Sigrún Davíðsdóttir's Icelog

An auction that didn’t solve the problem and the past as an aberration

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The outcome of the offshore króna auction 16 June has now been made public: offers at the rate of ISK190 a euro or lower were accepted. According to the Central Bank of Iceland press release a “total of 1,646 offers were submitted and 1,619 accepted; however, these figures could be subject to change upon final settlement. The amount of the accepted offers totalled just over 72, out of nearly 178 offered for sale in the auction.” – The on-shore rate is ISK139 to the euro. The question is how credible this outcome is, given the good economic conditions in Iceland. (Further to the background see an earlier Icelog here).

Although the auction apparently was a final offer the CBI is now offering to “purchase offshore króna assets not sold in the auction at the auction exchange rate of 190 kr. per euro.” The terms and conditions will be published tomorrow with the deadline at 10 o’clock this coming Monday morning, 27 June. The finale outcome of the 16 June auction and potential transactions in the following days, until Monday morning, will be published that Monday with settlement of both transactions completed on that day.

This outcome is far from the stock of ISK319bn that the offshore króna amounts to. The auction was supposed to be the last in a series of 23 auctions; this offer to buy offshore króna at the auction price of ISK190 is now a tail to that last auction.

In an interview on Rúv tonight, CBI governor Már Guðmundsson said that out of 1,646 offers submitted 1,619 had been accepted, or 98%. This means there are now a whole lot fewer offshore króna holders left – but the problem is, as Guðmundsson rightly acknowledges, that all the big funds holding these assets are holding on to their króna. “It is clear that the rather big holders have either not participated or offered a rate we could not accept,” said Guðmundsson.

In a cage – at the back of the queue

The governor said that with the auction out of the way, capital controls can now be lifted on domestic entities and individuals, i.e. Icelandic companies, pension funds etc. The process has been designed in such a way, according to Guðmundsson “that those who do not leave now stay in a similar financial environment as they have been in so far as to investment offers with added changes, which were necessary to secure that this environment would be stable even if we lift controls on domestic entities. They (i.e. the offshore króna holders) will now go to the back of the queue, they were at the front and then at some point it will again be their turn.”

This is undoubtedly a description the big offshore króna holders will contest. They will claim that conditions have been seriously tightened. When their assets mature these assets will automatically go into deposits at 0.5% interest rates, effectively negative interest rates, held with the CBI, very much akin to the cage that Guðmundsson once described so vividly at a meeting in Iceland.*

Thus the big offshore króna holders, who did not participate (or offered a non-accepted rate) will now feel they are in a cage at the back of a queue not knowing when they will be released. Or in other words: they will claim that the sovereign isn’t paying back its loans.

Calling things their right names

What is it called if a country pays only some of its debt? The term is “selective default” – and worryingly that’s now the term attached to Iceland if offshore króna holders, where Icelandic sovereign bonds and T-bills are the underlying assets, are not paid out in full.

Offering a rate of ISK190 to a euro when the on-shore rate is ISK139 in a country doing pretty well seems like a drastic haircut – and it is incidentally involuntary, from the point of view of the offshore króna holders, although the Icelandic government claims there was a fair second offer, i.e. the cage at the end of the queue.

In a defiant answer to a WSJ op ed, minister of finance Bjarni Benediktsson rejects that Iceland can be compared to Argentina. However, he fails to point out that after fighting creditors for fifteen years Argentina did indeed finally settle with creditors. A country can claim as much as it wants that it’s honouring all its obligation but the arbiter is not the country itself but the International Swaps and Derivatives Association, ISDA, which decides on which events release credit default swaps.

Reputation risk

I have earlier talked about the mixed messages from Iceland in dealing with creditors. Last year, great care was taken in negotiating with creditors when it came to lifting capital controls on the estates of the three collapsed banks.

This time, when the sovereign is directly involved, contrary to last year, the strategy is to offer a cage at the back of a queue with no date as to when that backend will be served. There must be a strategy somewhere but I can’t see it, which is worrying since the outcome could be lengthy court cases in all and sunder jurisdictions for years to come. In the world of short-term politics that would inevitably be a problem for another day and another government.

In the meantime, the financing cost of all things Icelandic, whether state or private sector, will either go up or stay as it is, instead of going down as it well could soon with the bright economic prospects there are (and as Moody’s had already beckoned). This was kept in mind last year. Now it seems that this past of playing carefully was not a prologue to the present but an aberration. Consequently, Iceland might be back to a costly future of reputation risk.

*At a public meeting on the offshore ISK in 2013, some of those present argued that the solution to the Icelandic current account problem was just to cage in the foreign-owned assets so capital controls could be lifted on the domestic part of the economy. Present at the meeting was CBI governor Már Guðmundsson who pointed that when new investors would then arrive in Iceland they would see the cage and ask who was in it. “The investors who invested in Iceland last time around.” (From an earlier Icelog).

Update: This morning, Wed. 22 June, minister of finance Benediktsson talked at Euromoney Global Borrowers and Investors Forum where I interviewed him afterwards; Benediktsson claimed the offshore króna auction had been a success in terms of the many bids received and now those remaining would have to wait. He said there had been no legal aftermath following the composition of the estates last year, precisely because it had been well prepared but said he was not worried this time. It was to be expected that the hedge funds holding offshore króna were making a noise but that was nothing the minister was worried about.

