Iceland is, in my opinion, the most offshorised economy in the world, from the point of view of how pervasive it was. The banks diligently sold offshore solutions as an everyman product. I talked about this topic as a Tax Justice Network workshop in spring. This was also the topic of an interview Naomi Fowler from the TJN recently did with me.
After the collapse of the Icelandic banks in October 2008 my attention turned to the role of offshorisation in Iceland. The banks operated in London, the Channel Islands and most important of all, in Luxembourg.
The widespread offshorisation, its effect and general lessons of offshorisation in Iceland was the topic of the interview Naomi Fowler did with me for Tax Justice Network recently, see here.
After my talk at the TJN spring workshop I wrote an article on the TJN see here.
The general lesson is: offshore creates an onshore shelter from tax, rules and regulation and thus creates a two tier society where tax, rules and regulation becomes optional for those offshored while living onshore, wether it’s in Iceland, the UK, US or elsewhere…
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The offshore króna holders have now taken to the international media to cry out over the unfair treatment they have been submitted to by the Icelandic government. As earlier, they have allied with a strongly libertarian organisation, Institute for Liberty, a think-tank of sort. Perhaps the ads will shake international investors but the effect in Iceland seems to be next to none and the move is clearly not intended to win them friends in Iceland. Perhaps it’s too early to tell but so far, the International Monetary Fund does not seem to side with offshore króna holders and rating agencies seem forgiving. All of this is taking place as Iceland has taken yet another step to lift capital controls, which are now almost entirely lifted for both businesses and individuals.
After placing articles in various international media recently, “Iceland Watch,” an initiative organised by a so-called think tank, Institute for Liberty with the slogan “Defending America’s Right To Be Free” has now taken a new step: placing an ad in US, Danish and Icelandic media. As mentioned earlier, DCI Group, a political PR group based in Washington acts on behalf of the funds involved.*
If Iceland will be hit with a full-force international legislation the offshore króna holders may be the last to laugh but so far Icelanders are just shrugging their shoulders at the ad campaign they don’t really understand.
A clever campaign?
It’s not clear to me who this campaign is supposed to stir and shake. Here in Iceland, very few people have any particular understanding of the issues at stake. After the very unexpected outcome of the EFTA Court Icesave ruling in January 2013 most Icelanders will feel there is little to fear from international courts.
Of course an erratic opinion, the offshore króna case is a different problem but in addition to lacking the insight the words “international litigation” will not sound frightening in Iceland. Given how few Icelanders understand the issues at stake the ads look bizarre to most Icelanders.
There is now an election campaign going on in Iceland, election on October 29 and the offshore króna situation doesn’t figure at all. Nor are the capital controls an issue since they have now been lifted on domestic entities and individuals. I’ve earlier pointed out that Icelanders didn’t really seem to notice when measures to lift capital controls were announced.
I’m not sure the campaign rocks the boat among international investors. Anyone with a nuanced understanding of the Icelandic situation will sense that the Iceland Watch claims are not really fitting the situation in Iceland but bombastic, unintelligent and wide off the mark.
Select default? Doesn’t sound like it according to IMF or rating agencies
I have earlier expressed surprise at the action taken in Iceland. Iceland is clearly exposing itself to a legal risk – there is a question of discrimination, as the offshore króna holders claim and given the good times in Iceland it’s difficult to argue for the haircut.
That said, it’s interesting to observe that neither the IMF nor rating agencies, have so far admitted to the haircut potentially being a case of selected default. The offshore króna holders might have wanted the international community to kick Iceland in place but no one is moving for them except those the króna holders muster to speak their case.
Choosing Institute for Liberty as an ally is intriguing but perhaps not surprising given that many large players in the hedge fund world have libertarian leanings.
The offshore króna saga according to the CBI
In its latest Financial Stability report the CBI spells out the offshore króna problem:
Important steps have been taken towards lifting the capital controls in recent months. In May, Parliament passed legislation on the treatment of offshore krónur, providing for amendments designed to ensure that the special restrictions applying to offshore krónur under the capital controls will hold even though large steps are taken to lift controls on individuals and businesses. In June, the Central Bank of Iceland held a foreign currency auction in which it invited owners of offshore krónur to exchange their krónur for euros before general liberalisation begins. Although most of the bids submitted in the auction were accepted, large owners submitted bids at an exchange rate higher than the Central Bank could accept, and the stock of offshore krónur was therefore reduced by one-fourth. During the summer, the Central Bank set the Rules on Special Reserve Requirements for New Foreign Currency Inflows, and afterwards there was a reduction in new investment in domestic Treasury bonds, which can prove to be a source of volatile capital flows. With the passage of a bill of legislation in October, most of the capital controls on individuals and businesses have been lifted.
