Sigrún Davíðsdóttir's Icelog

(Still) waiting for the Icesave agreement

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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.

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Written by Sigrún Davídsdóttir

March 31st, 2010 at 12:14 am

Posted in Iceland

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