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Written by Sigrún Davídsdóttir

June 22nd, 2016 at 1:11 am

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Mixed messages from Iceland

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While the Icelandic government is planning to play clever and give offshore króna holders, i.e. sovereign bondholders, a haircut – apparently because the Icelandic economy isn’t strong enough – Kaupthing, the largest owner of Arion bank , and that bank are assessing how to make use of the strong Icelandic economy with regards to Kaupthing’s shares in Arion. An intriguing case of “mixed messages”… now that another step is being taken to further ease the capital controls, in place since November 2008.

In the past few days, two articles have appeared – an op ed in Wall Street Journal and a guest blog on FT Alphaville – spelling out that Iceland is about to opt for a sovereign default, quite voluntarily and apparently with open eyes.

Iceland, of course, doesn’t quite see it that way, as I explained recently at some length. That said, I have been utterly baffled why Iceland, having taken such care last year to avoid all legal risk by negotiating with the creditors of the three fallen banks, is now reverting to the tactic, which at the time of the collapsing banks in October 2008 was half (but not quite) jestingly called “xxck the foreigners.”

Last year, some foreign pundits were comparing Iceland’s situation with Argentina, a wholly misplaced comparison since the government was no partner to the composition of the estates of the banks though the government had to take on the role of a facilitator in solving problems related to the foreign-owned, i.e. offshore ISK assets of the estates.

The outcome was around 75% haircut of the Icelandic assets. So successful was this step towards easing  capital controls that foreign inflows into sovereign bonds started at once, now amounting to around 5% of GDP – nothing compared to the 44% of GDP in November 2008 when the capital controls were put in place, under the auspice of the International Monetary Fund.

This time the government IS the other party since the offshore ISK assets are sovereign securities, which led James Glassman in the WSJ and then Arturo Porzecanski* in FT Alphaville to compare Iceland to Argentina: Iceland was about to turn into a very chilly version of Argentina.

Actually, after years of legal wrangling Argentina has of course finally settled with creditors, advised by the law firm Cleary Gottlieb, also advising Iceland (though somewhat ominously Cleary was the adviser not only in solving the Argentinian problem but also during the dark years); Argentina is now happily borrowing again. Financial firms have a notoriously short memory, after all they can’t afford to hold grudges. But the legal wrangling all over the world did blight the lives of Argentinians for around 15 years and no need to minimise how unpleasant and costly it all was.

The Icelandic situation right now is that tomorrow, on June 16, the Central Bank of Iceland will hold an auction for OS ISK holders (all info here). After setting the terms in such a way that a hair cut was all but inevitable for those participating in the auction and negative interest rates for those who didn’t the terms were changed this week – last minute wisdom… or panic, depending on the reader:

The amendments to the Terms of Auction removes ambiguity about whether, in spite of the auction results, the Bank can decide on a more favourable auction price than is specified in the table. As before, all owners of offshore krónur will receive the same price for their krónur, as the auction has a single-price format, which applies irrespective of whether the price accepted is lower than is specified in the table. It is appropriate to reiterate that as before, the Central Bank reserves the right to accept some or all of the offers submitted, or to reject all of them (emphasis mine).

Effectively, the CBI can now choose to accept the best offer… or well, come up with a better one.

Two questions: why this sudden and very late change and why was such care taken last year to negotiate whereas now it’s a take it or leave it offer?

As to the sudden change I don’t know but given the fact that a high participation is needed to solve the issue – or otherwise the OS ISK will be locked up in a really cold dungeon, i.e. at negative interest rates with no maturity in sight but only some vague words of a revision when suitable – it can be surmised that the CBI sensed that the large OS ISK holders were not going to participate: they have indicated as much. Although the auction is set for June 16 this isn’t the kind of auction where bidders walk in from the street and wave their hands; the bids will have been placed earlier due to time-consuming procedures.

On the different approach last year v now I had already made some guesses in my last blog: whetted appetite for collecting more for the state coffers, following last year’s windfall from the estates’ ISK assets; political need for a victory before the planned election in October (no date set yet); the certainty that OS ISK owners can’t rely on Icelandic courts to rule in their favour against the sovereign; using the harsh terms as a stick to beat the ISK holders (but when?) – I don’t find any of these very plausible, partly because I don’t see any of these reasons as a winning strategy.

One lesson from the Argentina very very long struggle is that international creditors rely on a many-pronged strategy, i.a. legal actions not only in the home country of the bond issuer but in many jurisdictions. I refuse to believe that Icelandic courts would side with the sovereign against the law but ultimately that’s not a deciding point since legal action will, most likely, be taken in many jurisdictions. And it’s not up to Iceland to define if a certain action is a default event or not.

The fact that two non-journalistic articles have already been published in international finance media indicates interest in certain quarters and a preparation, meaning that the large OS ISK holders, quite unsurprisingly, already have their plan A B and C mapped.

Considering the strong Icelandic economy Iceland has in general a weak case for forcing a haircut on holders of Icelandic sovereign bonds. The government can certainly hold its course but testing its limits to such a degree that it loses control of the situation – as it would i.a. if legal action were taken against it – shows at best lack of realism and worst a staggering stupidity.

That brings me to the same question as earlier: after the care taken last year to avoid time consuming action and legal risk why is the government and the CBI now opting for a course that involves all the things religiously avoided last year?

