Sigrún Davíðsdóttir's Icelog

The lack of closure in the Icesave dispute with the Dutch and the British government gives the sense that time doesn’t pass – it just hovers in one long Icesave moment bundled up with the IMF review. Yet again, questions fly back and forth: is Icesave linked to the next IMF review or not? (It clearly is because Icesave is a large variable in the Icelandic financial equation but that’s not a welcome answer in Iceland.) Iceland’s minister of finance Steingrimur J Sigfusson and minister of economy and trade Gylfi Magnusson sounded optimistic last week after a meeting with IMF’s director Dominique Strauss-Khan: the review, that should release Scandinavian loans, channelled through the Fund, was now imminent.

However, news from Bloomberg today indicated a different stance: there isn’t the necessary support within the IMF to do the review. Not that Strauss-Khan is against it as he, ever the diplomat, explained in an interview with Bloomberg: ‘I have always said Icesave is not a condition for the IMF, but we need to have a majority in the board,’ said Strauss-Kahn. ‘If the Icesave question is solved, I’m sure there will be a majority. If the Icesave question is not totally solved, I don’t know if there’ll be a majority on the board.’ – So now we know: Icesave isn’t a condition for further loans but there will unfortunately not be the necessary majority to settle the loans unless Icesave is solved – and not just partly solved but totally solved.

So why isn’t the Icesave dispute solved? The answer depends on whom you ask.

The Icelandic government lets it be understood that it’s waiting for the Dutch and the British, both tied up with coming elections.

According to spokesman to the Dutch minister of finance Niels Redeker, with whom I spoke last week, the Dutch await answers from the Icelandic government on two issues: a confirmation as to what to discuss in the next Icesave negotiation round – and a clarification on information that Icelandic authorities gave regarding the banks before their collapse in October 2008.

The Dutch want a confirmation that the coming negotiation will be based on the text of the agreement negotiated in October, i.e. the legal aspects are not on the table, only interests on the Icesave loan and a grace period. The British government shares this view. These two governments are not interested in hearing Iceland going on about whether Iceland is or it not obliged to pay. These issues have, according to the two countries, been dealt with once and for all.

According to Dutch sources their government doesn’t intend to make any money on the Icesave loan but only wants to be compensated for its time. – I couldn’t help thinking I heard here an echo of medieval theological debates on ‘usury’ where the core of the matter was if Christians were allowed to charge interests since charging interests was really charging for time and time belonged only to God. Anyway, neither the Dutch nor the British intend to be usurers in the modern sense of the word – they don’t intend playing Fagin to little Icelandic Oliver Twist.

Regarding the interest rate offered to Iceland it’s immensely enlightening to see that Greece has just raised €5bn in a bond issue, with seven years bonds fixed at 5,9%, which shows their weak position. Interesting to compare this with the 5,5% that the Dutch and the British offered Iceland – time certainly doesn’t come cheap for Iceland.

I find it difficult to see the referendum as a blessing but an Icelandic source informed me recently that the pressure caused by the referendum had indeed tweaked things into a marginally better position for Iceland on one issue: the grace period. But Iceland is still in a bad position, with no deal yet and no deal in sight.

No doubt, the Dutch and the British government want to bring the dispute to an end but they are not in any desperate hurry. Most likely the coming elections in the two countries will not change much re Icesave: there is no Icesave disagreement between political parties in these countries. Not exactly the case in Iceland where the government and the opposition fight a more bitter fight over Icesave than most other things.

It’s difficult to avoid the thought that to some dark forces in Iceland Icesave is a welcome smoke screen – it’s less painful to blame foreigners instead of dealing with the real culprits in the Icelandic collapse: greedy business men and bankers, gullible politicians and regulators who lacked knowledge and means to tackle the towering banks. The fact that regulators in other countries also failed miserably doesn’t make the situation in Iceland any better.

With the IMF loans not forthcoming there is now an ongoing debate in Iceland if the country really needs further loans. Shouldn’t Iceland just learn to live within its means? Maybe, but I still think sensibly used loans would ease the coming years. The ‘kreppa’ (Icelandic for ‘crisis’, meaning to be squeezed) is bad enough as it is and I think Gylfi Magnusson has sensible ideas on how to run the economy by making use of these loans to counteract the worst effects of the ‘kreppa.’