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The Polish “Stop BankingInjustice Association” is one of many grass root organisations that have sprouted in many European countries in the last few years, due to FX loans: retail lending to people only with income and assets in their domestic currency. Today, the Polish organisation held a meeting in the Polish Parliament in order to explain the politicians and others the status of FX loans affairs in Poland and elsewhere in Europe, with speakers inter alia from Italy, Spain, Ukraine, Hungary and Iceland. – Interestingly, only in Iceland have the FX loans been dealt with, fairly speedily though never without pain for the borrowers.
The problems of FX loans in Iceland came up fairly quickly after the banking collapse in October 2008. No wonder, the króna had collapsed and everything linked to the currency rates was rapidly rising. To begin with, I was not particularly interested, felt that the borrowers should have been aware of the risk, not much to do. However, after getting an email from a Croatian FX borrower, telling me of the plight of FX borrowers in her country, I started looking at these loans in a wider perspective.
FX loans: a wandering curse for more than 40 years
In short, FX loans have been a wandering curse, going from one country to another, for over forty years. There is abundant evidence that FX loans are utterly unsuited as a standard financial product for ordinary people with no income in FX and no buffer.
I have earlier pointed out this wandering curse element of FX loans, how they have wandered from country to country – Australia in 1980s, New Zealand in the 1990s, also in Austria, Germany, Italy and then after 2000 in Iceland and many countries of Central and Eastern Europe – is quite remarkable and also the fact that the pattern is always the same: it ends in tears. This is not a case of this time it’s different; indeed, it’s always the same.
Lessons learnt long time ago, yet banks keep offering FX loans
This statement from the Australian FX loan saga, captures the risk perfectly: “…nobody in their right mind, if they had done a proper analysis of what could happen, would have gone ahead with it (i.e. FX loans).” And in 2013 the Austrian National Bank warned: “Foreign currency loans to private consumers are not suitable as a mass product…” This was the lesson that the Austrian Finance Market Authority, FMA had already drawn in 2008 but only in 2013 did it state this so clearly and unequivocally.
The FX lending pattern is always the same: the banks have the need to hedge themselves, for various reasons (usually because their financing is in some way FX linked) so they offer retail FX loans. Because the interest rates are lower than the domestic rates people can borrow more, thus in a certain sense creating sub prime lending, from the point of view of the capacity to service loans in the domestic currency.
FX loans, sub prime aspects and the unavoidable shock
Given that the loans normally stretch over years and even decades and FX fluctuations happen quite frequently, it’s clear that the circumstances at the time when the loan is issued are unlikely to stay unchanged. It can be argued that borrowers with FX assets or available funds can profit from FX loans over the lifetime of the loan. That however is not the situation for the majority of FX borrowers who at the outset borrow what they at most can service.
In all countries, where FX retail loans have become widespread, the pattern has always been the same: first, the borrowers are castigated for taking loans they then can’t service. Then, the sub prime lending aspects appear: banks haven’t really informed the clients properly, minimised the risks etc and haven’t done the due diligence as to what would happen to these clients should the currency rates change. The question how far authorities should go in protecting people is certainly justified but all European countries do indeed have a strong focus on consumer rights and scrutinising the banks’ information and behaviour with regard to FX loans should be obvious.
The ruling of the Árpad Kásler case, in the European Court of Justice, ECJ, ECJ C?26/13 in 2014 turned the tables against the banks and in the favour of borrowers. Slowly slowly, the sub prime aspect, the insufficient information and the fact that these loans are normally not really FX loans but FX indexed loans has also mattered.
Iceland and elsewhere: FX indexed loans illegal, not FX loans per se
Iceland is the only country in the recent FX loan saga where the loans have sytematically been written down. In that sense, the Icelandic FX loan saga is success from the point of view of hard-hit borrowers. But it didn’t happen over night, it took time: the króna collapsed in 2008 and kept falling until late 2009. The two first Supreme Court rulings, testing the validity of the loans came in summer of 2010. Only by the end of 2014 and after ca. 30 Supreme Court rulings had the loans been recalculated.
The Supreme Court ruled that FX loans are not illegal but the FX lending isn’t really a FX lending but lending in domestic currency where another currency or a combination of more than one currency set the interest rate.
At the conference there were FX loan stories from different European countries, reflecting the state of affairs in the respective countries. In general it can be said that courts, taking note of the Kásler ECJ case, have at times ruled in favour of borrowers but it differs how willing courts are to take note of the precedence.
In Italy, FX loans cases have been in the courts for five years but have yet to reach a verdict in the lowest court. In Ukraine, there has been a moratorium on enforcing FX loans collaterals since 2014.