*In his blog Porzecanski is dismayed that the CBI and the government have recently passed a Bill to temper inflows. This action does however not come as any surprise. Already in its 2012 outline of prudence rules following the lifting of capital controls the CBI spelled out various measures which would be used in the future to secure financial stability. Considering the fact that the inflows in the years up to 2008 ultimately caused Iceland to opt for the capital controls, now being eased, this prudence is highly sensible, in my opinion. Yes, interest rates could be lowered in order to temper the appetite of international investors but that’s another thought for another day. In short, I definitely don’t share Porzecanski’s view though I can see his point. There is an Icelandic saying that a burnt child stays away from the fire – and that is, I’m sorry to say, an apt description of the mood in Iceland re foreign inflows.

Updated: Minister of Finance Bjarni Benediktsson has now responded in the Wall Street Journal, claiming that Iceland shares little with Argentina except that creditors have bought distressed debt at knock-down prices. – However, in the end it only matters who holds the debt, not how it was acquired. Also, Benediktsson does not mention that after legal wrangling, at great cost also legal cost, over 15 difficult years Argentina did indeed negotiate with creditors.

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Written by Sigrún Davídsdóttir

June 15th, 2016 at 11:02 pm

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Capital controls and legal risks: major concern last year, ignored now

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In the months leading up to the June 2015 plan on moving the three banking estates out of capital controls minister of finance Bjarni Benediktsson was adamant about avoiding legal risk. Indeed, that plan was only announced once the creditors had agreed to a haircut on the estates’ króna assets. The new Act on the offshore króna raises some legal issues as two of the four funds holding the lion share of these assets have pointed out in a letter to Alþingi. Intriguingly and contrary to last year, Benediktsson and the Central Bank of Iceland now seem to be intensely relaxed about legal risk though this time, contrary to last year, it really is the state that is the counterparty.

There has been little debate in Iceland regarding the offshore ISK and measures to lift controls on its owners. Certainly, the numbers are fundamentally different from when these offshore ISK, i.e. owned by foreigners (individuals or entities registered abroad; can in theory be Icelandic and are in some cases) caused the introduction of capital controls in November 2008. At the time these assets amounted to 44% of Icelandic GDP; now they amount to 14% of GDP or ISK319bn.

The largest part of the offshore ISK is owned by a few large institutional investors, two of them being Autonomy Capital and Eaton Vance. The underlying assets are Icelandic sovereign bonds and T-bills, meaning that the counterparty here is the Icelandic state.

As with creditors last year there have been meetings between the large offshore ISK owners and Icelandic representatives of the ministry of finance and the CBI. Contrary to last year, when nothing was done until it had been negotiated with the creditors of the estates, no agreement was reached before the new Act was passed in parliament this weekend.

Officials met with representatives of offshore ISK holders yesterday in New York to inform them of the new measures.

The state sure will pay its debt or… maybe not

Last year, creditors to the estates agreed to roughly a 75% haircut on the estates’ ISK assets. This outcome came as no surprise but had been more or less foreseen for the last several years, based on the Icelandic current account: this is what Iceland could manage without upsetting financial stability.

Hawkes among Icelandic officials have been adamant that offshore ISK owners should endure a similar fate. That however goes against the rule that a state pays its debt in full. At a hearing in the parliament’s economy and trade committee a CBI official underlined this fact: the sovereign will pay its debt.

This is clearly what the funds owning the offshore ISK have literally been banking on: the state is its counterparty and a state pays its debt.

Two options: ISK220 for a euro or deposit at negative rate

The new Act (English translation of the Bill) stipulates that offshore ISK holders can participate in an auction where the reference exchange rate will be ISK220 for the euro, more than a third higher than the present onshore rate of ISK140.

There was a meeting in New York yesterday, where the measures were explained. Clearly, a higher participation in the auction would lead to a better price (creating a version of “prisoner’s dilemma”…) but the funds might also calculate that they were better off heading to court.

If an auction doesn’t tempt them the assets will be turned into a “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.” This debt instrument has no maturity, interest rates are set at 0.5% but will be reviewed annually. Needless to say, 0.5% in Iceland is negative interest rates, well below inflation.

Effectively, the offer is either a haircut of more than a third of the assets or a lock-in at negative interest rates for unspecified time.

If the haircut was meant as a carrot compared to the lock-in stick, offshore ISK owners might well keep in mind the CBI official’s words that the sovereign was of course going to pay its debt in full – and simply head for the courts.

Property rights and human rights

Over the weekend, Eaton Vance and Autonomy sent a clarification of their stance to parliament (here, in Icelandic). The funds protest the Bill defines all offshore ISK as being “potentially more volatile than other króna-denominated assets, as the latter are subject to a home bias.” This does not at all apply to the funds, they claim since they have already shown a preference to being long-term investors in Iceland, i.e. they are willing to buy Icelandic bonds and T-bills.

In addition, they point out that considering growth and good state of the Icelandic economy, the present offer can’t be justified by hardship, as emergency measures following the banking collapse in October 2008.

Furthermore, the funds see their position as being strong since a partial payment would amount to a credit event, thus putting the state into default, with all the unpleasant consequences involved – a potentially expensive experience for Iceland, both the state, public institutions and companies.

There is a “Provisions of the Constitution and the European Human Rights Convention” in the Bill, stating that the “recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination.” – The funds clearly disagree and consider these provisions to be inadequate.