As to the second issue that the Dutch want answered: Dutch officials claim they were wrongly informed on the position of the banks in 2008. Here, most Icelanders will feel at one with the Dutch: Icelanders definitely feel they too were wrongly informed – it remains to be seen who knew what when. The report will hopefully clarify if the Icelandic Central Bank and the financial services authority, FME, kept quiet about the severity of the situation as the months passed in 2008 – quite likely they had some idea but were at a complete loss as to how to react to the alarming signs of a teetering financial system. But the question is also what information the banks gave the regulators. In his report, Kaarlo Jännäri indicated that i.a. the banks didn’t provide the correct information when stress tested. Incidentally, Anton Valukas, in his report on Lehman, claims that Lehman did the same.

The whole point of waiting for Godot is just the waiting – but the Icesave agreement has no such philosophical angle. It just needs to be over and done with.

Follow me on Twitter for running updates.

Upset that the British government was still too keen on protecting the financial sector, Germany’s Chancellor Angela Merkel said in exasperation that she wanted to remind everyone that something did indeed happen in the financial markets. It made ‘no sense,’ she said, ‘to keep behaving as if nothing had happened.’

Her words describe all too well to the situation in Iceland. The three resurrected banks – New Landsbanki previously Landsbanki, Arion bank previously Kaupthing, Islandsbanki previously Glitnir (but Islandsbanki before that) – have now amassed a sizeable collection of assets and are, in some cases, reselling these assets. In the Icelandic media the banks have been criticised for lack of transparency, especially Landsbanki. There seems good reason to be worried that old habits die hard – but how were the old habits?

A banker working at one of the collapsed Icelandic banks told me recently that it had been quite remarkable to see how the banks’ ‘chosen’ customers – the big customers that in many cases also happened to be the banks’ largest shareholders – were content to pocket the profits but expected the bank to compensate for any losses they might suffer. Documents stemming from the now bankrupt companies Baugur, where Jon Asgeir Johannesson was a major shareholder and Fons, Baugur’s regular co-investor owned by Palmi Haraldsson and Johannes Kristinsson, throw some light on the old habits. Claims lodged against Fons amount to ISK40bn, almost £207m. Claims against Baugur Iceland amount to ISK319bn, £1,65bn.

At the end of 2005 Fons borrowed ISK800m from Glitnir. Three months later 300m were paid off in accordance with the loan agreement. The remaining 500m, supposed to be paid off by the end of 2006, are now part of Glitnir’s claims against Fons. – There are many other examples where the banks’ main borrowers, often their main shareholders as well, apparently did not expect to pay back their loans (even though refinancing was never an issue). The Fons loan from 2005 seems to be a case in point and shows that the banks’ leniency towards their big customers started well before the panic of 2008.

In December 2007 as the credit crunch was seriously starting to hit the leveraged Icelandic companies, Fons borrowed ISK10bn from Glitnir against shares in FL Group, the faltering investment company closely connected to Baugur and Fons. A few days later Glitnir lent Fons another ISK2,5bn. The collateral was a ISK3,7bn loan agreement whereby Fons financed sale of assets to Baugur, i.e. Fons both sold and financed the sale. Nothing was paid off this 2,5bn, most likely because Baugur didn’t pay off its loan from Fons.

Although Fons didn’t pay off any of these loans Glitnir still lent Fons ISK6bn in July 2008 to finance the sale of shares in Aurum Holding, one of Baugur-Fons retail investments, from one Fons-company to another, i.e. like the left hand buying from the right hand. In an illiquid market the evaluation of the shares raises questions. Of the 6bn 1,5bn were set against Fons trading account at Glitnir and 2,5bn were supposedly used to pay off an older loan (though there are conflicting information as to which loan was paid off). Two billion kronur were put into Fons’ account at Glitnir where 1bn was used to pay off 1bn on a loan at Kaupthing, Luxembourg and 1bn was put into Jon Asgeir Johannesson’s private account at Glitnir.

The administrator of Fons has now sued Johannesson to claim back this billion kronur, claiming that the money was paid without the necessary paperwork to underpin the payment. This claim will be settled in court later this year.

This flow of money from Glitnir into and between companies related to the bank’s principal shareholders is a saga of obscure deals and loans that were never repaid. Other similarly questionable deals, related to Baugur and Fons, involve the Danish air company Sterling and the two Icelandic companies Skeljungur, a petrol company, and Securitas, a security company. – The two other Icelandic banks, Landsbanki and Kaupthing, are also big creditors in Fons and Baugur.