All in all, what is generally needed is an acknowledgement of the fact that FX loans all follow a similar pattern, no matter if it’s Australia in the 1980s or Spain in the 21st Century. FX loans are a type of sub prime lending and not a product fit as a general product. Until banks and authorities draw the same conclusion as the Austrian central bank and the Austrian Financial Services Authority in 2013 banks can go on selling these poisonous product and pretend to be surprised when it goes, so predictably, wrong.
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Anyone who has followed the Greek crisis will be familiar with stories of insane corruption and absurd clientilismo. As the criminal prosecution of the former head of ELSTAT, Andreas Georgiou, shows the Tsipras government prefers scapegoats rather than facing painful truths about the past. Now, also foreigners working for the IMF and Eurostat are being implicated in a new criminal case against Georgiou and his colleagues.
Before the January 2015 elections, which brought Alex Tsipras and his Syriza party to power, Tsipras had been adamant on the need to tackle corruption. Once in power this discourse ebbed out. Now Tsipras and his government is watching a so-called independent judiciary persecuting the former head of ELSTAT, the Greek statistical bureau, Andreas Georgiou, who demonstrably turned ELSTAT and statistics around after a decade of falsified statistics.
The latest and most remarkable turn in the ELSTAT saga is a new criminal investigation, not only focusing on Georgiou and two of his colleagues, whose cases have all been dismissed more than once (see my detailed ELSTAT saga, written after I visited Athens in June 2015) but also on the IMF and Eurostat staff.
As I have earlier pointed out the ELSTAT prosecutions are a test of the new Greece trying to be born after the crisis: as long as ELSTAT staff and now foreigners striving to bring clarity to statistics, one of the absolute pillars of any modern country, are being prosecuted Greece is failing to free itself of political corruption. The fact that the Greek state is yet again trying to prosecute civil servants who did their jobs admirably is a sign of something seriously wrong in this country.
To Icelog Georgiou says: “The prosecutions within the borders of the European Union of official statisticians, whose work has been thoroughly checked and fully validated by the competent European Union institutions for six years in a row, should be a cause of great concern given their important precedential significance at a European Union level and an international level as well.”
A new criminal investigation of ELSTAT directors – as well as IMF and Eurostat staff
The latest move was brought on by the chief prosecutor of the Greek Supreme Court, Xeni Demetriou. As a deputy prosecutor of the Supreme Court until June 2016, Demetriou had been responsible for proposing in September 2015 to annul the last acquittal decision regarding Andreas Georgiou and his two colleagues. In the event, the Supreme Court published a decision in August 2016 accepting that annulment proposal and referring the case back to the lower court so that the latter reconsider its decision.
Amazingly, in this latest move, Demetriou as chief prosecutor, initiates an additional, brand new criminal investigation. The case was brought following a publication of two articles in the Greek newspaper Dimokratia at the end of August; the articles were introduced with photos of Andreas Georgiou, as well as of Eurostat and IMF officials.
Apparently based on emails and other sources, Dimokratia focuses on the 2009 deficit calculation. The newspaper’s coverage doesn’t seem to add anything but clamours statements such as “The Mafia of the Deficit,” to what was earlier investigated and then dismissed in previous attempts to bring Georgiou and his colleagues to court. The magazine reported inter alia of burglaries to allegedly make the case against the ELSTAT directors go away, postulating that they incriminate Georgiou and his colleagues.
This new prosecution does not only involve ELSTAT directors but goes further, involving IMF and Eurostat staff. Dimokratia claims that Eurostat’s Director General Walter Radermacher forced Greece to use statistical methods not used in any other country, directly causing the high deficit. The grand scheme was to force Greece to pay foreign banks, or as stated by the magazine: “the dirty plan of the destruction of Greece was planned and executed with distorted data so that the foreign banks can be repaid completely.”
One of the Dimokratia sources is Nikos Stroblos, a former director of the national accounts division of Greece’s statistics office during the years of fraudulent reporting. As so often pointed out on Icelog: quite extraordinarily, Georgiou and ELSTAT directors who brought the reporting of statistics to international standards, are being hounded in Greece but nothing has been done to investigate what went on during the years of false reporting.
International support for Georgiou and his ELSTAT colleagues
Eurostat and the European commission have earlier voiced concern over the turn of events in Greece. On August 24 Commissioner for Employment, Social Affairs, Skills and Labour Mobility, as well as European statistics, Marianne Thyssen was adamant that the independence of ELSTAT and the quality of its statistics were essential, adding that from the point of view of the Commission and Eurostat “it is absolutely clear that data on Greek Government debt during 2010-2015 have been fully reliable and accurately reported to Eurostat.” The Commission called “upon the Greek authorities to actively and publicly challenge the false impression that data were manipulated during 2010-2015 and to protect ELSTAT and its staff from such unfounded claims.”