A legal risk but so what…

One view heard from one of those involved on the Icelandic side is that the measures are clearly close to the margin of the possible and postulate a clear legal risk. However, there was no need for Icelandic authorities to pay any special attention to problems the offshore ISK holders might identify, according to this source. Yes, the offshore ISK owners could now decide to challenge the Act but perhaps they had already had enough of wrangling with Icelandic authorities and might just be ready to call it a day. And anyway, an Icelandic court is unlikely to rule against the parliament, states the source.

That is certainly one way of seeing the situation. What I find difficult to explain is why the minister of finance and other officials were so adamant last year about avoiding all possible legal risks, by beforehand securing the creditors’ support to the plan to lift controls for the estates – but are now apparently intensely relaxed about possible legal risks and the pretty obvious invitation to a legal challenge.

All the more surprising since the creditors to the estates had known for a long time that they would only get part of their ISK assets whereas the offshore ISK owners are certainly counting on the state paying back and in full.

Could the Act be only a stick (as was the “stability tax” last year), are talks still going on? That’s one version and an Act of law can certainly be changed. That said, I still find the Act looking surprisingly like a final act if the intention is to explore further avenues with offshore ISK holders.

Reputation risk and “those in the cage”

At a public meeting on the offshore ISK in 2013, some of those present argued that the solution to the Icelandic current account problem was just to cage in the foreign-owned assets so capital controls could be lifted on the domestic part of the economy. Present at the meeting was CBI governor Már Guðmundsson who pointed that when new investors would then arrive in Iceland they would see the cage and ask who was in it. “The investors who invested in Iceland last time around.”

This doesn’t seem to be the most alluring introduction to Iceland but that is none the less what seems about to happen: offshore ISK holders are being offered a cage, unless they prefer fleecing.

Icelandic officials will clearly have Icelandic interests at heart. Last year, it seemed that these interests were best safeguarded by negotiating an outcome with creditors so as to secure a full harmony in the outcome and execution. With the offshore ISK the same officials seem to act in the certain belief that the state can dictate an outcome it wishes, with no need to pay any special attention to those who lent money to the state and who are also willing to continue lending. It will take some time before it’s clear if this is a sound judgement and what the possible reputation risk will be.

Update: here is further information from Ministry of finance on the new Act.

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Written by Sigrún Davídsdóttir

May 24th, 2016 at 10:30 am

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Where but in Iceland…

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Last year, Kaupthing’s second largest shareholder Ólafur Ólafsson was sentenced in February 2015 to 4 1/2 years in prison in the so-called al Thani case. After a change in the law on imprisonment shortened the time prisoners have to spend in prison under certain circumstances, Ólafsson was recently released to a half-way house in Reykjavík. He is now electronically tagged but can go to work – he is still one of the wealthiest men in Iceland and owns inter alia a large shipping company, Samskip.

Yesterday, a helicopter accident drew some attention to Ólafsson: it turned out he was on a sightseeing flight together with three foreign business partners and a pilot when the helicopter came down. All on board were injured but none of them suffered life-threatening injuries.

The helicopter, owned by Ólafsson and registered in Switzerland, according the Stundin, though a Danish and a Swiss company. Allegedly, the helicopter has been used a lot lately, allegedly twice turning off the device that allows the helicopter to be tracked.

According to Stundin a group of hikers saw a helicopter eight hours before the crash, flying in a dangerously daring way, close to the scene of the accident. It’s not been confirmed if the helicopter observed was the one owned by Ólafsson.

The accident has also drawn the attention of authorities to the fact that tagged prisoners can in theory travel abroad – it’s not banned – as long as they are back at 9pm. The reason foreign travel isn’t forbidden is only because it’s not until now that there have been prisoners wealthy enough to own their own planes. This will now be taken up.

The Icelandic magasine Séð og heart has now pointed at a weird coincidence. Ólafsson has a very close business partner, Hjörleifur Jakobsson, who like Ólafsson moved to Switzerland, has in general been closely involved in Ólafsson’s business ventures for decades and has often been called Ólafsson’s right hand in Icelandic media.

It turns out that as the Icelandic Prison Service is starved for funds it has outsourced the electronic tagging and the surveillance involved to a company called “Öryggismiðstöðin,” which is owned by no  other than Ólafsson’s right hand man, Jakobsson. The magasine is not alleging that Jakobson’s company is granting Ólafsson any favours, merely pointing out that such coincidences can happen in little Iceland.

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Written by Sigrún Davídsdóttir

May 23rd, 2016 at 9:45 pm

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Getting rid of the offshore ISK: plenty of sticks, carrots uncertain

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After markets closed May 20, minister of finance Bjarni Benediktsson introduced a new Bill (text in English) on offshore ISK, now amounting to ISK319bn, around 14% of Icelandic GDP.

As expected, offshore ISK owners are will be offered  to participate in an auction. Those who don’t accept the offer will see their funds put into so-called “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.”

The restrictions are special indeed: the debt instrument will only carry interest of 0.5%, to be reviewed every year. In addition, this debt instrument does not have a specified maturity. As interest rates in Iceland are well above 0.5% and not likely to be near this rate any time soon, the offer is to participate in an auction or have the funds locked in at negative interest rates forever and a day, i.e. well below market rates in Iceland.

If the word “expropriation” comes to mind the 4.1 Chapter is on “Provisions of the Constitution and the European Human Rights Convention”:

The recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination. Failure to adhere to these principles could create liability for compensatory damages on the basis of Article 72, Paragraph 1 of the Constitution, cf. also the protection of ownership rights according to the European Human Rights Convention, or could constitute illegal discrimination, which would be in violation of the non-discrimination rule contained in Article 65 of the Constitution, cf. also the prohibition of discrimination on the basis of subjective considerations, according to the European Human Rights Convention and the EEA Agreement.