Another bankrupt company with an interesting story is ‘Solin skin’, meaning ‘The sun shines’, owned by Baugur, Fons, Glitnir and the UK businessman Kevin Stanford, a frequent co-investor in Baugur’s ventures, a client at Kaupthing and now being investigated by the Serious Fraud Office. The only asset of ‘Solin skin’ was a futures contract on shares in Marks & Spencer. The contract was renewed close to twenty times and incurred spectacular losses. The claims on this tiny company that no one outside of Baugur’s inner circle knew of until its bankruptcy amount to ISK15bn, £77m. – As a comparison the cost of running Althingi, the Icelandic parliament, this year will be ISK2,7bn. The losses of this, in Baugur-Fons’ grand-scheme-of-things, tiny company would be enough to run Althingi for over five years.

The administrator of ‘Solin skin’ has compared the company to a gamble on the house. It seems unlikely that a normal bank would have allowed the company to renew the contract time and again, steadily adding to the losses with no assets to cover them.

In 2007 Jon Asgeir Johannesson bought two flats in New York in one of the most hyped condos in the city, at 50 Gramercy Park. Landsbanki financed the acquisition. The bank’s resolution committee is unwilling to inform what is happening with the flat or if Johannesson has had access to it after he couldn’t fulfil the loan agreement. Attempts to sell the flat, last on the market now in January at $15m, have apparently been unsuccessful. The news of a possible court case against Johannesson for renting out one of the flats with an Ikea kitchen and not a designer kitchen expected in this condo drew some smiles – might it be that after many questionable deals Johannesson would in the end falter on a designer flaw and not a financial deal?

The year 2007 was a year of conspicuous private spending by many of the Icelandic high-flyers, giving rise to a new phrase in Icelandic, ‘it’s so 2007’, meaning ‘outrageously extravagant.’ Banque Havilland, that took over Kaupthing Luxembourg, has already repossessed the yacht bought that year by Johannesson and his wife, and sold it to a Russian buyer. In December 2009 GE Capital repossessed Johannesson’s private jet. Strikingly bold actions compared to Landsbanki’s veil of secrecy hiding the ownership of the New York flat where Johannesson and his wife are still registered as inhabitants.

What causes concern in Iceland is that many of those responsible for lending money ad infinitum to heavily indebted companies and individuals are still working for the three resurrected Icelandic banks (though it doesn’t make the Icelandic banks unique in the international banking sector). – In ‘Liar’s Poker’ Michael Lewis describes banks that were always willing to sacrifice the interest of their clients for their own. Interestingly, the Icelandic banks always set the interest of a few chosen clients/shareholders above their own. So far, no court case has tested the responsibility of the managers and the boards of these banks in deals like those mentioned above.

The report coming out on April 12 will no doubt clarify the operations of the banks. After the report it might be more difficult to continue ‘as if nothing had happened.’

Follow me on Twitter for running updates.

The long awaited report by the Icelandic ‘Investigative Commission’ on the fall of the banks will be published on April 12. Expected to be around 2000 pages it’s not translated into English in its entirety but there will be a substantial executive summary. Each chapter will also have a thorough summary in English.

The Commission was set up by Althingi, the Icelandic parliament, at the end of 2008. The aim was to clarify what caused the collapse of the Icelandic banks. The Commission has focused on all aspects of the banks, i.a. their loan policy, ownership and auditing as well as the role of politicians, civil servants and regulators, law and legislation.

However, the report isn’t a criminal investigation. Since there is a strong feeling that fraud and criminal acts were part of the boom before the bust Icelanders’ trust in authorities will hardly be restored until alleged fraud has been investigated in some detail. That work is now ongoing at the Office of the special prosecutor where four prosecutors lead a team of investigators. The first charges could be made public later in spring or early summer but the report might give an indication of eventual fraudulent behaviour without incriminating individuals.

The debate is already raging in Iceland – will the report clarify things or not? It will depend on the expectations but the report will undoubtedly tell a coherent and clarifying story. Since many will be stung by the collapse saga there is a sense that the spin is already going on, trying to undermine or minimise the importance of the report. The hope is that the report will clarify the most pressing issues regarding the collapse, leaving Icelanders to move on to other things.

So far, no other country has published a similar report. It will be a terrific read for those of us who since October 2008 have been speculating about what really happened!

Follow me on Twitter for running updates.

Recently, the world media camped in Iceland, perplexed over a referendum on an agreement that was no longer an issue, then left – and now the Icelandic government seems equally perplexed as to how to continue. From hovering in a Danteesque limbo the Icesave now seems stuck in Dante’s hell where everything is frozen, nothing moves but isn’t quite dead.