The International Statistical Institute, ISI, has earlier voiced great concern for the course of events in Greece and has recently, yet again, called upon “the Greek authorities to actively and publicly challenge the false impression that data were manipulated during 2010-2015 and to protect ELSTAT and its staff from such unfounded claims.”
Further, ISI, “is extremely concerned about the persecution/prosecutions of Mr. Andreas Georgiou, Ms. Athanasia Xenaki and Mr. Kostas Melfetas for doing their work with the highest professionalism, integrity and adherence to international standards and the UN Principles, regardless of political pressure. It is inconceivable that such work, independently verified and approved in line with international standards, could lead to prosecution, and even successful prosecution of those responsible. Instead, such work should be praised!”
Persecution due to correct statistics shows the Tsipras government’s ties to the past
So far, none of this has had the slightest effect on the Tsipras government.
As pointed out recently on Icelog, the case against Georgiou and his colleagues, and now also involving IMF and Eurostat staff, is a test of the Greek government’s commitment to change and to acknowledge fraudulent behaviour in the past.
As pointed out by Tony Barber in the Financial Times on September 12, Tsipras is “yet again testing his EU partners’ patience. He is not only dragging his heels on economic reform, but is letting a criminal prosecution go ahead in a blatantly politicised case against Andreas Georgiou, a former head of the national statistics agency.”
In his review of “Game Over,” ex minister of finance George Papaconstantinou’s book on his six years in politics, Peter Spiegel notes the significance of the ELSTAT case and the Greek tendency to find scapegoats: “… it is Greece’s abiding myth that somehow the day of reckoning was avoidable. Papaconstantinou’s highly readable book makes that falsehood clear. No doubt Mr Georgiou’s trial will do the same.”
As long as Alexis Tsipras and his government continue to persecute the ELSTAT directors it is clear that the old bad ways and corrupt powers are untouched and still ruling.
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For a long time Iceland didn’t know anything but A from the credit rating agencies. As so many other things the As evaporated with the banking collapse in October 2008. Lately, everything has been going swimmingly for the Icelandic economy except the A rating has proven to be elusive. Now, Moody’s has fixed that: Iceland is back to A3, outlook stable. Icelandic politicians and central bankers will nod approvingly, they feel the A should have been there a while ago; the only group, which might feel perplexed are the offshore króna holders who think they are being short-shrifted in spite of the boom.
Icelandic politicians and central bankers feel that Iceland has been doing much better than reflected in the rating agencies’ ratings. This is partly acknowledged by Moody’s (emphasis mine):
Iceland’s rating trajectory has lagged the improvement in some of its core fundamentals since the financial crisis, because of the residual risks posed to economic and financial stability by the complex process of removing the capital controls first imposed in 2008. The second driver for the upgrade of Iceland’s government rating to A3 at this point in time reflects Moody’s expectation that the phasing out of capital controls will proceed smoothly to completion and therefore not disrupt economic and financial stability.
Moody’s argues that Iceland now is far into liberalising the capital controls – the third step, lifting controls on Icelanders and Icelandic entities, is now in sight, having been announced recently. As I pointed out recently, the lifting now longer seems to capture Icelanders, the announcement went largely unnoticed.
As to offshore króna holders Moody’s isn’t worried either:
The first two stages of the liberalization process are now complete. The resolution of the failed bank estates was completed in late 2015. In June 2016, the central bank auctioned part of its FX reserves for ‘offshore krónur’ (mainly non-resident-owned ISK assets trapped when capital controls were imposed in late 2008 at the time the old banks collapsed), thereby further reducing the overhang of such assets. Moody’s view is that while the few remaining holdings of offshore krónur are sizeable at 8% of GDP, the event risk they pose for Iceland’s external position is limited. The liberalization of capital controls on residents will begin immediately following parliamentary approval of the relevant legislation. A further easing of controls on residents is scheduled to take place on January 1, 2017.
If the offshore króna holders thought the rating agencies would favour their points of view, inter alia interpreting the offshore króna measures as a selective default as has been heard from the offshore króna holders, or would be likely to calculate litigation as a risk, that doesn’t seem to be the case. In Iceland, things are going swimmingly, the economy is booming and at long last Moody’s as the first of the rating agencies has acknowledged it. So far, so good.
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The Ministry of finance has now introduced the third and last significant step towards lifting capital controls. After lifting controls on the estates of the failed banks last year and the disputed action earlier this year to solve, or box in, offshore króna holders, it’s now as promised since the elections in 2013 time to lift controls on Icelanders, both individuals and companies, just in time for the coming election on October 29. All but the very wealthiest Icelanders will now be outside controls. And Icelanders? They don’t pay much attention to this latest step.
