georgiou president of ELSTAT from 2010, the man who set the statistics straight, and some of his staff, have been hounded by political forces, also Syriza. Further, a Greek parliamentary investigation aims at showing that foreigners are to blame for the odious debt, which should not be paid while there is no effort to clarify a decade of falsifying statistics.
In Iceland there were also voices blaming its collapse on foreigners but the report of the Special Investigation Committee silenced these voices. – As long as powerful parts of the Greek political class are unwilling to admit to past failures it might prove difficult to solve its results: the excessive debt and deficit.
“This is all the fault of foreigners!” In Iceland, this was a common first reaction among some politicians and political forces following the collapse of the three largest Icelandic banks in October 2008. Allegedly, foreign powers were jealous or even scared of the success of the Icelandic banks abroad or aimed at taking over Icelandic energy sources. In April 2010 the publication of a report by the Special Investigation Committee, SIC, effectively silenced these voices. It documented that the causes were domestic: failed policies, lax financial supervision, fawning faith in the fast-growing banking system and thoroughly reckless, and at times criminal, banking.
As the crisis struck, Iceland’s public debt was about 30% of GDP and budget surplus. Though reluctant to seek assistance from the International Monetary Fund, IMF, the Icelandic government did so in the weeks following the collapse. An IMF crisis loan of $2.1bn eased the adjustment from boom to bust. Already by the summer of 2011 Iceland was back to growth and by August 2011 it completed the IMF programme, executed by a left government in power from early 2009 until spring 2013. Good implementation and Iceland’s ownership of the programme explains the success. For Ireland it was the same: it entered the crisis with strong public finances and ended a harsh Troika programme late 2013; its growth in 2014 was 4.8%.
For Greece it was a different story: high budget deficit and high public debt were chronic. From 1995 to 2014 it had an average budget deficit of -7%. Already in 1996, government debt was above 100% of GDP, hovering there until the debt started climbing worryingly in the period 2008 to 2009 – far from the prescribed Maastricht euro criteria of budget deficit not exceeding 3% and public debt no higher than 60% of GDP. Both Greek figures had however one striking exception: they dived miraculously low, below their less glorious averages in time for joining the euro. Yet, only the deficit number ever went below the required Maastricht criteria, which enabled Greece to join the euro in 2001.
Greece had an extra problem not found in Iceland, Ireland or any other crisis-hit EEA countries: in addition to dismal public finances for decades there is the even more horrifying saga of deliberate hiding and falsifying economic realities by misreporting Excessive Deficit Procedure, EDP and hide debt and deficit with off market swaps.*
This is not a saga of just fiddling the figures once to get into the euro but a deceit stretching over more than ten years involving not only the Greek statistical authorities but the Greek Ministry of Finance, MoF, the Greek Accounting Office, GAO and other important institutions involved in the compilation of EDP deficit and debt statistics – in short, the whole political power base of Greece’s public economy.
Already in 2002 Eurostat discovered that the debt and deficit dip around the euro entry was no miracle but manipulation: Greek authorities simply reported wrong numbers. In 2004, Eurostat’s Report on the revision of the Greek government deficit and debt figures showed that this had been on-going between 1997 to 2003. Consequently, the Greek statistical authorities, the then National Statistical Service of Greece, NSSG (from which ELSTAT was created in mid-2010) were forced to revise its data for the years 2000 to 2003 upward, above the criteria set for Greece’s entry in the Eurozone. These issues were unique to Greece: “Revisions in statistics, and in particular in government deficit data, are not unusual… However, the recent revision of the Greek budgetary data is exceptional.”
The Eurostat 2004 report was followed by intense and unprecedented scrutiny with Eurostat using all its power to control and make sure the Greek stats were correct. Yet, NSSG did not learn its lessons, or rather, the political interference was relentless.
In autumn 2009 the ECOFIN Council requested a new report, this time from the EU Commission, EC, due to “renewed problems in the Greek fiscal statistics” after the “reliability of Greek government deficit and debt statistics (has) been the subject of continuous and unique attention for several years.”
The EC report on Greek Government Deficit and Debt Statistics, published in January 2010 showed that Greek numbers on debt and deficit were still wrong: deficit forecasts changed drastically from the March to the September reporting more than once and once the real statistics were available the numbers were still higher. Again, such a revision was rare in EU member states “but have taken place for Greece on several occasions.”
As earlier, the reason for the faulty data was methodological shortcomings, not only at the NSSG but also at the GAO and the MoF responsible for providing data to NSSG and, even more grave, political interference and “deliberate misreporting,” where the NSSG, GAO, MoF and other institutions involved in the reporting, all played their part.
The Goldman Sachs, GS, off market swap story was one chapter in the faulty data saga. In 2008, when Eurostat made enquiries in all member states on off market swaps, Greek authorities informed Eurostat promptly that the Greek state had engaged in nothing of the sort. This 2008 statement turned out to be a blatant lie when Eurostat investigated the matter, as shown in a Eurostat report in November 2010. The swap story is a parallel to the Greek data deceit in the sense that it was not a single event but a deceit running for years, involving several Greek authorities.
Needless to say, fiddling the numbers did not eradicate the debt and deficit problem. The EC report was published as Greece was losing access to markets. Negotiations on a bailout were complicated by unreliable information on Greek public finances. On May 2, 2010, as the first Greek Memorandum of Understanding was signed, with a €110bn loan – €80bn from European institutions and €30bn from the IMF – it was clear that the crucial figures of debt and deficit might still go up.
Following these major failures at the NSSG its head had resigned in 2009. At the GAO and the MoF ministers, vice ministers and general secretaries changed with the new Papandreou government but the ranks below remained unchanged, as did the mentality. With changes in the statistics law in summer 2010 ELSTAT replaced NSSG. A new board was put in place and also a new head: Andreas Georgiou, earlier at the IMF, returned home to take over at ELSTAT. This ended the battle to produce correct statistics: since August 2010, neither Eurostat nor other European authorities have questioned Greek national statistics.
It was however the beginning of an on-going horror story for Georgiou and some of his staff who have been hounded since ELSTAT began reporting correct statistics in accordance with European standards: three times, competent judiciary officials have recommended to have the criminal case launched against them put to file, i.e. to drop the case. Only recently, a council of appeals court judges have let go of charges against the three for having caused the state a loss of €171bn, which would have meant a prison sentence for life. However, charges against Georgiou for violation of duty are still being upheld; should he be found guilty he will not be able to hold a public post again.
There are now two committees, set up by the Greek parliament, investigating the past. One is the Parliamentary Truth about the Debt Committee. Set up in April 2015, with members chosen by the Syriza president of the Greek parliament Zoe Konstantopoulou, it concluded in its preliminary report, presented June 17, that Greece neither can nor should pay its debt to the Troika because that debt is “is illegal, illegitimate, and odious.” The other, a Parliamentary Investigative Committee made up of members of parliament and normally referred to as the Investigative Committee about the Memoranda, is scrutinising how Greece got into the two Memoranda of Understanding with international partners, in 2010 and 2012, in the context of adjustment programs. – Both committees have repeated the claims against Georgiou and the two ELSTAT managers.
In spite of over a decade long saga of false statistics and political interference there has been no attempt so far to set up an independent committee to tell the whole Greek debt saga, from the 1990s to the present day, manipulated statistics, deceitful swaps, political interference, warts and all.
2004: the first Greek crisis … of unreliable statistics
The first Greek crisis did not attract much attention although it was indirectly a crisis of deficit and debt – it was a crisis caused by faulty statistics, unearthed by Eurostat already in 2002. After going through the deficit and debt figures reported by Greece the 2004 Eurostat’s Report on the revision of the Greek government deficit and debt figures rejected figures put forward by the NSSG in March 2004. After revision the numbers for the previous years looked drastically different – the budget deficit, which should have been within 3%, moved shockingly:
|DEFICIT||% GDP||% GDP||% GDP||% of GDP|
Report on the revision of the Greek government deficit and debt figures
The institutions responsible for reporting on the debt and deficit figures were NSSG, the MoF through the GAO as well as MoF’s Single Payment Authority and Bank of Greece. Specifically, NSSG and the MoF were responsible for the deficit reporting; the MoF was fully responsible for the debt figures.