What is clear is that the referendum – considered by the Dutch and the English an Icelandic domestic issue – wasn’t the catalyst some had hoped for. Maybe the desired effect will come later but so far so nothing.

As those who have followed the Icesave saga will know the Icelandic government reached an agreement last summer with the Dutch and the British government but didn’t have to political strength to move it through Althingi, the Icelandic parliament, unchanged. The changed version was renegotiated, at the end of the year there was the long awaited parliamentary accord and the Icesave bill passed. A sigh of relief swept the island where most felt they had heard far too much Icesave talk for too long.

But it was too early to sigh in relief. In January, the president of Iceland insisted on disrupting the bill’s parliamentary process and refused to sign the bill. The unfortunate situation is that the president can disrupt the process (though none but the present one has, so far) but since the president is no part of the political and parliamentary system he isn’t party to the political solution: he can disrupt but not mend.

At the moment, the Delphic utterances from Icelandic politicians indicate that things are being mulled over. There seems to be uncertainty as to which text to work on in the negotiations: should it be the text of the first agreement last summer or the later one that Althingi passed? Things are being sifted through, for whatever reason it seems difficult to relaunch the negotiations.

After the referendum Niels Redeker, spokesman for the Dutch minister of finance told AFP that the Netherlands and Britain were waiting for Reykjavik to make “a complete proposal that addresses the legitimate interests of all the parties.”As far as is known, The Dutch and the British have offered to renegotiate two aspects of the agreement: the interest rates and an interest free period.

As always, Iceland is rife with rumours. Some claim that Icesave shouldn’t be resolved until after the report from the ‘Truth Commission’, the commission set up by Althingi to clarify the collapse of the banks. No doubt, Icesave will figure in the report – and that story might not be particularly glorious neither for bankers, politicians and regulators. And neither is it favourable for the Dutch and the British regulators that failed to rein in Icesave – it was never the intention that banks operating under the so called EU ‘passport scheme’ should be less regulated than domestic banks, i.e. in this case Dutch and British banks.

How different it all seemed on Nov. 16 2008 when ‘agreed guidelines’ were ‘reached on deposit guarantee’ and the Icesave dispute seemed to be about to be resolved:

“Agreed Guidelines

1. The Government of Iceland has held consultations with the EU Institutions and the Member States concerned regarding the obligations of Iceland under the EEA with respect to the Deposit Guarantee Directive 94/19/EC. All parties concluded that the Deposit Guarantee Directive has been incorporated in the EEA legislation in accordance with the EEA Agreement, and is therefore applicable in Iceland in the same way as it is applicable in the EU Member States.
2. The acceptance by all parties of this legal situation will allow for the expeditious finalization of negotiations underway concerning financial assistance for Iceland, including the IMF. These negotiations shall be conducted in a coordinated and consistent way, and shall take into account the unprecedented difficult situation of Iceland and therefore the necessity of finding arrangements that allow Iceland to restore its financial system and its economy.

3. The EU and the EEA Institutions will continue to be involved and consulted on this process.”

The government at the time, a coalition of the social democrats (now leading the government) led by the Independence Party (conservatives, now in opposition) was firmly behind this agreement. However, this proved to be only the very simple beginning of a long saga and no quick solutions. EU didn’t continue to be involved, allegedly because the Icelandic government preferred to negotiate only with the British and the Dutch government.

Now, seventeen months later, with Icesave still unsolved it’s difficult to get an overview of the Icelandic public finances. Possible lenders are unwilling to settle loans until they know the outcome so as to be able to gauge the financial state of Iceland. In Iceland, that’s widely seen as hostility, not least by those who find it difficult to face the fact that the downfall of the Icelandic banks had much more to do with home-grown ways of banking and lack of regulatory enforcement than hostile foreign powers.

The bank collapse in October 2008 was a disaster but the lack of resolution in the aftermath is turning into nothing less than a catastrophe in slow motion. The hubris of the boom has been followed by isolation and anger of the bust. The Icesave saga is stranger than any fiction. It’s particularly lamentable because Iceland isn’t only brimming with natural energy. More than most, Icelanders are full of enterprising energy and resourcefulness – virtues that could come into full force if only Iceland could cut itself loose from the frozen fetters of Icesave.

Follow me on Twitter for running updates.