Ordinary Icelanders have not much felt the capital controls in their daily lives since the capital controls only cover investment but now those wealthy enough to want to buy property abroad or invest in foreign companies etc. can do so. The main points are the following, according to the Ministry of finance press release:
- That outward foreign direct investment be unrestricted but subject to confirmation by the Central Bank of Iceland.
- That investment in financial instruments issued in foreign currency, other monetary claims in foreign currency, and prepayment and full payment (retirement) of foreign-denominated loans be permissible up to a given amount, upon satisfaction of specified conditions.
- That individuals be authorised to purchase one piece of real estate abroad per calendar year, irrespective of the purchase price and the reason for the purchase.
- That requirements that residents repatriate foreign currency be eased and that they be lifted entirely in connection with loans taken abroad by individuals for real estate or motor vehicle purchases abroad, or for investment abroad.
- That various special restrictions be eased or lifted entirely, including individuals’ authorisation to purchase foreign currency for travel.
- That the Central Bank of Iceland’s authorisations to gather information be expanded so that the Bank can promote price stability and financial stability more effectively.
As of 1 January 2017, the following are to take effect:
- The ceiling on investment in financial instruments issued in foreign currency, other monetary claims in foreign currency, and prepayment and full payment (retirement) of foreign-denominated loans will be raised.
- Transfers of deposit balances will be permissible for amounts below a certain ceiling. The requirement for domestic custody of foreign securities investments will be revoked. This will enable residents and non-residents to transfer deposits and securities to and from Iceland and to trade in securities abroad within the limits specified in the bill.
- Individuals’ authorisation to purchase foreign currency in cash will be expanded significantly.
Capital controls lifted in a record boom
All of this is made easier since Iceland is enjoying a record boom with tourism flourishing and more foreign reserves compared to more or less any time in the country’s recent history. As I’ve mentioned earlier, Icelandic authorities don’t regard it as a problem that the largest offshore króna holders are preparing to test in court(s) the earlier decisions regarding the offshore króna, i.e. either a haircut in an auction or a lock-in with 0.5% interest rates, effectively negative in Icelandic context and no expiry date. Nor does the comparison with Argentina seem to cause worries in Iceland.
Easing out of the capital controls is obviously a hugely important step for Iceland. Yet, it has mostly gone unnoticed in the media. The reason is that people normally haven’t noticed the controls except in minor things like having to bring a flight ticket in order to buy travel currency. For those running companies it’s been a different story, the controls have both been annoying and harmful. Measuring losses due to capital controls isn’t easy but in 2014 The Icelandic Chamber of Commerce estimated it to be ISK80bn annually. As the CBI and others have frequently pointed out the longer controls remain in place the greater the harm.
The CBI has put in place safety measures re foreign inflows. Some claim this means that controls are still in place but that’s certainly not how I see it. By 2012 the CBI had already announced in a report, Prudential Rules Following Capital Controls, that as well as lifting capital controls the bank would also develop financial stability rules in order to temper foreign inflows if needed, much like other countries with have done such as Asian countries under similar circumstances.
Collapse measures out, political distrust in
Alors, after almost eight years with capital controls Iceland has now almost entirely graduated from that part of the banking collapse, certainly a significant step towards normality. The question is still if the second measure, i.e. re offshore króna holders, will come back to haunt the country.
Though the emergency measures from 2008 have disappeared over the years politically the collapse still looms large in Icelandic politics. It’s not that the collapse itself is frequently discussed, not at all, but it shapes the hues and colours of the political debate. Quite specifically, the collapse has inter alia stoked distrust in politicians both in general and in certain politicians, due to their stories, still looms large. Icelanders are willing to throw their trust on new parties, next to be tested in the coming election.
One obviously prudent measure not introduced in Iceland is the separation of retail and investment banking. Three governments have ignored doing this, meaning that there is probably a silent political will to sell Landsbanki and Íslandsbanki without this safety measure. Hugely indicative of the influence of powerful private interests, quite worrying for the public interest.
Now, mostly free of restraining controls the Icelandic króna, the currency of the world’s smallest independent economy with own currency, will again be free (with the safety jacket of financial stability rules) to float in the large ocean of international finance. Trying times await booming Iceland, testing if the right lessons were learnt in 2008.
Fitch has downgraded “Iceland’s Long-Term Local Currency (LTLC) IDR to ‘BBB+’ from ‘A-‘. The Outlook is Stable.” – The downgrade results not from Icelandic conditions but are due to changes Fitch has introduced to reflect regulatory changes, see here.
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The re-awoken charges against ex-ELSTAT head Andreas Georgiou and two of his colleagues are attracting attention in the international media. Last, the Financial Times takes the case up on its front page today. According to recent report on EurActiv it also seems that powers in Brussel are rightly getting increasingly worried about the procedures in Greece against Georgiou.