It is clear that the beneficial owners of offshore króna assets are residents and non-residents and that disposal of offshore króna assets has been subject to restrictions ever since the capital controls were imposed. The extraordinary circumstances currently prevailing are considered to justify the transfer of offshore króna assets in the form of electronically registered securities to administrative accounts with the Central Bank of Iceland and the transfer of deposit balances to accounts that will be subject to the special restrictions provided for in the bill of legislation. The same principles lie behind the recommendation that payments due to other offshore króna assets be subjected to comparable restrictions.

It is appropriate to emphasise that the bill of legislation does not represent a transfer of ownership rights. Furthermore, changes in the custody of króna-denominated assets are not conducive to eroding their value, with reference to the fact that the authorisations for disposal will be either unchanged or more liberal. Nevertheless, it can be said that, by stipulating changes in administration of custody, owners’ right of disposal are being restricted as regards the selection of an administrator.

The Central Bank is authorised to charge administrative fees on offshore króna assets, but these fees shall not exceed the Bank’s actual incurred expense. The restrictions in the bill of legislation centre mainly on owners’ right to decide where their assets are held in custody.

The restrictions provided for in the bill are an element in the vital task of reducing the risk attached to the aforementioned offshore króna assets. The conditions prevailing at the time this bill of legislation is presented – i.e., the imposition of capital controls following the financial crisis in autumn 2008, the steps taken since then, and the damage that protracted capital controls do to the domestic economy – are discussed in detail in Section 2. Furthermore, reference is made to the discussion in that section concerning the necessary scope of the measures provided for in the bill of legislation.

The continued restrictions on the right to dispose of offshore króna assets are based on vital public interest considerations. These restrictions are a necessary element of measures to release the pressure that offshore króna assets could put on the exchange rate of the Icelandic króna, other things being equal, and they are also a way to give the owners of the assets the option of releasing them without jeopardising exchange rate stability. The objective of the bill is to enable the liberalisation of capital controls on households and businesses in Iceland, and also on owners of offshore króna assets. (Emphasis mine).

The situation of the Icelandic economy can be debated but it is, for the time being, fairly if not extraordinary good.

The above mentioned  “continued restrictions” indicate that as capital controls are lifted on others, those who hold offshore ISK but didn’t want to participate in the auction are effectively kept locked in.

As soon as plan to lift capital controls was announced in June last year, carry trades on the ISK rose. Intriguingly, part of the present locked-in offshore ISK stems from carry trades (actually often long-term investment rather than only hot inflows). This means, that even before the old overhang has been released, new inflows have started – either a sign of the market’s extremely short memory or faith in the Icelandic economy.

The government carefully avoided legal wrangling with creditors of the estates of the fallen banks. The question is if the new Bill does the same trick and leads to a satisfactory outcome for all. The above are points likely to cause consternation among the four largest holders of offshore ISK, all institutional investors. The question is if it’s more important for them to find a solution and finally clarify the situation or if they see the new measures as an infringement on their legal rights.

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Written by Sigrún Davídsdóttir

May 20th, 2016 at 10:53 pm

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Presidential elections: fighting old debates or looking ahead? – Updated

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It’s no exaggeration to say that Icelanders are stunned to see another old politician throwing his gauntlet into the presidential ring: Davíð Oddsson is running for president, competing with Ólafur Ragnar Grímsson, his old political adversary from decades ago. There are several other candidates but the most serious threat to the political oldies is Guðni Th Jóhannesson lecturer in history. Icelanders will now be invited to watch a battle as if stuck in the 1990s or watching ahead with Jóhannesson and the younger candidates. 

“Davíð” is a common name in Iceland but an Icelander hearing the name “Davíð” without further qualifications will know who is being referred to. Davíð Oddsson has been a fixture in Icelandic politics since elected mayor in 1982. Born in 1948 he is five years younger than president Ólafur Ragnar Grímsson. As a leader of the conservative Independence party (1991-2005) Oddsson often fought ferociously against Grímsson the leftie in the 1980s and the 1990s until Grímsson moved to Bessastaðir, the presidential residence. – After all, the most famous description of Oddsson, that the at the time prime minister had a “shitty nature” (“skítlegt eðli” in Icelandic sounds much ruder), came from Grímsson.

Formally Grímsson left the political scene in 1996 but others claim the old politician has never left politics, just adapted his tactics to his role. All of this seemed history – until today when Oddsson announced he would run against Grímsson. Icelanders now feel they are being dragged into the political battles of earlier decades. Both Grímsson and Oddsson feel they “won” the Icesave dispute, a clear example of dragging the past into the present. The question is if Icelanders want to look back or onwards.

Oddsson brings the distant past and the banking collapse into the present

As a prime minister from 1991 to 2004 Oddsson became the longest serving PM in Iceland. After a year as a foreign minister he moved to the Central Bank of Iceland, serving as a governor until early 2009 when he was hounded out by public protest and the left government. He was then offered the post of editor of  Morgunblaðið, the newspaper once Icelandic strongest private media.

Among his supporters Oddsson is seen as a strong and fearless politician. Albeit, it’s likely that his supporters are losing numbers, not because they change their mind but because they are mostly old and are slowly leaving this world. These people see him as the best PM ever, later ignominiously treated in 2009 by “the loony left” and activists.