The Eurostat drew various lessons from the first Greek crisis. Legislative changes were made to eradicate the earlier problems – not an entirely successful exercise as could be seen when the same problems re-surfaced. But the most important result of the 2004 crisis was a set of statistical principles known as the European Statistics Code of Practice, adopted in February 2005, revised in September 2011, following the next Greek crisis of statistical data. Unfortunately, NSSG drew no such lessons.
2009: the second Greek crisis … of unreliable statistics
Following the 2004 report Eurostat had NSSG in what can best be described as a wholly exceptional and intensive occupational therapy: from the ten EDP notifications 2005 to 2009 Eurostat had reservations to five of them, far more than any other country received. No country but Greece got “methodological visits” from Eurostat. The Greek notifications, which passed, did so only because Eurostat had corrected them during the notification period, always increasing the deficit from the numbers reported by Greek authorities.
But in spite of Eurostat’s efforts the pupil was unwilling to learn and in 2009 there was a second crisis of statistics: things had not improved as was bluntly stated in a 30-page report on Greek Government Deficit and Debt Statistics from the EC in January 2010. In addition: what had been going on at Greek authorities had no parallel in any other EU country.
This second crisis of Greek statistics in 2009 was in the first instance not set off by a real figure but by the dramatic revisions of the deficit forecast for 2009. As in 2004, this new crisis led to major revisions of earlier forecast: the April forecast was revised twice in October. What happened between spring and October was that George Papandreou and the PASOK ousted New Democracy and prime minister Kostas Karamanlis from power; the new government was now beating drums over much worse state of affairs than earlier data and forecast showed.
After first reporting on October 2 2009 there came another set of numbers from NSSG on October 21, revising earlier reported deficit for 2008 from 5% of GDP to 7.7% – and the forecasted deficit ratio for 2009 of 3.7% was revised to 12.5% (as explained in footnote, numbers for current year are a forecast, whereas numbers for earlier years should be actual data).
And this was not all: in early 2010, Eurostat was still not convinced about the actual EDP data from the years 2005 to 2008. The earlier 2009 deficit forecast of 12.5% had risen to an actual deficit of 13.6% by April 2010 to finally land on 15.4% in late 2010.
The EC report detected common features with events in 2004 and 2009: a change of government – in March 2004, Kostas Karamanlis and New Democracy came to power, ending eleven years of PASOK rule and as mentioned above George Papandreou and PASOK won back power in October 2009.
In both cases “substantial revisions took place revealing a practice of widespread misreporting, in an environment in which checks and balances appear absent, information opaque and distorted, and institutions weak and poorly coordinated. The frequent missions conducted by Eurostat in the interval between these episodes, the high number of methodological visits, the numerous reservations to the notifications of the Greek authorities, on top of the non-compliance with Eurostat recommendations despite assurances to the contrary, provide additional evidence that the problems are only partly of a methodological nature and would largely lie beyond the statistical sphere.
In other words, the problem was not statistics but politics. As politics is well outside its remit, Eurostat could not get to the core of the problem: “Though eventually an overall level of completion was achieved, given that Eurostat is restricted to statistical matters in its work the measures foreseen in the action plan were mainly of a methodological nature, and did not address the issues of institutional settings, accountability, responsibility and political interference.”
The political interference could i.a. be seen from the fact that reservations expressed by Eurostat between 2005 and 2008 on specific budgetary issues, which had then been clarified and corrected, resurfaced in 2009, i.e. earlier corrections were reverted and were now once more wrong.
Good faith versus fraud
The EC 2010 report identified two different but in some cases linked sets of problems. The first was due to methodological weaknesses and unsatisfactory technical procedures, both at the NSSG and the authorities that provided data to the in the NSSG, in particular the GAO and the MoF.
The second set of problems stemmed “from inappropriate governance, with poor cooperation and lack of clear responsibilities between several Greek institutions and services responsible for the EDP notifications, diffuse personal responsibilities, ambiguous empowerment of officials, absence of written instruction and documentation, which leave the quality of fiscal statistics subject to political pressures and electoral cycles. “
Eurostat’s extra scrutiny and unprecedented effort had clearly not been enough: “even this activity was unable to detect the level of (hidden) interference in the Greek EDP data. In particular, after the closure of the infringement procedure at the end of 2007, Eurostat issued a reservation on the quality of the Greek data in the April 2008 notification and validated the notifications of October 2008 and April 2009 only after it intervened before and during the notification period to correct mistakes or inappropriate recording, with the result of increasing the notified deficit in both instances. As an example, Eurostat’s methodological missions in 2008 resulted in an increase of the 2007 deficit figure notified by the Greek authorities, from 2.8% to 3.5% of GDP.”
The EC 2010 report further pointed out that “on top of the serious problems observed in the functioning of other areas involved in the management of Greek public revenues and expenditures, that are not the object of this report, the current set-up does not guarantee the independence, integrity and accountability of the national statistical authorities. In particular the professional independence of the NSSG from the Ministry of Finance is not assured, which has allowed the reporting of EDP data to be influenced by factors other than the regulatory and legally binding principles for the production of high quality European statistics.”
The EC report concluded that there was nothing wrong with the quality assurance system in place at Eurostat; the shortcomings were particular for Greece: “The partners in the ESS (European Statistical System) are supposed to cooperate in good faith. Deliberate misreporting or fraud is not foreseen in the regulation.”
Again, the rarity of the magnitude of such revisions was underlined: “Revisions of this magnitude in the estimated past government deficit ratios have been extremely rare in other EU Member States, but have taken place for Greece on several occasions.”
The EC 2010 report spells out interplay between authorities, dictated by political needs. Against these concerted actions by Greek authorities, the efforts of European institutions were bound to be inadequate – “the situation can only be corrected by decisive action of the Greek government.”
The Goldman Sachs 2001 swaps – part of the Greek statistics deceit saga
In early 2010, international media was reporting that Greece had entered a certain type of swaps – off market swaps – with Goldman Sachs in 2001 in order to bring its debt to a certain level so as to be eligble for euro membership.
Already in Council Regulation (EC) No 2223/96 swaps were classified as “financial derivatives,” with a 2001 amendment making it clear that no “payment resulting from any kind of swap arrangement is to be considered as interest and recorded under property.” However at that time off market swaps were not much noted. By the mid-2000s it became evident that the use of off market swaps could have the effect of reducing the measured debt according to the existing rules. Eurostat took this into account and issued guidelines to record off market swaps differently from regular swaps. – Further, Eurostat rules specify that when in doubt national statistical authorities should ask Eurostat.
In 2008, Eurostat asked members states to declare off market swaps if any. The prompt Greek answer was: “The State does not engage in options, forwards, futures or FOREX swaps, nor in off market swaps (swaps with non-zero market value at inception).”
In its Report on the EDP Methodologial Visits to Greece in 2010, Eurostat scrutinised the 2001 “currency off-market swap agreements with Goldman Sachs, using an exchange rate different from the spot prevailing one” that the Greek Public Debt Agency, PDMA, had made with the bank. It turned out that the 2008 answer was just the opposite of what had happened: the Greek state had indeed engaged in swaps but kept it carefully hidden from the outer world, i.a. Eurostat.
After having been found out to be lying about the swaps Greek authorities were decidedly unwilling to inform Eurostat on the details. Not until after the fourth Eurostat visit, at the end of September 2010, nota bene after Georgiou took over at ELSTAT, did Eurostat feel properly informed on the Goldman Sachs swap.
The GS off market swaps were in total thirteen contracts with maturity from 2002 to 2016, later extended to 2037. As Eurostat remarked these transactions had several unusual aspects compared to normal practices. The original contracts have been revised, amended and restructured over the years, some of which have resulted in what Eurostat defines as new transactions.