After a trip to Athens last year I wrote about the case in detail on Icelog. When the case resurfaced now in summer I pointed out that Greek authorities were punishing the messenger instead of those who really falsified Greek statistics for roughly a decade.
The reason I find the ELSTAT case so interesting and important is that in my view it’s a test case for the willingness of the Greek political class to face the misdeeds of the past, the corruption and all the things that hinder prosperity in Greece. In addition, a country without reliable statistics can’t really claim to be a modern and accountable country.
As it is now, Greece is heading towards a political trial where those who fixed the fraud are being hounded and punished, not the perpetrators. As long as the charges against Georgiou and his colleagues are upheld it is clear that the forces who want to keep Greece as it was – weakened by corruption and unhealthy politics – are still ruling. That isn’t only worrying for Greece but for Europe as a whole.
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Holders of Icelandic offshore króna holders seem to have gained some intriguing friends. A so-called think tank, Institute for Liberty with the slogan “Defending America’s Right To Be Free” has suddenly found the urge to set up a project called “Iceland Watch” with its own website, specifically to follow, it seems, how Icelandic authorities deal with offshore króna holders (inter alia linking to some of my blogs).
The focus of interest, according to the Institute, is the following:
“The Institute for Liberty has followed Iceland’s path to recovery since the 2008 collapse and has developed an increased concern over recent protectionist economic policies like the discriminatory practices against offshore króna investors.
“In creating Iceland Watch, we aim to keep the public apprised of any anti-democratic and anti-free trade policies put into place by the Althingi, Iceland’s parliament, which could threaten the property rights of offshore investors in Iceland’s króna.
“Holders of Iceland’s offshore krona include several American investors, which serve a variety of retail investors like retirees with 401k plans and institutional investors such as corporate and public retirement plans, foundations, and endowments.
“Despite investors’ willingness to support Iceland during its time of transition and several distinct offers to negotiate good faith solutions, the Icelandic government refuses to offer anything other than a clear take-it-or-leave-it scenario. The discrimination against foreign investors is disturbing and could affect millions of American holders of 401k and retirement accounts.
“When Iceland’s parliament, the Althingi, convenes its Summer Special Session on August 15, its actions will indicate whether the island nation will reintegrate itself into international free markets or further its isolation by instating new costly, misguided policies that chill investment and economic growth.”
The Institute’s website indicates it’s also interested in Puerto Rico’s debt, another place where American investment funds struggle to get repaid. More intriguingly, the Institute has also fought Obamacare and other typically far-right interests.
Indeed, the Institute is part of ad hoc networks of “think tanks,” non-profit organisations and ,,grassroots” organisations funded by far-right American billionaires such as David and Charles Koch and the hedge fund owner Paul Singer, who for years fought the Argentinian government, now a settled issue.
The Institute is mentioned in Jane Mayer’s insightful and well-documented analysis of the money powers on the right-wing of the Republican party, far more right-wing than the mainstream Grand Old Party is. Powers, that for a few decades have pumped money into setting up phoney “grassroots” organisations in support of the tobacco industry, against environmental issues and lately, Obamacare. Mayer’s book, Dark Money; The Hidden History of the Billionaires Behind the Rise of the Radical Right, came out in spring, an essential read to understand the undercurrents in US politics the last decades and the issues behind political funding, now open to anonymous donations, and the Citizens United ruling in 2010.
According to Mayer, Institute for Liberty got lucky with funding, yet another node in the efforts to fight Obamacare; in 2009 it received $1.5m:
Four hundred thousand dollars of these funds were channeled back to DCI Group (Washington PR company, instrumental according to Mayer in fighting Obamacare) for “consulting.” The previous year, the Institute for Liberty’s entire budget had been $52,000. Suddenly it was so awash with cash that the group’s president, Andrew Langer, told the The Washington Post,‘ “This year has been really serendipitous for us.” He said a donor, whom he declined to name, had earmarked the funds for a five-state advertising blitz targeting Obama’s health-care plan. (Mayer, p.192).
As I’ve pointed out earlier, there have been some articles popping up here and there – op-ed in WSJ, guest blog on FT Alphaville and the most recent on The Street, “Iceland Should Learn From Argentina’s Bad Example” by Aldo Abraham, an Argentinian academic.
No need to point out that of course all of the media rumbling is orchestrated, driven as it is by non-journalistic input; as seen from Mayer’s book the DCI Group has links to the Institute. Everyone fights their turf as best they can, the links to the knights of dark money is rather unsettling but “à chacun son goût.” It is intriguing to see the cause of Icelandic offshore króna holders as part of this picture: not necessarily surprising but yes, intriguing.