Younger people remember his time as a governor where the CBI lost around ISK270bn on repro deals with the banks in the year before the 2008 banking collapse: the CBI knew what was going on but didn’t want to stop the merry-go-round. Again, others will claim nothing else could be done. However, the loss was large and real.

On the the day the banking collapse became a reality, 6 October 2008, Oddsson decided to lend €500m to Kaupthing – this lending is one of the very few unexplained and inexplicable actions related to the banking collapse (see my blog on this loan).

Oddsson: writing for the fishing industry and his own irritation

Morgunblaðið is owned by two large and powerful fishing companies and has been seen as an untiring campaigner for the fishing industry’s interests, against the European Union, against taxing the fishing industry etc.

As a PM Oddsson did lead Iceland into the European internal market by the agreement on the European Economic Area in 1993 but has grown ever more EU-sceptic. As editor, he has in addition cultivated his own unrelenting irritation against Rúv, the public broadcaster. Oddsson’s pen is sharp and merciless, in the latter years often more fierce than funny.

By deciding to run Oddsson brings all of his past into the present, both the deeds he’s still admired for by some conservative voters and the more questionable time, i.e. as a governor. Facebook has been ablaze in Iceland today, inter alia bringing up that the Time Magazine named Oddsson as one of 25 leaders from the world of banking and politics responsible for the banking crisis in 2008: he was earlier an avid campaigner for regulation-light and oversaw the privatisation of the banks, in  addition to the repo lending.

Icelandic presidents and changing public taste

The first Icelandic president, Sveinn Björnsson, was a politician voted by parliament as the Icelandic republic was founded in 1944. When Björnsson died in 1952 the second president Ásgeir Ásgeirsson, a social democrat was duly elected, remaining in office until he retired in 1968.

Before Ólafur Ragnar Grímsson’s victory in 1996, Icelanders had twice rejected politicians in favour of non-politicians. In 1968 the director of the Icelandic National Museum Kristján Eldjárn was voted president, beating Gunnar Thoroddsen, a conservative politician and Ásgeirsson’s son-in-law; in 1980 Vigdís Finnbogadóttir lecturer in French became the first Icelandic female president, also writing international history as the first woman democratically elected as president. The two had reached national fame through television, Eldjárn with a TV program on Icelandic archeology, Finnbogadóttir by teaching French on TV.

In 1996, times had changed and a politician won over several non-politicians. Grímsson, a divisive politician who started his political career in the Progressive party before moving farther left, to the People’s Alliance, won, much aided by his very charming Icelandic wife Guðrún Katrín Þorbergsdóttir. She died in 1998, after which he met the British-Israeli Dorrit Moussaieff, born into a wealthy family owning a jewellery business where she has later worked. They got married in 2003.

Surreal choices

It was already surreal to see a sitting president running for the sixth time. To see one of his political rivals from Grímsson’s political past conjures up a situation, which is beyond weird. Oddsson’s candidacy is not wholly surprising: it was frequently mentioned as a possibility in 2012 and this time there have been persistent rumours.

A four(!)-page article in Morgunblaðið, by an old friend of Oddsson on Oddsson, richly adorned with photos of the glorious leader with other glorious leaders, appeared last week, out of the blue; it now makes greater sense though the tone is no less comic. Think of the Guardian running four pages on Alan Rusbridger or the Financial Times on Lionel Barber…

The day Grímsson repeated his 2012 act by changing his mind and announcing he would run, contrary to his declaration in his New Year address, Morgunblaðið published a particularly vitriolic editorial about the man who couldn’t leave power. It was widely thought that part of the anger stemmed from the fact that Oddsson had been planning to run but hadn’t planned on challenging Grímsson.

Grímsson’s decision was however not as well received as in 2012. Lately, his wife’s links to offshore companies have done little to enthuse voters. Oddsson might think this paves his road to Bessastaðir. In addition, some are guessing he counts on Grímsson withdrawing – all of this are pure guesses.

As Oddsson rightly said this morning, politicians can no longer count on the party allegiance of voters; Icelandic voters have been extremely fickle lately. It was however remarkable how tepid the answer was from Bjarni Benediktsson leader of the Independence party when asked if he would support Oddsson: “I think the answer to this question is partly, no actually let us say wholly self-evident. But I believe Davíð will appeal to people far beyond the party.”

Oddsson has time and again scolded, reprimanded and denigrated Benediktsson in Morgunblaðið. From this point of view Benediktsson’s tone is understandable. Oddsson hasn’t made life easy for the party leadership; there will be many there who will feel no reason to show any allegiance at all. There will be those who see Oddsson as an earlier leader who time and again has made life very difficult for the party leadership by his comments; he has repeatedly be seen as a very vocal backseat driver, unhappy about his seat, certain of knowing what’s best for the party as the leader in more glorious times of much greater support.

Who could beat Grímsson and Oddsson?

Not an easy task because of the electoral system: the candidate getting the greatest number of votes will be president; there is no second round in case no one gets a clear majority. There are now around ten candidates running, some have already withdrawn, unclear what happens with these two political titans… or dinosaurs, depending on the point of view.

Andri Snær Magnason is a well-known writer and environmental campaigner in Iceland, born in 1973. There was some buzz around his candidacy but he only seems to appeal to a small group of “latte-licking” 101 inhabitants, i.e. hipster in the centre of Reykjavík.