The GS swaps hid a debt of $2.8bn in 2001; after later restructuring the understatement of the debt was $5.4bn. The swap transaction, never before reported as part of the public accounts, was part of the revisions in the first ELSTAT reporting after Georgiou took over. This did actually increase the deficit by a small amount for every year since 2001, as well as increasing the debt figure.
The swap story is a parallel to the Greek data deceit in the sense that it was not a single event but a deceit running for years, involving several Greek authorities. Taken together, both the swap deceit and the faulty reporting of forecasts and statistics by Greek authorities show a determined and concerted political effort to hide facts and figures, which in reality did not change when new governments came to power.
A thriller of statistical data and mysteriously acquired emails
For Greece, the economy deteriorated drastically following the financial crisis in 2008. Public debt was at 129% of GDP end of 2009. The country effectively lost market access in March 2010. With an agreement signed May 2 2010 Greece became the first Eurozone country to be bailed out. The messy statistics made the negotiations tortuous.
After the appalling failures, misrepresentations and direct manipulation of figures for political purposes, both at NSSG and other institutions involved in the collection and presentation of statistical data, things turned for the better after Andreas Georgiou took over as president of the newly established ELSTAT in August 2010. However, not everyone in the Greek political system celebrated the fact that ELSTAT was now operating strictly to ESS standards.
It is worth noting that by the time Georgiou took over most of the corrections of earlier figures had already been done under the auspice of Eurostat. There was however the last set of corrections of deficit and debt figures. As pointed out earlier, the GS off market swaps were included for the first time, changing figures for earlier years and the actual deficit figure for 2009 was yet again revised upward in the first set of data, delivered by the new President. As the EC report in January 2010 had foreseen the deficit figure was yet to rise: the April figure of 13.6% was now 15.4%.
Following the adoption of the new statistics law in March 2010, ELSTAT was now independent of the MoF although its board was politically appointed in addition to a representative from the employees’ union. This might not have been a problem if the board had understood the European Statistics Code of Practice in the same way as Georgiou.
At ELSTAT Georgiou emphasised its independence and accountability where the board should be involved only with the broader issues, not the statistical production process. Instead, the board felt, among other things, that it should vote on and approve the statistics and saw Georgiou as being manipulative, wanting to rule over the statistics. Three of the members of the new board, set up in August 2010 – ELSTAT’s vice president Nikos Logothetis, Zoe Georganda and Andreas Philippou – had applied for the position of president, which possibly did not make things easier.
The break-down of trust happened at a meeting with the presidium of the employees’ union on 21 October 2010, after Georgiou had been in office less than three months. At this meeting, the presidium showed Georgiou a document – a legal opinion from Georgiou’s lawyer with whom Georgiou had been in touch via his private email account, on issues related to the law on ELSTAT that was in the process of being changed. Georgiou realised that someone had an unauthorised access to his account. He later became aware that another member of the board, Zoe Georganda, possessed an email Georgiou had exchanged with Poul Thomsen, head of the Greek IMF mission.
Georgiou brought the case to the police who discovered that Nikos Logothetis had been entering Georgiou’s account from the first day Georgiou took up his position at ELSTAT. When the police did a house search, Logothetis was actually at his computer, logged into Georgiou’s account. After less than six months in office Logothetis resigned from the ELSTAT board in February 2011 as criminal charges, based on his hacking into Georgiou’s account, were brought against him.
Logothetis has denied accessing the account and claims instead that various leading European statisticians framed him. His case is pending in court. In spite of being charged with unauthorised access to Georgiou’s account, Logothetis has repeatedly been called in as an expert witness in parliament in the cases against Georgiou and his two colleagues. His most recent appearance was in June with the Investigative Committee about how Greece got into the adjustment programs.
When revising wrong statistics equals ignoring national interest
In September 2011, Antonis Samaras the newly elected leader of New Democracy and minister for culture, gave a much noted speech at the Thessaloniki International Expo, where he attacked George Papandreou, accusing him of manipulating the statistics when Papandreou came to power in autumn 2009. Samaras claimed that Papandreou had done this only to discredit Kostas Karamanlis, who Samaras succeeded as a party leader and who had lost the election that brought Papandreou to power. – This speech proved fateful, not for Papandreou but for ELSTAT’s president Andreas Georgiou.
A few days after Samaras’ speech, Georgiou was called to the parliament to explain why he had ignored national interests and revised the figures upwards. Georgiou referred to the ESS Code of Practice but gained little understanding. Instead he was accused of inflating the 2009 figures under instruction of Eurostat to push Greece into the Adjustment Programme. This ignored the fact that the main corrections had been done before Georgiou took over at ELSTAT.
It is important to keep in mind the context for the 2009 deficit: there was the forecasted deficit of 3.9%, put forth by the MoF and reported by NSSG in April 2009 and then the estimate of the actual 2009 deficit of 13.6%, as reported by NSSG in April 2010. All of this had happened before Georgiou took over at ELSTAT in August 2010, after which the final adjustment from 13.6% to 15.4% was made.
The accusations against Georgiou also ignored the fact that Greece had entered the Adjustment Programme three months before he took over at ELSTAT and also that the Greek statistical data had been found to be wrong already before 2000 in addition to the swaps, reporting faulty data up to 2004 and then again up to end of 2009. Political figures both on left and right of the political spectrum united against the ELSTAT president as if the only reason for the country’s debt and deficit were statistics. The Greek Association of Lawyers accused Georgiou of high treason.
Around the time of the hearing in parliament in September 2011, a prosecutor took up the case against Georgiou and two ELSTAT managers and eventually pressed criminal charges in January 2013. In accordance with due process, an investigating judge began a more thorough investigation but at its conclusion, almost two years later, in August 2013 recommended that the case be dropped as nothing was found to merit taking the case further. Following interventions by politicians the case was kept open by the judicial system.
Twice again—in 2014 and 2015—prosecutors proposed that the case be dropped, always followed by interventions from nearly all sides of the political spectrum, which insisted on charges of false statements on the 2009 deficit and debt, and breach of faith against the state/causing the state damages be sustained and that the case be taken to trial. As the punishment should be relative to the damages, calculated to amount to €171bn, this would effectively have amounted to a prison sentence for life.
The charges against Georgiou and the two ELSTAT managers for allegedly making false statements on the 2009 statistics and breach of faith have recently been dropped. However, charges against Georgiou for alleged violation of duty i.a. for not bringing the 2009 figures to vote on the former board are being upheld. Some members of that former board still insist that the actual deficit figure of 2009 turned out to be identical to the planned deficit figure for 2009 of 3.9%, put forward in April 2009.
Truth commissions and ELSTAT
One of the measures agreed on by the Eurogroup and Greece after the fateful Euro Summit July 12, “(g)iven the need to rebuild trust with Greece,” was “safeguarding of the full legal independence of ELSTAT.” – This reflects the fact that ELSTAT’s independence is still not secured and ELSTAT’s president still under attack.
The two parliamentary committees – the Truth about the Debt Committee and the Investigative Committee about the Memoranda – both seem to be in denial regarding the swaps and the faulty statistics and both uphold blaming and shaming Georgiou and the two ELSTAT mangers.
In the Truth about the Debt Commission’s preliminary findings the earlier claims against Papandreou’s government are again taken up: “George Papandreou’s government helped to present the elements of a banking crisis as a sovereign debt crisis in 2009 by emphasizing and boosting the public deficit and debt.”
Further, it concluded “that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.”
As recently as June 18, Nikos Logothetis testified before the Committee about the Memoranda, claiming that the deficit figures for 2009 and 2010 had been deliberately and artificially inflated. He called Georgiou a “Eurostat pawn” who had used tricks to increase the deficit figure.
However and quite remarkably, the Greek parliament has never questioned anyone on the tricks and manipulations going on at ELSTAT and other public institutions involved in reporting wrong data from before 2000 until 2010.
International support for ELSTAT managers
Contrary to the sustained attacks at home, Georgiou and the two managers have enjoyed the support of Eurostat, European and international associations of statisticians, reflecting the fact that under Georgiou ELSTAT’s reporting has fully complied with Eurostat standards.