The Princeton economist Angus Deaton, summarises masterly in his powerfully argued “The Great Escape” that the worrying trend in US politics is the tendency of interest groups to buy influence in Washington.
As spelled out in earlier blogs Argentina is potentially a worrying example for Iceland: it fought creditors and then settled after a decade of costly legal wrangling, beneficial for the lawyers involved and corrupt powers but deeply deeply harmful for Argentina. In Iceland, voices similar to those Argentinian politicians who fought the Argentinian debtors can be heard. Elections are coming up in October, politicians will hardly strife to be on the side of foreign creditors although successful plan last year re the estates of the failed banks, based on agreement with creditors, is a positive argument for co-operation with creditors.
Views vary: some claim Iceland’s cause is wholly different from Argentina. However, although Iceland has graduated from the earlier IMF program the Fund is still closely connected to Iceland; it’s difficult to imagine that the Fund’s views will be ignored. Happily, Iceland is blossoming and, according to the latest IMF report, has more than gained what it lost on the crisis, i.e. it’s difficult to argue for any emergency actions. In the end, Iceland will have to decide on the best course to follow so as to adhere to the rule of law and further prosperity.
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In Greece, authorities go after those who tried to sort out the mess of the Greek economy, not those who created it. That’s one conclusion to be drawn for charges, yet again, brought against Andreas Georgiou former head of ELSTAT, the Greek statistics bureau. It should be scary for Greeks and European institutions to see the relentless persecutions of a civil servant who did his job.
Since he was appointed head of ELSTAT in summer of 2010, well after it was clear that the Greek statistics were unreliable, Andreas Georgiou has had to fight forces in Greece who simply refuse to let go of him and his colleagues, a story carefully recounted on Icelog a year ago, with the precise data of statistics and the development of the ELSTAT saga. Time and again, the case against Georgiou has been dropped but always brought up again.
New criminal charges now against Georgiou do not only threaten him with a prison sentence but also threaten to awaken earlier dropped charges against him and two of his colleagues.
And those who for years falsified statistics? No, not one hair on their head has been ruffled, no investigations set up as to how it was possible that wrong and falsified statistics were reported to Greeks themselves and to international bodies such as Eurostat, the European statistical bureau, more or less from 2000 until 2009.
In Game Over, the Inside Story of the Greek Crisis, George Papaconstantinou minister of finance during the fateful time from the October 2009 election until June 2011 recounts thoroughly how the falsified statistics came up as soon as the PASOK government came to power.
Already during his first days in Office, Papaconstantinou heard from various institutions that inter alia the much watched budget deficit was well beyond what the Greek authorities had reported to Eurostat two days before the October 2009 election. “In short, they had lied,” Papaconstantinou concludes in his book. What ensued was a discovery of fraudulent statistics going back years.
No one could precisely show Papaconstantinou how the reported figure was found. One of his first acts in office was to call the head of the national statistics, professor Emmanouil Kontopyrakis to his office. The professor had no idea how the deficit figure was computed but to him it did seem like a “reasonable projection” – the minister asked him to resign.
As Papaconstantinou carefully recounts much of the mistrust of his European colleagues directed at Greece was based on the fact that there wasn’t even precise statistics and figures to work with to begin with.
When Andreas Georgiou took over as head of ELSTAT in August the much-debated deficit figures, both forecasted and the real figures, had been corrected, of course greatly increasing the deficit, under the auspice of Eurostat.
As carefully detailed in my ELSTAT saga last year, the numbers kept going upwards. The 2009 deficit first forecasted 3.7% in early October was by April 2010 estimated by Eurostat to be an actual deficit of 13.6% but Eurostat was still not sure it couldn’t rise; by late 2010 Georgiou and his team found it to be 15.4%.
In his book, Papaconstantinou writes that Georgiou proved to be the right man for the job, “helping to make Greek statistics credible. I was less lucky with of the other people appointed to the ELSTAT board.” In a police investigation one board member was later discovered to have hacked Georgiou’s email account. Another member accused Georgiou of inflating the deficit figure, causing the bailout, a “totally absurd” accusation according to Papaconstantinou.
The memorandum on the Greek rescue packet was finalised May 2 2010. Yet, Georgiou, who only took over in August 2010, is continuously persecuted for having influenced the bailout.
Considering how poisonous the unreliable data proved to be in the discussions up to the May 2010 memorandum it would have been greater reason to thank Georgiou and his team for delivering sound statistical data.
But that is not what happened and things didn’t stop there. The opposition lapped up the accusations. “Soon the justice system was involved. Prosecutors brought criminal charges against Georgiou for actions having caused billions of damage to Greece. We were suddenly in a parallel universe; rather than bringing to task those who had lied about the true size of the deficit, we were accused for having told the truth!”