Born in 1968, Guðni Th. Jóhannesson has been a vocal public intellectual in the Icelandic political debate, not taking political sides but a voice of reason and historical oversight. With a Canadian wife and four young children and a daughter from a previous relationship he represents something entirely different from the two old politicians.

Both Grímsson and Oddsson argue for their candidacy by claiming that Iceland is going through perilous times and need an experienced captain. Johannesson doesn’t recognise the peril, any more than most Icelanders seem to do, and he propagates optimism and a firm belief in the future of Iceland.

Grímsson and Oddsson might to a certain extent appeal to the same voters leaving most likely Jóhannesson as a choice for those who want to tear themselves from former political debates and of problems. But because of the peculiarity of the electoral system, it’s not entirely easy to predict the outcome.

*Updated: after flip-flopping on earlier decision president Ólafur Ragnar Grímsson has now withdrawn his candidacy. Davíð Oddsson, rumoured to have known or had an inkling that Grímsson would leave the race, is now the only candidate of the old political guard in Iceland. The question is if Icelanders still want the old… or prefer new faces. It seems that Guðni Johannesson has a strong following. Remains to be seen, the elections are 25 June.

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Written by Sigrún Davídsdóttir

May 8th, 2016 at 6:48 pm

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Lessons on offshore from the Icelandic collapse

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After my talk on “Iceland: the offshorisation of an economy” at the Tax Justice Network Workshop on “Corruption and the Role of Tax Havens” I was invited to blog on the Icelandic offshore lessons. Thanks a million to TJN for the invite, the blog is here.

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Written by Sigrún Davídsdóttir

May 5th, 2016 at 12:06 pm

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Iceland hits back at Airbnb and other short-time let – updated

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When things get big in Iceland they get big, proportionally at least. There are 540 inhabitants in Vík, Mýrdalur – and 1300 spaces for short-time lets. Could that be a world record? Or only comparable to Venice, Cinque Terre etc…

Record or not, the Vík Council has now announced it will now stop granting licence for short-time lets. There is enough on offer in the village. Those who already hold licenses can extend them until 2022 so this isn’t a clamp-down but a mere halt on further expansion.

Apart from spaces offered by the locals there are examples that houses have been bought or built solely for the purpose of short-time lets for tourists. The Council points out that these houses, often empty, add nothing to the village life except a bit of cash, not necessarily profiting the local community if the owners live elsewhere.

Earlier, the Icelandic Supreme Court ruled in a case where flat-owners in one of the luxurious high-rises along Skúlagata, close to the music house Harpan, sought a confirmation that flat-owners need to agree to short-time lets; one owner can’t ignore the neighbours. The Court ruled in favour of the flat-owners. This does change the environment for short-time letters.

In the meantime, there is no lack of Airbnb and other letting suitable for tourists. However, this summer and the whole year will see an unprecedented number of tourists in Iceland. Bar eruptions etc. this year it’s likely there will be more than the 1.5m who came last year. If you are heading to Iceland, make sure you have your accommodation secured – there might be plenty of flights available, never so much on offer, but accommodation might at times be scarce.

*May 14, the local council in Kirkjubæjarklaustur decided to restrict bed & breakfast/home accommodation: no more than ten places will get permission and only if certain criteria met. The council motivates its decision by pointing out that lack of housing, i.a. because of lack of land to build on, prevents development at Kirkjubæjarklaustur.

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Written by Sigrún Davídsdóttir

May 4th, 2016 at 10:16 am

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Offshore onshore and Luxembourg, the black heart of Europe

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“Corruption and the role of tax havens” was the headline of the annual workshop of the Tax Justice Network – and the word Luxembourg was heard quite often there.

There were plenty of interesting talks, much to learn. Two things are still playing around in my head: an exchange on the offshore bubble inside, not outside, of our Western countries – and the destructive role of Luxembourg when it comes to both taxation and finance.

Offshore is actually onshore

I was on a panel today about “Stories of secrecy;” I gave a talk about “Iceland, the offshorisation of an economy” and Richard Smith from Naked Capitalism talked about the role of Scottish LPs in the Moldova bank robbery where $800 were syphoned off, into offshore companies. Nicholas Shaxson, author of “Treasure Islands,” was the moderator.

Shaxson mentioned the increasing focus on financial stability and the offshore universe, something that is very clear when it comes to Iceland and events in autumn 2008 – the offshorisation did not alone cause the banking collapse but it played its role in hiding money, connections, ownership, debt and everything else that can be hidden offshore.

One image I have been toying with lately, in order to explain the dangerous effect of offshorisation, is that each Western country is like a balloon where law and order, civil society seems to permeate the whole balloon. However, at a closer look, the offshore is like a bubble inside the balloon, where civil society is kept out, where bankers, accountants and other facilitators, together with companies and wealthy individuals act as if the rules of society, the social pact, didn’t exist; i.a. have created this safe haven from law and order.

What we should really be focusing on is that offshore isn’t outside of our countries, it is right within, creating a space immune to all the things the social pact otherwise touches, the social pact of taxation, rule of law etc. And it hugely undermines financial stability… as we saw in 2008, not only in Iceland.

Luxembourg: at the heart of dirty deals and tax destruction

Omri Marian is an assistant professor of law at the Irvine School of Law, University of California. He has studied 172 of the tax contracts the Lux Leaks brought into the open. His very illuminating point is that at first glance the Luxembourg tax laws looks just as sophisticated as tax laws normally do in Western countries. However, there is simply no execution of this convincingly looking legal tax code.