Icesave worries have just been eclipsed by a volcano eruption in the South of Iceland, close to Eyjafjallajökull, at a place called Fimmvörðuháls, a popular destination for hikers. On the news this morning there were shots of the eruption. The news is of course in Icelandic but they show clips taken during the night and early morning. The nine years old girl being interviewed was worried what would happen to the animals but so far everyone is fine. More to be seen at the Rúv website, the State Broadcaster.

So far, it’s a small eruption and since it’s not under the glacier itself, but close to it, there are no floods which would have followed if there would have been ice masses melting. Farms in the vicinity were evacuated shortly after midnight according to a plan and so far the eruption is what Icelanders call ‘a tourist eruption’ – a fantastic spectacle of nature.

Follow me on Twitter for running updates.

Recently, I talked to the CEO of a very successful Icelandic company that has grown steadily over the decade it’s been operating. Every year, the CEO would go through the annual report, lean back and think with great satisfaction that his company was indeed showing a healthily steady growth. Then the banks and their satellite companies would come out with their annual accounts – and the CEO’s heart would sink, questioning what on earth was he was doing: compared to these companies his company’s growth was pitiful. Now, anno 2010, his company is still doing well and even hiring people. The three main Icelandic banks collapsed in October 2008 and most of the companies owned by those favoured by the banks are now bankrupt.*

This blog appeared on New Economic Perspectives. Click here to read more…

Follow me on Twitter for running updates.

It’s not illegal to own a hammer but it’s illegal to use the hammer to destroy or damage other people’s assets. – This seems to be the short version of how Lehman Brothers used the so-called Repo 105 transactions*: it’s a legitimate tool but they used it to bluff the credit rating companies and consequently the financial world. One of the consequences of using this transaction was that the bank was apparently insolvent earlier, probably much earlier, than Sept. 15 2008.

The Lehman report was ordered in January 2009 by the United States Bankruptcy Court for the Southern District of New York, put together by the Examiner, Anton Valukas and released this week. It concludes that Lehman’s CEO Richard Fuld, Lehman’s CFOs and possibly Lehman’s auditors, from Ernst & Young, might have something to answer for in court. No doubt, their names will be tied to Lehman over the coming decade or so as all and sundry will be bringing them to court in an array of Lehman-related cases.

Valukas states that although the Repo 105 transaction was perhaps not ‘inherently improper, there is a colourable claim** that their sole function as employed by Lehman was balance sheet manipulation. Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.”  Lehman used Repo 105 “to reduce balance sheet at the quarter‐end.”  In 2007‐08, Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence.’

The report is based on a staggering amount of material, laconically described as: ‘The available universe of Lehman e‐mail and other electronically stored documents is estimated at three petabytes of data – roughly the equivalent of 350 billion pages.’ – Most appropriately, numbers parallel to those in the ‘Lehman universe’ are not often encountered except in astronomy.

Why is Lehman being scrutinised so thoroughly and not banks that governments in various countries have recapitalised? The UK Treasury had to intervene with Northern Rock, Bradford & Bingley, Lloyds Banking Group and Royal Bank of Scotland, banks that would have followed Lehman into bankruptcy if the Treasury hadn’t saved them. But as far as is known, the accounts of these banks haven’t been picked over like Lehman’s.

Recently, there were fleeting news that the Treasury had contemplated the idea in connection with Lloyds but then given up on it. It was thought, at the time, that there was no time to do it – but as a major shareholder the Treasury has all the time in the world to go into the banks’ universe and start reading. The same goes for Ireland: AIB, Bank of Ireland and Anglo have been recapitalised, they are still reporting huge losses – and their management in the months up to autumn 2008 hasn’t been scrutinised.

Icelanders are still waiting for their bank report, due in the coming weeks, put together under the auspices of a commission, set up by Althingi, the Icelandic parliament. High Court judge Pall Hreinsson is its chairman and the other members are the Parliament’s Ombudsman Tryggvi Gunnarsson and Sigridur Benediktsdottir associate chair in economics at Yale. In Iceland the commission is called ‘the investigative commission’, foreigners have dubbed it ‘the truth commission.’ The report will deal with events and development up to fall of the three Icelandic banks in Oct. 2008, scrutinise the regulatory and political environment and indicate possible improvement. The Lehman report is over 2200 pages; the Icelandic one will be around 2000 pages.

Icelanders have already had an insightful but short report on their banks, published in March 2008, written by Kaarlo Jännäri. The headlines it made at the time indicated that bad luck had been a major factor in their downfall. Interestingly, that’s the slightest cause, according to Jännäri. He concludes that the ‘collapse of the Icelandic banking sector resulted from a combination of several factors. An analysis of the Norwegian banking crisis in the late 1980s concluded that it was caused by bad banking, bad policies and bad luck. This saying can also be applied to Iceland.’