In late May, European Statistical System, ESS, published a statement expressing concern regarding the situation in Greece, “where the statistical institute, ELSTAT, as well as some of its staff members, including the current President of ELSTAT, continue to be questioned in their professional capacity. There are ongoing political debates and investigatory and judicial proceedings related to actions taken by ELSTAT and to statistics which have repeatedly passed the quality checks applied by Eurostat to ensure full compliance with Union legislation.”
On June 12 2015 The International Statistical Institute, ISI published its fourth statement regarding the situation in Greece, welcoming the proposal from the Greek Appeals prosecutor Antonis Liogas “that judicial authorities drop the investigation into claims that the current head of ELSTAT, Andreas Georgiou, inflated the country’s public deficit figure for 2009.” ISI pointed out that according to the prosecutor the probe into Georgiou and the two managers had not delivered any evidence suggesting that the three had manipulated the figures.
ISI repeated its statement from 2013 that “the charges against Mr. Georgiou and two of his Managers of exaggerating the estimates of Greek government deficit and debt for the year 2009 are fanciful and not consistent with the facts’… The ISI expresses the hope that justice will prevail in this case and that the threat of prosecution will finally be lifted from Mr Georgiou and his Managers.”
As well as the statement on ELSTAT in the Euro Summit’s July 12 statement, these recent statements on ELSTAT show that political pressure on ELSTAT is still palpable.
The lethal blend of “unhealthy politeness” and “excessive deference”
The lack of scrutiny, as demonstrated in the saga of the faulty Greek statistics, can partly be blamed on the European powers. True, both Eurostat and then the European Commission did exhume the ELSTAT failures and misreporting; but that it could happen in the first place is also due to failures at the European level.
When the European Union created a single currency the Euro countries in effect embarked on a journey all on the same ship. By now, it is evident that neither did the crew, European authorities, have the necessary safety measures to keep discipline among the passengers nor have the passengers kept an eye on each other. In the summer of 2011, Mario Monti, already tried by his experience as EU Commissary, formulated what had gone wrong:
“At the roots of the eurozone crisis lies of course the past indiscipline of specific member states, Greece in the first place. But such indiscipline could simply not have occurred without two widespread failings by governments as they sit at the table of the European Council: an unhealthy politeness towards each other, and excessive deference to large member states.”
A successful monetary union demands more than the countries being just fair-weather friends. The crisis countries, most notably Greece, can only learn from the past if they understand what happened. In Greece these failures were i.a. this basic function in a modern state of truthfully reporting statistics.
Truth or politically suitable truth
In December 2008, while Iceland was still in shock after the banking collapse, its parliament set up a Special Investigation Committee, SIC, which operated wholly independent of parliament. The three SIC members were its chairman Supreme Court Justice Páll Hreinsson, parliament’s Ombudsman Tryggvi Gunnarsson and lecturer in economics at Yale University Sigríður Benediktsdóttir who together supervised the work of ca. forty experts. Their report of 2600 pages was published April 10 2010.
The report buried the politically motivated explanations of the collapse being caused by foreigners and established instead a recount of what had happened, based both on documents and hearings (in private, not in public hearings). One benefit of the SIC report is that no political party or anyone else can now tell the collapse saga as suits their interest: the documented saga exists and this effectively ended the political blame game. Importantly, the report points out lessons to learn.
Sadly, nothing similar has been done in other crisis-hit European countries. The Irish parliament embarked on such a process in summer 2014 but so far, the efforts have not been wholly convincing. The two committees, set up by the Greek parliament, do not seem entirely credible, i.a. because the allegations of ELSTAT misconduct and manipulation under Georgiou are being recycled. Further, their scope seems myopic, i.a. as no effort is made to explain what went on at the institutions that from before 2000 until 2010 were reporting faulty statistics and forecasts and lying about the GS swaps.
All of this taken together shows a political class, also within Syriza, not only unwilling to face the past but actively fighting any attempt to clarify things in a battle where even national statistics are a dangerous weapon. The fact that leading Greek political powers are still fighting the wrong fight on statistics is unfortunately symptomatic for political undercurrents in Greece – and that partly explains the profound lack of trust among its creditors.
*A note on EU statistics: twice a year, before end of March and August, statistical authorities in the EU countries report forecasts of debt and deficit numbers for the current year, i.e. what the planned deficit and debt is and then statistical data for earlier years, i.e. the real debt and deficit, according to strict Eurostat methodology in order to produce comparable statistics. This reporting, called Excessive Deficit Procedure, EDP, is published by Eurostat in April and October every year.
Update: Andreas Georgiou’s time in office has not come to an end: he was hired for five years and is not reapplying. – It should be noted that it was George Papakonstantinou who was Minister of Finance when Georgiou was hired as president of ELSTAT. In addition, it was under Papakonstantinou that new laws to assure ELSTAT’s independence were passed in the summer of 2010.
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Many controlling shareholders in China have pledged shares as collaterals for bank loans – this was a common practice in Iceland up to the October 2008 banking collapse. Now, this practice seems to be causing suspensions of trading in shares in China. If this is indeed a widespread Chinese practice the well-studied effects in Iceland provide a chilling lesson: when the steady rise of Icelandic share prices, both in banks and other companies stopped and prices fell this practice turned into a major calamity for the banks and companies involved. In hindsight, it was a sign of an incestuous and dysfunctional business environment. The Icelandic experience was well covered in the 2010 report by the Icelandic Special Investigation Committee, SIC, and provides food for thought for other countries where these practices surface.
One of the most stunning and shocking findings of the Icelandic SIC report was the widespread use of shares as collaterals for loans in all Icelandic banks, small and large but most notably the three largest ones – Kaupthing, Landsbanki and Glitnir.
It is necessary to distinguish between two types of lending against shares as practiced in Iceland: one is a bank funding purchase of its own shares, with only the shares as collaterals. The other type is taking other shares as collaterals.
These loans with shares as collaterals were mainly offered to the banks’ largest shareholders – in the big banks these were the main Icelandic business leaders – their partners and bank managers. In the smaller banks local business magnates who in many cases were partners to those Icelandic businessmen who operated abroad, as well as in Iceland. Thus, this practice defined a two tier banking system: with services like these to a small group of clients – that I have called the “favoured clients” – and then normal services for anyone else.
As a general banking model it would not make sense – the risk is far too great. But this lending mechanism and the ensuing stratospheric risks seem to have been entirely unobserved by not only the regulators in Iceland but also abroad where the Icelandic banks operated.
The SIC report, published 10 April 2010, explained in depth the effects of shares as collaterals: when share prices fell the banks could not make margin calls without aggravating the situation further. Consequently the banks lost their independent standing vis à vis their largest shareholders and clients – effectively, the banks and the business elite were tied to the same mast on the same ship and all would sink together in case the ship ran aground (as then happened).
Being familiar with the Icelandic pre-collapse situation it was with great interest that I read an article in the FT,* explaining what might be the reason behind the suspended trading in shares of almost 1500 Shanghai- and Shenzen-listed companies, mostly on the ChiNext stock exchange:
“Some analysts believe the suspensions are instead related to one of the scariest “known unknowns” surrounding the market meltdown — just how many controlling shareholders have pledged their shares as collateral for bank loans.”
If this is indeed the case the Icelandic experience indicates a truly scary outlook and dysfunctional Chinese banking. There might be further troubles ahead.
Bank lending against own shares – or – turning the loan book into equity
In Iceland, the use of shares as collaterals counted both for shares in the banks themselves, by the largest and large shareholders and their business partners and then also by managers of the banks – and shares in other companies (not banks) owned by these same investors or those of their business partners.
The use of banking shares and non-banking shares pose somewhat different problems though the fundamental problem is the same, when this is practiced on a large scale to a chosen group of “favoured clients” with complicated cross-ownership as was the case in Iceland.
The SIC report mapped all of this but before its publication there were already rumours and stories related to the practice. I started hearing these stories from Icelandic bankers and others very soon after the banking collapse in October 2008. A foreign accountant I spoke to at the time was familiar with South American examples some decades earlier of banks lending to buy own shares – not an exemplary way of banking, in his opinion. “By lending against own shares a bank is effectively converting its loan book into equity,” was his way of describing this practice.