No matter though Georgiou’s case has been thrown out several times the dark forces in Greek politics always find a way of bringing it back. And that has now happened again, the case is being brought back in a new guise (see here and here). It seems that Europe risks having a political prisoner within its boundaries, imprisoned for doing his job.
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Congressman Dennis A Ross has written a letter, see below, to Sunil Sabharval, US Executive Director at the International Monetary Fund, IMF, inquiring as to what US officials knew about the offshore króna actions taken by the Icelandic government. The Congressman’s mission is clearly to safeguard US interests, i.e. the interest of US funds holding offshore króna, a problem I have dealt with extensively in earlier blogs, inter alia here. Although not stated explicitly, the most sensitive underlying assets are sovereign securities, payable in Icelandic króna.
In the letter the reasons for the Icelandic collapse are somewhat simplified to say the very least, apparently easier to blame the government than the banks; also rather funny to see the offshore króna holders treated as entirely blameless lured by good deals, another saga.
The thrust of the letter is that since Iceland has now recovered well from its 2008 crisis Iceland shouldn’t be discounting the offshore króna or offering the investors punitive terms. – Further to this: intriguingly, Iceland had not made a loss on the 2008 banking crisis but a gain of 9% of GDP(!), according to the latest IMF Article IV Consultation statement on Iceland, from June 22.
The Congressman points out that the offshore króna holders (i.e. the largest holders) have come up with various solution but Icelandic authorities have been unwilling to take any notice. He now wants to know if US officials are aware of what is going on – and he expects an answer, which as far as I know has not yet been given. IMF has preached a cooperative approach to lift capital controls, reiterated in its June statement on Iceland but seems to consent with the action taken by Icelandic authorities re the offshore króna.
Here is Congressman Ross’ letter:
Last time, this time – in general
As I recounted at length in the years, months and days up to the plan to lift capital controls on the estates of the banks, presented June 8 last year, Icelandic authorities dithered for long due to infighting until they took the plunge – to be fair, the authorities claimed it just took time to prepare the plan and refused all allegations of infighting. But the plunge wasn’t taken until it was clear the plan was supported by the largest creditors.
The same now with the offshore króna action, it all took longer than had been planned, my understanding is that it took long because of different views; however, those involved say it just took the time it took, complicated matters etc. Yet, this time the government acted unilaterally, no agreement with the largest offshore króna holders. Thus inter alia the above letter, I assume.
The government claims the offshore króna holders do not act as a group, contrary to the creditors to the old banks. That isn’t wholly correct – each estate had to be dealt with separately and support was sought for each estate. Thus, the creditors were not a unified group but three groups. So much for that argument now re the offshore króna holders.
As a ground for pride Bjarni Benediktsson minister of finance has pointed out that there was no legal aftermath to the plan last year. Quite true but that’s because the plan wasn’t passed until creditors’ support was ensured. Which is exactly the opposite of now where the government has acted unilaterally re the offshore króna holders who consequently have taken the first steps towards legal action.
In addition, there is the concern Congressman Ross shows, as well as articles in the Wall Street Journal and FT Alphaville, as I have mentioned in earlier blogs – offshore króna holders are clearly trying to point out to the world that Iceland, by planning a haircut on the offshore króna assets (when they are converted into foreign currency) doesn’t intend to honour its international commitments.
Last time, this time – in particular
I have earlier pointed out that I was wondering if the Icelandic government was going to make use of some “tricky teleological interpretation” in its dealings with offshore króna holders.
I didn’t explain in any detail what I had in mind but here it is:
Long before the June 8 plan last year, the Icelandic government claimed it couldn’t possibly have anything to do with the composition of three private banks. Right, except that composition was meaningless if it wasn’t clear beforehand how much of the Icelandic assets creditors (only 10% of the assets went to Icelandic creditors, mostly the CBI) could convert into foreign currency. Composition agreement couldn’t be reached until the government had found a solution i.e a haircut, which the creditors could agree to – that was what mostly took so long to solve.
This time, the core of the offshore króna problem is similar regarding sovereign securities. The government can claim that it’s honouring all its obligations as it will pay out any such securities in full and on time… in króna. The thing is that offshore króna holders can – or could, the auction is now over – either choose to convert at ISK190 a euro (the onshore rate is now ISK136, was ISK139 at the time of the auction) or have their króna kept on a special deposit account at 0.5% interest rates with no maturity in sight. The question is if this is seen as fair… or not.
Last year, the government came to the conclusion that it had to step in to facilitate a composition. Now, it’s just shrugging its shoulder and the message is, as I’ve stated earlier, “let them litigate” – alors, last year, the goal was to prevent legal action, this year it’s bring it on…
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