Jännäri doesn’t dwell on bad luck: ‘There might – just might – have been a possibility for the Icelandic banks to survive if the almost total freezing of the international financial markets had not taken place and confidence in Iceland had not been lost. Even in that case, they probably would have needed government support to maintain their solvency, as credit losses would have risen due to the deterioration of their loan portfolios. Now that the blaming game continues at high speed in Iceland, it is perhaps beneficial to bear in mind that most, if not all, Icelandic players in this game must also look in the mirror. Placing the blame solely on external circumstances is not appropriate.’

Jännäri points out weaknesses caused by the banks’ connected lending, lending to related parties, cross ownership, poor corporate culture and immature banking culture. An interesting point is large exposure: “At the end of June 2008, there were a total of 23 exposures over the 10% limit of own funds in the three large banks (6 to 10 in each bank). They constituted between 94 and 174% of the banks’ own funds. … In most cases, the assets pledged as collateral for these loans are shares in the companies in which these customers had invested the funds borrowed. Many of these companies are sound enterprises and thus the collateral has real value, but some are of more dubious quality, in particular in the present global circumstances. Even if the number of large exposures in these banks was small, it is still very unusual that banks as large as these should have so many large exposures of this nature. My judgment is that their behaviour in this regard has been very imprudent.’ (KJ’s emphasis)

No doubt, the coming report will expand on these and other issues in a story that, according to Hreinsson, will be a very bleak one. And unavoidably, the banks’ audits will be scrutinised in the coming report. Needless to say, the banks’ auditors were the large international auditing companies.

Banks that needed to be recapitalised by the state were for all intents and purposes insolvent – and insolvent companies are generally picked over. Bankruptcy can be compared to a train crash in slow motion. The attempts to salvage the train often leads to illegal actions, either to hide or delay the coming crash or to extract assets out of the company. Voters in the UK and Ireland and other countries where banks have been recapitalised with public money should be asking politicians and regulators loudly why the audits and practices of these banks haven’t been closely inspected.

*Explained on page 6 in the executive summary

** Meaning ‘seemingly valid claim’ (I had never come across this term before; interestingly, it stems from the 14th century)

Follow me on Twitter for running updates.

The outcome of the referendum on Icesave didn’t come as a surprise – but how to interprete the ‘no’? It doesn’t give much meaning claiming it’s only a ‘no’ to an agreement that is already obsolete in the sense that the Dutch and the English have been offering better terms in negotiations up to the referendum. But does the ‘no’ mean that Icelanders want better terms and conditions? Or is it a ‘no’ to paying so much as a krona? And if Icelanders don’t want to pay is it because they think they can’t afford it – or because they aren’t happy paying the bankers’ debt?

There is of course no way to gauge the exact meaning of ‘no’ but a poll, published in Iceland today, gives an indication: 60 percent claim that Icelanders have no responsibility to pay for Icesave, 37 percent that they are responsible to pay some of the debt and 3 percent think Icelanders should pay up. The question was: ‘Should Icelanders be responsible for paying back Icesave-depositors in the UK and the Netherlands?’ Since the question doesn’t specify the EU deposit insurance of €20.000 the outcome isn’t crystal clear but certainly an indication of the mood in Iceland.

The referendum doesn’t seem to have had any effect on the Dutch and the British negotiators who saw it as a domestic issue in Iceland. If Icelanders thought it would put pressure on the negotiators there is yet no sign of a referendum effect. Standard & Poor hasn’t changed the outlook on Iceland since the ‘no’ was expected.

Chancellor of the Exchequer Alistair Darling said yesterday in an interview on the BBC’s Politics Show that Icelanders should pay their share of the Icesave deposits but equally the UK should be reasonable. It was in no one’s interest to isolate Iceland.

Today’s leading article in the Independent states that Icelanders deserve empathy, not bullying, in difficult times. Bankers, not the population, were to blame for the financial meltdown. ‘Of course, sympathy should not be overdone. Icelanders did very well in the years of the banking boom, when living standards soared. And there was a gross political failure of regulation, too. The former Icelandic government gave free rein to its banks to snap up vast assets abroad financed by irresponsible levels of borrowing. It is galling to see Iceland’s right-wing opposition – which was responsible for presiding over that boom and bust when in office – now leading a populist revolt against the terms of repayment.’