Asking a foreign banker in London if this was a general practice that banks lent clients to buy the bank’s share with the bank’s own shares as the only collateral he said he knew of this Icelandic practice: “It’s so insane that I don’t even know if it’s legal or not. No bankers in their right mind would consider it.”
But Icelandic bankers did.
Funding own share purchase – weak(ened) equity
What the SIC report pointed out regarding banks funding their own share purchases was the following:
“The capital ratio of Glitnir, Kaupthing Bank and Landsbanki was, in their annual reports, always slightly above the statutory minimum. However, these capital ratios did not reflect the real strength of the banks and the financial system as a whole or the capacity to withstand shock. This was due to considerable risk exposure stemming from the banks’ own shares, both through primary collaterals and forward contracts on their own shares. If equity no longer provides a cushion for protecting depositors and creditors it is not equity in the economic sense. Under such circumstances it is no longer possible to take the capital ratio into account when evaluating the strength of a financial institution, as the risk of loss stemming from the institution’s own shares lies with itself.
The banks had invested their funds in their own shares. Share capital, financed by the company itself, is not the protection against loss it is intended to be. Here this is referred to as “weak equity”. Weak equity in the three banks amounted to about ISK 300 billion by mid year 2008. At the same time, the capital base of the banks was about ISK 1,186 billion in total. Weak equity, therefore, represented more than 25% of the banks’ capital base. If only the core component of the capital base is examined, i.e. shareholders’ equity, according to the annual accounts, less intangible assets, the weak equity of the three banks amounted to more than 50% of the core component in mid year 2008.
In addition to the risk that the banks carried on account of their own shares, the SIC assessed how much risk they carried from each other’s shares. Here this is referred to as “cross-financing”. Around mid year 2008, direct financing by the banks of their own shares, as well as cross-financing of the other banks’ shares, amounted to about ISK 400 billion. If only the core component of the capital base is examined this amounted to about 70% of the core component in 2008.
The SIC is of the opinion that the financing of owners’ equity in the Icelandic banking system had been based, to such a great extent, on borrowing from the system itself that its stability was threatened. The shares owned by the biggest shareholders of the banks were especially leveraged. This resulted in the banks and their biggest owners being very sensitive to losses and the lowering of share prices.
Overstatement of a bank’s equity increases its growth potential. However, the bank’s ability to deal with setbacks decreases at the same time. The risk of bankruptcy is thereby increased. Under these circumstances, the loss to depositors and other creditors becomes greater than it would otherwise have been. If the bank in question is systemically important, as was the case with all of these three banks in Iceland, the costs to society will also be significant, as has been the case.”
The spiral to hell
The Icelandic banking system was fully privatised in 2003 but anecdotal evidence indicates that these practices of banks lending against own shares or taking shares as collaterals on favourable terms had started earlier, albeit on a much smaller scale. It is interesting to keep in mind that quite intriguingly the management of the banks did not change radically with privatisation. There were the same managers in place before and after privatisation.
Apart from weakening the banks’ equity the lending against own shares turned into a major headache for the Icelandic banks already in 2007 with the drying up of credit markets. The share price of the banks started falling, forcing the banks to make margin calls.
Under normal circumstances the banks would have taken the shares, liquidated them and pocketed the money to cover the losses. But by accepting own shares as collateral the banks had created anything but normal circumstances.
These circumstances were further aggravated with cross-ownership and close connections between holding companies and the banks. Thus, the collateralised shares, banking shares or not, created a highly poisonous circumstances where the banks could not follow normal business practices: by liquidating the shares the price would have fallen further – this really was a spiral straight to hell.
2007-2008: increased lending to “favoured clients” instead of shrinking the balance sheet
But shares in Icelandic banks and companies were not only placed as collateral in the Icelandic banks. Foreign banks had to some extent taken them as collateral for loans to the major Icelandic businessmen who were making splashes abroad – all of them major shareholders of the Icelandic banks – and their companies. During the winter 2007 to 2008 the foreign banks started making margin calls, threatening liquidation, in reality threatening the existence of the Icelandic banks.
During these winter months all the Icelandic banks did the same thing: they bailed out these large businesses, i.e. the banks lent funds to repay the foreign loans in order to prevent the market to be flooded with shares in the Icelandic banks and the major holding companies, owned by the big players and their partners.
By Easter 2008 this concerted action was more or less completed and now, the Icelandic banks were the main backers of their own shareholders and the main businesses, as well as vanity objects such as chalets, jets and yachts.
Loans to the already highly leveraged businesses went up, in some cases even doubled. And this at a time when the banks should have been shrinking their balance sheet, not expanding. Indeed, practically no one, outside of the “favoured clients” was getting loans. This did of course greatly increase the losses when the game of musical chairs stopped in October 2008.
Icelandic banks and businesses really felt the effect when funding on international markets dried up in summer and autumn 2007. Much of this panic lending in the winter of 2007 to 2008 was possible only because the banks were at the time funded by foreign depositors – most notably Landsbanki with Icesave and to some extent Kaupthing with its Icesave copy-cat product, Kaupthing Edge – but also deposits from charities, universities and local councils, mostly in the UK. Kaupthing used i.a. deposits in its Isle of Man entity that it had bought earlier.
Kaupthing – a business plan based on “parking” own shares
All of this was practiced in all the Icelandic banks – large and small – but as far as I can see none practiced lending against own shares as diligently as Kaupthing. It is not an exaggeration to say that Kaupthing’s business plan was partly just this: to lend funds to buy Kaupthing shares, i.a. extra funds to large clients, who were borrowing for other things.
These loans were allegedly presented as “risk free” in the sense that there were no private guarantees attached to these loans; the client would just place the shares as collateral and nothing more could be lost than just the shares. In addition to Kaupthing share-buying loans to large clients Kaupthing managers were offered these loans.
While the going was good these “share holders” mostly pocketed the dividend instead of necessarily paying off the loans. However, the bank management seemed to place great trust in having a large chunk of its shares “off market” and i.a. not shorted.
Kaupthing managers mostly pledged a personal guarantee in addition to the shares. Just days before the bank collapsed the bank decided to absolve all the managers of their personal guarantee. This decision was later turned around in court and these loans have turned into a millstone around the neck of some of these managers.
Many of the top-level Kaupthing managers have claimed that they never sold any of their shares, thus accruing losses. However, there is evidence that at least in one case a manager sold his own shares by letting another company he himself owned purchase shares, needless to say financed by a Kaupthing loan and no guarantee or collateral but the shares. Thus he did pocket a considerable sum of money from selling Kaupthing shares though outwardly still owning them.
Why Icelandic winding up boards ended up owning big stakes in foreign companies
There is nothing inherently wrong about using non-banking shares as collaterals but prudence is a must. The shares must be valued not a par but well below if shares are to make any business sense to a bank. Also, the bank must not be dependent of the share price staying high, i.e. not falling. This rule of prudency seems not to have been followed when it came to share collaterals by “favoured clients” in the Icelandic banks.
When the holding companies of some of these big clients, such as Jón Ásgeir Jóhannesson, failed it turned out that the resolution committees (later winding-up boards) of the failed Icelandic banks ended up owning large shareholdings in companies earlier owned by Icelandic businessmen, i.e. companies such as Iceland, the supermarket chain and the toy shop Hamley’s owned by Jón Ásgeir Jóhannesson.
Shares as collaterals = sign of dysfuntion and (possibly) corruption
In hindsight, one could say that these were bad banking decisions taken when the world seemed to be made of only rising share prices and infinite funding. However, I beg to differ. As pointed out above, these offers of both funding for shares – whether shares in the same bank, the other banks or in companies always owned by a small circle of businessmen – and then taking the shares as collaterals was not a general service but only offered to a circle of “favoured clients.”