It sounds insane but one person, a certain Marius Kohl, was in charge of agreeing to all the privately negotiated “advance tax agreement,” effectively the tax for individual companies. The agreements, normally running to hundreds of pages, would often be signed off by the very hard-working Kohl on the day of application.

This reminded my of my experience with the Luxembourg financial regulator, Commission de Surveillance du Secteur Financier, CSSF. After the collapse of the Icelandic banks in October 2008 it slowly dawned on me that most of the banks’ dirty deals, especially in Kaupthing and Landsbanki, had been run through their Luxembourg operations.

Yet, when I asked lawyers and accountants I was told that all was in good order in Luxembourg, they had strict laws regarding the financial sector; the CSSF was there to keep an eye on things.

Listening to Marian it dawned on me that yes, this is how Luxembourg does it: it pays lip service to European rules and regulation and what you normally expect from a Western democracy by having a legal code on tax and the finance sector. But that’s all: the laws exist but only on paper – there is no execution to speak of.

Some years ago I visited the CSSF, got an audience with some six or seven people there. A very memorable meeting; we sat at the largest meeting table I have ever sat at; I on one side, the CSSF-ers on the other side. I told them what was slowly coming to light in Iceland: the alleged fraud and shenanigans, the loans with light covenants and little or no collaterals and guarantees, alleged market manipulations via the banks’ proprietary trading and share parking in companies the banks finances etc. – so, weren’t they going to look into the banks’ operations. There were darting eyes and down-cast faces: no, no need to do anything, all in good order in Luxembourg. D’accord…

I intend to write further on the thoughts above – but suffice it to say that if the European Union is at all serious about acting on the offshorisation of the European economies it has to make sure that Luxembourg not only adorns itself with all the correct-looking legal codes but actually enforces it, i.a. by having the staff needed to do so.

*Nicholas Shaxson blogged today on the Tax Justice Network on these aspects of Luxembourg and quoted some of my earlier blogs on Luxembourg, i.a. my observations that Luxembourg attract financial companies because they know full well that Luxembourg is a safe haven… from regulatory scrutiny.


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Written by Sigrún Davídsdóttir

April 29th, 2016 at 11:41 pm

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Six resignations in Iceland due to the Panama papers

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The resignation of prime minister Sigmundur Davíð Gunnlaugsson is the most spectacular event stemming from the leaked Panama papers. Gunnlaugsson resigned less than two days after the infamous interview, broadcast April 3, where two journalists asked him about Wintris, the offshore company linked to him and his wife. – So far, five others have resigned because of coverage related to the Panama papers.

Noticeably, Gunnlaugsson only resigned as prime minister, not as leader of the Progressive party. Yet, Progressive members have now shown their disdain for party members’ offshore activities:  yesterday, the chair of the Progressive party, Hrólfur Ölvisson resigned after a coverage, again based on the Panama papers.

Ölvisson, until then only known to a small circle of Progressives, has made use of more than one offshore company, i.a. to hide ownership. Also, Ölvisson enjoying political connections, benefitted from the type of loans the Icelandic banks issued to well-connected people, i.e. loans with no or light guarantee, collaterals and covenants, essentially leaving all risk with the bank. – Several bankers have been sent to prison for breach of fiduciary duty by issuing such loans.

Ölvisson has had close business relations to Finnur Ingólfsson, a Progressive MP and minister before he became governor of the Central Bank of Icelandi. He did only make a short stop at the CBI, leaving after only two years, in autumn 2002, when the privatisation of the banks was ongoing. Ingólfsson was part of the group, all with ties to the Progressive party, who then bought Búnaðarbanki. When Kaupthing, a much smaller bank, bought Búnaðarbanki, the close ties of the group moved along to Kaupthing.

Also this week, two pension fund directors resigned, Kristján Örn Sigurðsson and Kári Arnór Kárason. Both figure in the Panama papers, both had set up offshore companies, Kárason in 1999 and 2004, Sigurdsson before and after the banking collapse in October 2008. As far as can be seen neither made use of the companies, i.e. the businesses of the companies didn’t evolve as planned.

Vilhjálmur Þorsteinsson is a well-known investor in Iceland. His wealth stems originally from his tech ventures and later fom investments. He was named in the reporting before April 3 and then resigned as a cashier for the Social Democratic Alliance. When further offshore ventures came to light, which he had vehemently denied he had, he resigned from the board of the web-media Kjarninn, which he has invested in.

The first one to resign, even before Gunnlaugsson, was Júlíus Vífill Ingvarsson, a Reykjavík councillor from the Independence party. Ingvarsson set up an offshore company as late as 2014. He went public with it after having been asked about it by journalists from the International Consortium of Investigative Journalists, resigning at the same time. His motivation for the company was that he wanted to set up a private pension saving fund although it’s impossible to set up such a fund and define it as a private pension plan.

The leader of Independence party and minister of finance Bjarni Benediktsson was exposed as an owner of an offshore company to encompass property investment with two other Icelanders in Dubai. However, he has resisted demands to resign, he still enjoys the support of his party, which following Gunnlaugsson’s resignation made a significant gain in the opinion polls, jumping fom 20% to 27%.

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Written by Sigrún Davídsdóttir

April 28th, 2016 at 2:37 pm

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