It is indeed difficult for Iceland to claim it’s too poor to repay its debt – though some economists maintain that high interest rates on the loan could jeopardise the whole economy in the coming years. The irony is that many Icelanders feel angry that ‘viking raiders’ who sailed the sea of cheap money, leave a trail of bankrupt companies and yet manage to hold onto their most valuable assets – and yet, Icelanders who say that Iceland shouldn’t repay the Icesave debt seem to want Iceland to deal with its debt the way the ‘viking raiders’ do: just ignore it.

But what now? Will prime minister Gordon Brown listen to the president of Iceland who, in a BBC interview yesterday, challenged Brown to show leadership and find an acceptable solution? Maybe – but it’s unlikely. A solution that’s acceptable to the president might not be one that Brown will contemplate. The president hopes that a solution, based on negotiations the last weeks, will be found. But the British and the Dutch negotiators feel that it’s up to the Icelanders to make up their mind, not the other way around.

For the time being the British and the Dutch only offer to negotiate two variables of the Icesave equation: the interest rates and an interest free break. According to my sources, the Icelanders have been unwilling to accept to debate only these two things. The Dutch and the British also feel that now the opposition is at the table, negotiations are more difficult. There seem to be those who simply don’t want to find an agreement.

Some of the Icelandic negotiators might think that the best strategy is being stubborn and obstinate – to wait and see if better offers will be put on the table. This was a much used tactic during the ‘Cod Wars’, as Iceland extended their fishing limits, first from 4 to 12 miles and later to 50 miles. These disputes took three years each time, 1958-1961 and 1970-1973 – and both times Iceland was victorious.

At the heart of these disputes over were international principles. Though Iceland would have preferred to discuss Icesave as a principle – were the EU directives on deposit guarantees clear or not – the Dutch and the British couldn’t be dragged in that direction. Neither is there an interest within the EU. The directives on European banks operating in other EU countries will no doubt be clarified at some point but hardly made retroactive. Both British and Dutch Icesave depositors have been compensated. Icesave isn’t of any general interest in these two countries and consequently no political pressure to solve the issue.

There is no lack of empathy from abroad, plenty of pundits who have expressed sympathy for Iceland, either that they shouldn’t pay or should get better terms. However, Scandinavian politicians show tough love. Sweden’s prime minister Frederik Reinfeldt said after the referendum that though bitter for Iceland to pay debt accrued by bankers pay it had, none the less. The same has been heard from Finland, Denmark and Norway.

In Iceland, the role of Iceland’s president is a hotly debated side issue to Icesave. Previous presidents have never shown any inclination to share the political limelight. President Olafur Ragnar Grimsson had no qualms about wading right into the centre of the political arena when he refused to sign the Icesave bill, passed through parliament over Christmas. Many saw Grimsson’s move as an attempt to woo the nation after falling from grace because of his earlier intimate relationship with bankers and ‘viking raiders’

The president has criticised the Scandinavian governments for siding with Iceland’s arch enemies against Iceland. Now the Norwegian minister of foreign affairs, Jonas Gahr Støre, felt he had to teach the president a constitutional lesson, saying that the president misunderstood the situation: Iceland had to honour its international obligations and the president had no part in the debate. – It now seems that parliament can’t avoid to clarify the constitutional ambiguity has of the president’s role.

Icelanders often see their national characteristic as being stubborn and obstinate like sheep. Though it played into their hand to wait and see during the ‘Cod wars’ it might not seem a strong tactic now that the price of waiting seems to be negligible for the ‘arch enemies’ but high for themselves.

Follow me on Twitter for running updates.

Friday night I appeared on David Frost’s programme ‘Frost over the world’ on al Jazeera in order to explain the referendum. You can watch it here.

Follow me on Twitter for running updates.

Referenda have a tendency to turn into a vote on something entirely different from the issue being voted on. In November 1994 I was in Tromsö a few weeks before the Norwegian referendum on membership of the European Union. One arctic morning a taxi driver told me that he had just driven the Norwegian Home Office minister who had asked him what he was going to vote. ‘And I was more than happy to tell him that I would vote no!’ Some years earlier, he explained, the taxi drivers in Tromsö had asked the Home Office to assist them in clamping down on unlicenced taxis but got no help. ‘And now,’ the driver said vehemently, ‘the government can’t just ask me for help when they didn’t do anything to help me and my colleagues!’