Of the European countries in crisis only the operations of the Icelandic banks have been thoroughly analysed. From hearsay and sporadic reporting my feeling is that a similar scrutiny of operations of i.e. the Spanish and the Irish banks would bring interesting stories to the surface. Spanish bankers are being charged and stories might come up in court. I keep being amazed at how remarkably relaxed Irish politicians and high-level civil servants seem to be regarding evidence of shenanigans in the Irish banks and yet these same banks brought calamity and hardship to Ireland.
As to China and Chinese banking I will for sure be interested if similarities with Icelandic banking will materialise. If that is the case, it is a bad sign.
*Thanks to Stefan Loesch for directing me to the FT article. – This post is cross-posted on Fistful of Euros.
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Now that Greece has controls on outtake from banks, capital controls, many commentators are comparing Greece to Iceland. There is little to compare regarding the nature of capital controls in these two countries. The controls are different in every respect except in the name. Iceland had, what I would call, real capital controls – Greece has control on outtake from banks. With the names changed, the difference is clear.
Iceland – capital controls
The controls in Iceland stem from the fact that with its own currency and a huge inflow of foreign funds seeking the high interest rates in Iceland in the years up to the collapse in October 2008, Iceland enjoyed – and then suffered – the consequences, as had emerging markets in Asia in the 1980s and 1990s.
Enjoyed, because these inflows kept the value of the króna, ISK, very high and the whole of the 300.000 inhabitants lived for a few years with a very high-valued króna, creating the illusion that the country was better off then it really was. After all, this was a sort of windfall, not a sustainable gain or growth in anything except these fickle inflows.
Suffered, because when uncertainty hit the flows predictably flowed out and Iceland’s foreign currency reserve suffered. As did the whole of the country, very dependent on imports, as the rate of the ISK fell rapidly.
During the boom, Icelandic regulators were unable and to some degree unwilling to rein in the insane foreign expansion of the Icelandic banks. On the whole, there was little understanding of the danger and challenge to financial stability that was gathering. It was as if the Asia crisis had never happened.
As the banks fell October 6-9 2008, these inflows amounted to ISK625bn, now $4.6bn, or 44% of GDP – these were the circumstances when the controls were put on in Iceland due to lack of foreign currency for all these foreign-owned ISK. The controls were put on November 29 2008, after Iceland had entered an IMF programme, supported by an IMF loan of $2.1bn. (Ironically, Poul Thomsen who successfully oversaw the Icelandic programme is now much maligned for overseeing the Greek IMF programme – but then, Iceland is not Greece and vice versa.)
With time, these foreign-owned ISK has dwindled, is now at 15% of GDP but another pool of foreign-owned ISK has come into being in the estates of the failed bank, amounting to ca. ISK500bn, $3.7bn, or 25% of GDP.
In early June this year, the government announced a plan to lift capital controls – it will take some years, partly depending on how well this plan will be executed (see more here, toungue-in-cheek and, more seriously, here).
Greece – bank-outtake controls
The European Central Bank, ECB, has kept Greek banks liquid over the past many months with its Emergency Liquid Assistance, ELA. With the Greek government’s decision to buy time with a referendum on the Troika programme and the ensuing uncertainty this assistance is now severely tested. The logical (and long-expected) step to stem the outflows from banks is limit funds taken out of the banks.
This means that the Greek controls are only on outtake from banks. The Greek controls, as the Cypriot, earlier, have nothing to do with the value or convertibility of the euro in Greece. The value of the Greek euro is the same as the euro in all other countries. All speculation to the contrary seems to be entirely based on either wishful thinking or misunderstanding of the controls.
However, it seems that ELA is hovering close to its limits. If correct that Greek ELA-suitable collaterals are €95bn and the ELA is already hovering around €90bn the situation, also in respect, is precarious.
How quickly to lift – depends on type of controls
The Icelandic type of capital controls is typically difficult to lift because either the country has to make an exorbitant amount of foreign currency, not likely, a write-down on the foreign-owned ISK or binding outflows over a certain time. The Icelandic plan makes use of the two latter options.
Lifting controls on outtake from banks takes less time, as shown in Cyprus, because the lifting then depends on stabilising the banks and to a certain degree the trust in the banks.
This certainly is a severe problem in Greece where the banks are only kept alive with ELA – funding coming from a source outside of Greece. This source, ECB, is clearly unwilling to play a political role; it will want to focus on its role of maintaining financial stability in the Eurozone. (I very much understand the June 26 press release from the ECB as a declaration that it will stick with the Greek banks as long as it possibly can; ECB is not only a fair-weather friend…)
Without the IMF it would have been difficult for Iceland to gather trust abroad in its crisis actions – but Greece is not only dependent on the Eurozone for trust but on the ECB for liquidity. Without ELA there are no functioning Greek banks. If the measures to stabilise the banks are to be successful the controls are only the first step.
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Today, the Reykjavík District Court ruled in the most extensive banking case so far, a case of market manipulation and loans to Kevin Stanford and other businessmen to buy shares in Kaupthing, alleged to have part of the market manipulation by Kaupthing senior managers.
This is a complicated case, where the Office of Special Prosecutor went through, in court, months of trades to show a pattern they claimed was consistent with charges of market manipulation. – The judgement will no doubt be appealed by those who were sentenced.
Sigurður Einarsson ex-chairman of the board of Kaupthing was sentenced to a year. Hreiðar Már Sigurðsson, the banks CEO at the time, was found guilty but not sentenced to prison because he has already been sentenced in another case, the al Thani case. According to Rúv, Einarsson sentence will be added to the four years he was sentenced to in the al Thani case. Ingólfur Helgason, Kaupthing manager of Icelandic operations was sentenced to 4 1/2 year. Magnús Guðmundsson manager of Kauphing’s Luxembourg operations was acquitted as was another employee, Björk Þórarinsdóttir member of Kaupthing’s credit committee. Bjarki Diego credit officer at the time was sentenced to 2 1/2 year. Three employees, who carried out the relevant trades, got suspended sentences of 18 months to two year.
One thing, which has proved valuable in this case as in other similar cases, is phone tabs. Interestingly, they have all been done after the collapse.
A complicated case – and contrary to what some seem to think Iceland has a similar legislation regarding market manipulation and other financial fraud as other Western countries. The difference is that there is a will to prosecute these cases: they are time-consuming to investigate but it is perfectly doable and the stories are simple. The fact that big banks are too big to investigate in other countries is only because there is a lack of appetite among authorities and politicians – there really is no other reason, no other explanation.
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The waiting for Godot turned into a theatrically staged presentation at Harpa by the prime minister and minister of finance, assisted by their two main Icelandic experts. The grand plan to lift capital controls has now seen the light of day. If realised as planned the future looks bright for Iceland. But there are still political risks until the planned good deeds are indeed done.
Here are the main points of the new plan: the size of the problem is ISK1200bn, $9bn, ca. 60% of Icelandic GDP where ISK300bn, $2.2bn, is the original overhang from October 2008 (mostly carry trade funds, which flowed to Iceland in the years before the collapse) and then ISK900bn, $6.7bn, in the estates of the failed banks: ISK500bn, $3.7bn, is pure ISK assets, ISK400bn, $3bn, is debt paid in FX by Icelandic entities.
According to the new plan, there are “non-negotiable stability conditions” the estates of the three failed banks have to meet. These conditions are defined in the plan, but not spelled out in króna. On the basis of these conditions the estates have to pay a “stability contribution,” as part of the composition agreement; again, the amount of the contribution is not stated.
The composition agreement has to be in place by the end of the year. If not, the estates will be forced into bankruptcy and will then have to pay a 39% “stability tax,” a one-off tax, of ISK850bn, $6.3bn, due on 15 April 2016. However, there is a deduction to the tax, meaning it will be, according to the presentation, ISK680bn, $6.3bn.
This is all stated in the plan – but in interviews afterwards Bjarni Benediktsson minister of finance the contribution, which he aims at and not the tax, will be ISK500bn.
The rhetoric used implied that the state could, on the basis of emergency and imminent danger, overrule private property rights, i.e. of the creditors. This sounded somewhat bombastic given that Iceland is a thriving country and well capable of solving the problems related to the foreign-owned ISK. Also, there was emphasis on solving the problems for the “real economy” – all of this was interesting, clearly used to create a sense of the danger the government is averting with its plan. This is the rhetoric in the world of staged politics and the Icelandic government is no exception here (except that its spin is always rather visible, i.e. not very professional as good spin should be invisible).
According to the presentation “For seven years there were no realistic proposals from the estates” – given the fact that Glitnir and Kaupthing presented their composition draft in 2012 and 2013 and have waited for answers and clear guidelines this is again part of the rhetoric. The government’s tactic has so far been like inviting the creditors to a game of dart without telling them where the dartboard was.
As already explained, I doubt the size of the problem as related to the estates: I estimate it being ISK500bn, not ISK900bn. The higher number is, as far as I can see, again to underline the danger and justify the means. But again, this is part of the staged performance; the numbers were flashed up again and again.
Will the stability contribution be ISK500bn? From calculations I have seen the likely contribution is in the range of ISK300bn to ISK420bn, $3.1bn, – reaching ISK500bn does not seem likely. The contribution will be paid over time, most likely two to three years. It depends on values of assets etc that change over time, therefore the uncertainty. Further insight into the numbers can be gauged from the letters received from the three estates, see here. Whatever the estates agree to 60% of creditors have to vote for it.
A tax of ISK682bn, $5bn, as stated in the press release, is also, as far as I understand too high a number; ISK620bn, $4.6bn, would be more likely.
The old overhang will be resolved by the CBI in the classic way of auctioning and offering long-term bonds, no surprise there as this plan is already on-going.
Tax (= stick) or contribution (= carrot)?
What does the government want, a tax or contribution? Interestingly, the tax was the main focus of the presentation and little time and attention given to the contribution. The same in the press release, where composition and contribution is merely mentioned en passant whereas the tax is spelled out in great detail.
This however seems to have been part of the show. I understand that the advisers are wholly on the side of composition and contribution, as are the creditors. The emphasis on the tax would then be wielding the stick to make sure the creditors go for the carrot (another matter if a stick was needed).
While emphasising tax and bankruptcy, the refrain was that the capital controls liberalisation is NOT a money-making scheme for the treasury but to lift the controls and nothing else.
The government’s chief negotiator Lee Buchheit also stressed this aim to the Icelandic media but he did put a number on the outcome. His number was ISK650bn, $4.8bn, (see here, at 9:55 min; the number comes up at 15:49) in spe for the government. As far as I can see, an unrealistically high number, closer to the tax, which no one officially wants, than the desired contribution.
Buchheit had earlier mention another thing: that lifting the controls would take a short time, only about six years. This may not be what most people understand as “a short time” but it is a realistic time frame: it will take some time to carry out this plan.
In spite of the emphasis on giving priority to the “real economy” easing of controls for people, businesses and pension funds will only come later. On this, the presentation gave no dates. According to my sources, new Bills in parliament coming autumn or winter will clarify this issue.
Moral hazard and political risk
In spite of the government rhetoric of big funds to come, the debate in Iceland has mostly been characterised by relief: at last a plan, which seems realistic. The opposition has embraced it, pointing out that this is very much what had always been the plan.
There have been some voices asking why Greece and Argentina are struggling with their creditors while Iceland has so effortlessly negotiated with its creditors. The answer is of course that creditors in Iceland are not creditors to the state, contrary to Greece and Argentina, where the problem is sovereign debt; not the case in Iceland.
As stated earlier it is clear that the government aims at composition and contribution, not tax and bankruptcy. There is however always a political risk and the possibility of panic politics. The Progressive party has fallen from 25% of votes in the election in 2013 to 9% in the opinion polls in spite of successfully carrying out the promised “debt correction.”
The party very much got elected on the basis of its promises to fight the “vulture funds,” mentioning ISK800bn days before the election after talking about “only” ISK300bn to ISK400bn. And this was a promise of funds right into the state coffers, not to pay down sovereign debt as is now the plan; a plan that might annually free up ISK30bn, $200m to ISK40bn, $300m, otherwise used on interest payments.
The government had been adamant about not negotiating with creditors. Since talks have been going on over the last months the government has now defined these as “conversations,” not negotiations. No matter the word used it is clear that the largest creditors agree to the plan – and what they agree to is the outlined composition. Tax is a different matter.
For some reason, the old Roman saying “Pacta sunt servanda” has never quite reached Iceland. Icelanders and Icelandic governments over decades have repeatedly understood agreement made as being only valid until they have a different idea as to what they want. This will now again be tested.
Could the composition fail if an agreement on composition is not in place by the agreed deadline at end of the year? My understanding is that this is not likely: if needed, the deadline will be extended but that would of course only happen if things are moving in a realistic way.
Having had their patience tested over the last few years, creditors and the winding-up boards are no doubt both eager and well-prepared for the coming negotiations. Unless there will be a political itch to pick a fight, serving either political interests and/or special interest groups, things could look really bright in Iceland by the end of the year, otherwise the darkest time in Iceland.
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There were negotiations and changes until last minute. So much, that the various press releases published after the presentation of the plan to lift capital controls do not have the same numbers as to the percentage of a possible tax.
The Task Force’s preliminary analysis suggested that to achieve the goal of neutralizing a threat to the balance of payments, this Stability Tax would be set at a rate of 37% of the total assets of each estate (measured as of end-June 2015), with an automatic exemption of ISK 45bn for each estate, which would bring the effective tax rate down to about 35%.
Tax of 37%, de facto 35% after exemption, on the assets as they are at the end of June this year – was then changed and the automatic exemption was removed. The changes were the tax as it was presented at the press conference and in a general press release following the presentation:
A new bill of legislation on a stability tax imposes a one-off 39% tax on the total assets of the failed commercial or savings banks in accordance with their assessed value as of 31 December 2015.
This indicates that the tax was in the end higher than had been negotiated with representatives of the creditors, who were not amused, or so I hear, when they saw the changes.
*I am writing this ca. 8 hours after the press releases have been published but this has not yet been corrected.
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In a heavily staged appearance, prime minister Sigmundur Davíð Gunnlaugsson told Icelanders that ISK850bn, ca 45% of Icelandic GDP would fall into the state coffers, used to reduce the public debt, not for pet projects as earlier announced. With
The size of the problem to solve amounts to ISK1200bn, i.e. this is the sum of ISK, in the estates of the banks and Glacier bonds etc., that cannot be converted to FX and therefore cannot be paid out to creditors right now. What amounts to ISK850bn, or 39% of the assets of the estates at the end of this year will have to be paid off in a stability “contribution” if composition is negotiated and then this amount will be reduced – or tax and bankruptcy if no composition, to fulfil what the government calls “stability conditions.”
Glacier bond-holders and others will either be able to take part in auctions in autumn or buy long-term bonds. All of this is done under the auspice of a phrase repeated over and over again: “National interests takes precedence over interests of private parties.” Here is the English press release, carefully worded and not very clear.
After dealing with this amount, pension funds and ordinary Icelanders will have greater movement. Some quick thoughts on some of the topics du jour:
Size of the problem:
It is clear that the ISK300bn (actually ISK290bn) of the remains of the old overhang (see my last blog before this one on the barest essentials) cannot be paid out in FX – so this amount is clearly a part of the problem. But this is already being dealt with and that action will now continue: the CBI will hold auctions in autumn and those ISK-owners can also buy long-term bonds to come, either in ISK of FX.
That leaves ISK900bn – and this is a more questionable size: ISK500bn (ISK507bn exactly) is the number I have been posting earlier as the size of the problem because these are ISK assets. The remaining ISK400bn are FX assets in Iceland, i.e. assets in Iceland paid off in FX, which I would think was a more debatable size but this is how the government defines the size of the problem.
Stability “conditions” – contributions and tax:
So the problem that needs to be solved amounts to ISK1200 – and by reducing it by 39% the rest can be paid out. Or that seems to be the calculation.