For the Norwegian driver the tiny matter of EU membership on vote didn’t matter at all when voting. The issue voted on in Iceland today will not matter either to most voters since that issue isn’t something that will ever turn into reality even if voted for. Not even the Prime Minister will bother to vote – so the question is why the referendum is being held at all. The answer is that the government would then be seen to be robbing the country of its right to speak its mind. No, not on an earlier agreement with the Dutch and the British – but on the banks in general. As a friend wrote to me the other day: ‘I know the referendum doesn’t change anything but it’s good for the soul to vote!’

‘Who would have thought we would go into 2010 still discussing Icesave,’ an Icelandic friend wrote to me at the beginning of the year. Since the collapse of the banks no issue has been debated ad nauseam.

As the debate has shown so crushingly there are many sides from which to observe the issue. First some facts: Icesave was an internet account, set up by Landsbanki in the UK in autumn 2006. It opened in the Netherlands as late as May 2008 –remarkably late, considering all the warning lights. Lights not heeded in Iceland but noticed elsewhere. As has often been pointed out it was a EU directive that enabled the Icelandic banks to set up operations, i.a. Icesave, in EU countries. The assumption was that since the banks were already regulated in one EU country they could operate elsewhere.

The FSA and British politicians have often mentioned that because EU directives opened doors for the banks to set up shop in the UK there wasn’t anything UK regulators could do. I find this an exceedingly feeble argument – of course the UK regulators could scrutinise the banks had they felt the urge to. The directive doesn’t mean that foreign banks could operate here under a lighter regulation than domestic banks.

In July 2008 Lord Oakeshott asked the government ‘What steps the United Kingdom financial authorities have taken to satisfy themselves, independently of the Icelandic financial authorities, of the solvency and stability of Icelandic banks taking deposits in the United Kingdom’ and if the government had inquired into the ‘Icelandic Deposit Guarantees and Investor-Compensation Scheme behind which the United Kingdom Financial Services Compensation Scheme stands as guarantor of last resort.’ Notice ‘independently of the Icelandic financial authorities’. Lord Davies didn’t really answer the question, only outlined the rules and how they applied to Icesave and Kaupthing Edge, run as a UK subsidiary and consequently covered by the UK deposit guarantee (if only that had been the case with Icesave…)

The FSA didn’t turn its attention to the Icelandic banks until too late for the same reason that the UK banks were allowed to operate freely: a firm believe in light touch regulation and in ‘self-correcting’ markets. Icesave was seen as a supportive structure for the operation of Landsbanki, otherwise wholly dependent on fickle wholesale markets. The FSA actually thought that Icesave was just as ‘tær snilld’ (pure brilliance) as Landsbanki’s managers thought.

In early 2008, as the Icelandic banks encountered growing criticism, Icelandic politicians, bankers, central bankers and anyone who had anything to say would use every opportunity to defend Iceland. In hindsight it’s interesting to watch the Channel 4 report on Iceland from the beginning of Februar 2008 – where governor of the Central Bank David Oddsson (prime minister 1991-2004), claims the banks are strong and Iceland strong enough to defend them, even in the unlikely event they all failed; ‘it’s never like that’ an ill at ease Oddsson points out.

With repeated assurances of Icelandic state guarantees from Icelandic politicians and officials the British and the Dutch government paid their country’s depositors, thinking that Iceland would then pick up the bill. Voices for honouring these earlier guarantees have been quite feeble lately.

Writing this log I was listening to a radio interview with prime minister Johanna Sigurdardottir explaining how pointless the referendum is: the sad fact that when people finally have their say on Icesave it’s not about paying or not to pay. It’s about saying yes or no to an agreement that’s irrelevant because there is now a better British Dutch deal on offer. Some politicians have claimed that by saying no the issue can be brought to court – that’s not the case at all. The negotiations are still going on and will continue. Sigurdardottir firmly underlined that the unresolved Icesave issue is expensive for Iceland – ironically, it’s of little consequence for the Dutch and the British.

The sad thing is that the government has been too weak to convince others of the importance to finish the deal and focus on other things. Communication isn’t the strong side of Icelandic politicians any more than for Icelanders in general. Some years ago I interviewed foreigners who worked for Icelandic companies abroad: they all complained of the lack of communication within their respective companies – Icelanders saw discussions as a waste of time.

‘Now is the time for little dreams,’ someone said on the Icelandic radio earlier tonight, talking about art and crafts shop that will open up in empty warehouses by the Icelandic harbour. Every Icelander understands the implications of these words: earlier on, only big dreams were worth dreaming. Icesave rose from the big dreams – and it will take years to pay the bill.

Follow me on Twitter for running updates.