The conditions, i.e. the numbers, are non-negotiable, as was repeated again and again. If the estates negotiate a composition by the end of the year they do not pay a tax but a “contribution”: in fact the same numbers, i.e. 39% or ISK850 but – as far as I understand this will be some reduction so the amount will be ISK500-600bn.
If they do not negotiate a composition the estates go into bankruptcy and pay the full amount: 39%.
This leaves some angles since the ISK850 is well above the ISK500bn but not quite the ISK900bn and well, the ISK300bn is outside of this equation. How these numbers were found I do not know but well, this is how the non-negotiable numbers look like.
The non-mentioned dates
Apart from foreign creditors smarting from controls there are the Icelanders: here, pension funds will be able to invest for ISK10bn a year, more or less what they have asked for, until 2020, unclear from when. And ordinary people will at some non-mentioned date be able to feel liberalisation on certain transactions.
What will creditors do?
Some creditors have already been negotiating with representatives of the government so the plan is indeed not quite out of the blue. According to a Glitnir announcement today, 25% of their creditors agree to this.
Kaupthing’s situation is different, less ISK assets, which might mean that Kaupthing creditors will be less happy to pay. However, no chance to tell until there is an announcement. Everyone might be happy to see an end to this and possible payout in sight.
Either this will all go well, composition beckon and much good will. Or not and the future is legal wrangling in multiple jurisdictions for a decade, like in Argentina. Today, the Icelandic government has taken the country on a journey along a very narrow road above a precipice. If all goes well, everyone reaches the final destination on the other side and there will be much rejoice.
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There are many misconceptions floating around regarding Iceland and capital controls. Here are the barest essentials:
Iceland introduced capital controls on November 29, seven weeks after the official collapse date October 2008. The reason was not money flowing out of banks, as in Cyprus but because foreigners, mostly those who had invested in Icelandic bonds, so called “Glacier bonds”, were converting their Icelandic funds into foreign currency, rapidly draining the none-too large currency reserves. At the time, these holdings amounted to 44% of GDP.
Over time, this original overhang of 44% of GDP has been reduced and now amounts to 16%. This is a process overseen by the Central Bank of Iceland, CBI, which has held auctions to match in- and outflows. The original overhang is further being worked on; the Central Bank of Iceland recently announced measures and more will come as part of a plan to lift capital controls.
The controls are on CAPITAL, meaning that capital, i.a. for investment can not be moved in our out of the country. This means that Iceland no longer adheres to the four freedoms of European Economic Area, EEA, i.e. freedom on goods, services, people and capital.
However, the controls are NOT on goods and services, meaning that money to pay for goods and services can move freely.
With time however another reserve of foreign-owned ISK has formed, i.e. ISK in the estates of the three failed banks. Since foreign creditors hold ca. 95% of the claims to these three estates the ISK assets of the estates are another pool of foreign-owned ISK, now ca. 25% of GDP. FX assets of Glitnir amount to 63% but the FX ratio in Kaupthing is 72%.**
These two pools of foreign-owned ISK holds the controls in place, which is why a plan needs to tackle both of them. As said earlier, the old overhang is already part of a process. What now needs to be tackled is the ISK pool within the estates of the three banks.
The simple and classic way to solve this kind of a problem (Iceland certainly is not the first country to face this problem) would be to negotiate with creditors on a haircut of the ISK assets in the estates. This is what the creditors have been hoping for and this is what the Icelandic government has not been willing to do.
The government’s reasoning has been that engaging with creditors was none of their business and could expose the government to legal risk. After all, the estates are of private companies, no relation to the state. However, the estates cannot be resolved unless it is clear how to deal with their ISK assets and since they cannot be taken out of the country the creditors cannot be paid out, i.e. the estates cannot be resolved. Which means that really, the government holds the threads, i.e. because it has put legislation in place regarding the estates and so, the government is already part of this equation.
Now it seems that the creditors will get some sort of an offer – maybe with a scope to negotiate, maybe only a take-it-or-leave-it offer. Remains to be seen until all the government’s cards are on the table, probably Monday afternoon.
What complicates matters is that the government seems to want not only to get a cut of the ISK assets but of the foreign assets as well. There is no balance-of-payment reason for taking foreign funds though the government refers to “stability tax.”
Further, the Icelandic capital controls are NOT a sovereign debt problem, such as lie at the core of the Argentinian dispute with creditors nor is it parallel to the Greek situation, another sovereign debt problem. And the Icelandic capital controls are not comparable to the Cypriot controls, which were put in place to keep money in the banks and prevent them from collapsing as funds flowed out.
*For data regarding the estates and capital controls see the latest CBI Financial Stability report.
**UPDATE: sorry, I wrote earlier that this was the ISK ratio – it is of course the FX ratio!
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The Icelandic government, or some parts of it, keep on its game of leaking key information always to the same journalist. Now it is the first big step towards lifting capital controls. As could be expected, this seems more about political posturing than a convincing solution. The coming measures may however provide creditors with their long awaited break to negotiate. If not, Iceland faces the same as Argentina: years of wrangling with ever more aggressive creditors – as the chief foreign adviser to Iceland should be able to inform the government on, from first hand experience.
In March, the Ministry of Finance published three links to regulation and documents regarding duty of silence of advisers, parliamentarians and civil servants who might be in possession of information related to the lifting of capital controls. This was part of a concerted effort to keep under wraps anything related to the lifting of the capital controls – until that day came when the government announced its plans. Whatever the source, DV’s journalist Hörður Ægisson, who over the last few years has been a diligent receiver of government information, published on Friday the outline of this plan, introduced at a cabinet meeting that day, most likely to be made public at a press conference on Monday. The question is if the Ministry of Finance will now look into this leak, considering the measures it took in March.
The Icelandic media landscape is a sorry sight: independent media is weak, the money is where the special interests are. This will no doubt be made clear yet again in the coming weeks as the details of the capital controls plan-to-come will be discussed and debated.
The estates will now have a few weeks to negotiate a composition agreement. If creditors do not accept the parameters the government has in mind the estates will be put into bankruptcy proceedings. So far, the estates and their creditors have been hoping for a composition, since creditors can then run the estates and resolve it when they deem best contrary to bankruptcy proceedings, which are time-limited. Both proceedings do though have the same aim: to maximize the creditors’ recovery.
The problem at the core of this is the foreign-owned ISK: assets worth ISK320bn in Glitnir, ISK160bn in Kaupthing, which means that the size of the ISK problem is different for the two banks – also making it respectively a different case for the two estates for find a solution. The Icelandic government seems to want to get hold of these ISK assets, remains to be seen how it goes. An expected stability tax of 40% can hardly be on priority claims, because that would then hit the UK claims, not the intention. It is difficult to see that the tax could be put in place sooner than 2017, which means no lifting of controls for Icelandic entities until after that, which means still years of capital controls. However, this is speculation until the plan is published.
Among themselves, the hardliners have been talking about getting creditors with their back to the wall facing a gun, i.e. with no options but to follow the government’s diktat. However, Iceland has a rule of law and creditors have legal options in Iceland and abroad. It remains to be seen, as the Icelandic saying goes, who laughs last.
The worrying thing for Iceland is if protracted legal dispute keeps going for years, hindering the lifting of the capital controls. The government seems to be taking the risk of just kicking the process off, in this way, then seeing where it leads to.
Lee Buchheit, advising the government on these issues as on Icesave earlier, brings with him experience, which hopefully will not be relevant. Cleary Gottlieb, the firm he represents, is adviser to the Argentinian government (not Buchheit though but his colleagues). At a conference in Buenos Aires recently, Buchheit foresaw that Argentina’s dispute with creditors might run for at least a decade. Probably not what Cleary envisaged for its stubborn Argentinian client – and hopefully not what is in spe for Iceland.
It certainly has to be kept in mind that Argentine’s problem is sovereign debt and a mismanaged restructuring whereas Iceland has a balance-of-payment problem vs estates of failed private banks. It would take quite a few wrong steps to put the Icelandic government in the situation where it would be directly in dispute with creditors, as is the Argentinian government. So far, no one has really believed the government could end there.
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