Sigrún Davíðsdóttir's Icelog

Archive for December, 2010

Icesave – the (third) agreement

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Tonight, the Icelandic Icesave-negotiation team, led by the American lawyer Lee Buchheit, introduced the new Icesave-agreement at a press conference in Reykjavik. Buchheit pointed out that the fundamental assumption was that the Landsbanki assets will cover the Icesave-payment, the first €20.000 on each Icesave-account, that the Dutch and the British government paid to the deposit holders. The total amount is $5bn. Consequently, the amount may change in ISK but the currency risk is offset by the fact that most of the assets are foreign.

Early next year, Iceland has to pay ISK25bn, interests for 2009-2010. The Icelandic deposit guarantee fund already has ISK20bn. Iceland will start to pay its Icesave bill in six years, in June 2016, quite some time to prepare. If the government at that time will have to pay less than ISK45bn, £246.7m it will pay the whole amount and that ends the matter. Buchheit seems to think this is likely since the Landsbanki assets will cover majority of the payments. This unavoidably means that other creditors than Icesave depositors won’t get much.

If the amount due for the Icelandic government will be more than ISK45bn the payments will be stretched out, at most to 2046(!) – Icesave will hardly cause Iceland to default as some Icelanders have feared.

The interest rates are of great interest: 3,3% to the UK, 3% to the Dutch government, reflecting the different cost of borrowing for the two countries. The Icesave-negotiation team underlined that the outstanding money to be paid isn’t a proper loan. It’s a distressed situation, not a loan. It’s acknowledged that all countries bear some responsibility and this agreement, i.e. the interest rates, can’t be compared to the bail-out loans to Greece and Ireland. Famously, Greece is paying 5,3% on its bail-out package and the average interest rates for Ireland is 5,8%.

Now that the negotiation has ended it seems that the opposition in Althing, the Icelandic parliament, is positive towards the agreement. The opposition suggested Lee Buchheit for the job and also nominated another team-member. Now parliament has to pass an Icesave-bill – and then it remains to be seen what the president does. A year ago, the parliament did indeed pass a bill but the president refused to sign the law and sent it out for a referendum. Before that referendum was held it was already clear that it would be renegotiated.

*An English outline of the deal is here.

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Written by Sigrún Davídsdóttir

December 9th, 2010 at 11:08 pm

Posted in Iceland

Icesave: the end-game?

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The Dutch government has just announced that a new Icesave-deal has been finalised. The interests on the loan to the Dutch will be 3% and 3,3% to the UK, reflecting the interest rates in the Eurozone vs the UK. The Icelandic government will have a press conference at 6pm GMT today.

There will be those who say that this is a huge victory for Iceland since the interest rates in the previous deal was 5,5%. However, the fact that it’s 2 years since the UK and the Dutch paid the Icesave deposit-holders and that this matter has been harmful to Icelandic businesses abroad the cost of waiting is probably high though difficult to calculate.

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Written by Sigrún Davídsdóttir

December 9th, 2010 at 4:42 pm

Posted in Iceland

Ireland – Iceland

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In the Irish Independent today Thomas Molloy writes about ‘Iceland’s glasnost economy’ that Ireland sorely needs. He makes an interesting comparison (and quotes Icelog/, pointing out similarities and differences between the two countries.

I’ve earlier blogged on the Irish matters from an Icelandic perspective. It was the ‘Golden Circle’ and Patrick McKillen’s case against Nama, where Nobel Prize economist Joseph Stiglitz was an expert witness, that first drew my attention to Icelandic Irish parallels. I then realised that there are two Irish reports on the Irish situation so I read them and blogged on them. Comparing the Irish reports to the Icelandic report by the Althingi Special Investigative Commission I concluded that although exellent reports they can’t be compared to the SIC report. My point was that in spite of the reports there is a lot that Icelanders now know but the Irish don’t know.

Following the struggle of the Irish government recently I blogged if Iceland was safe but Ireland sorry. Not that I believe that Iceland is a great example to follow, Iceland couldn’t save its banks though it wanted but at least the banks, shareholders and creditors got some lesson there. And as I visited Ireland earlier this week it struck me that corruption might be a better explanation to the state of some European countries than just the fact that they are peripheral, pointing out the correlation between crisis and corruption.

These four Icelogs on Ireland vs Iceland underline that although each country has its own characteristics the parallels are quite illuminating as to the origin and causes of the situation Europe is in.

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Written by Sigrún Davídsdóttir

December 9th, 2010 at 11:51 am

Posted in Iceland

The clear correlation between crisis and corruption

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I’m in Dublin these days. Before going I had been following news from Ireland rather carefully: it’s a small country and there is a natural affinity between Iceland and Ireland. The word ‘cronyism’ certainly has popped up once in a while in the international reporting on Ireland but it’s come as a surprise to me that the word on everyone’s lips here is ‘corruption’ – the Irish, those who have no interest in denying it, largely see the political life as fairly corrupt.

It’s not just rumours, the ex-Taoiseach (prime minister) Bertie Ahern was forced to resign two years ago because of persistent corruption charges. Most Irish know by heart what he said, when interviewed on corruption charges: “What I got personally in my life, to be frank with you is none of your business. If I got something from somebody as a present or something like that I can use it.” Brian Cowan who replaced Ahern abolished the tent at the Galway races: the tent where the political leaders of his party, Fianna Fáil, had traditionally met with the property developers, the core of the Irish business community, for fundraising.

There has been a deluge of Irish crisis books. Today, at the Hodges Figgis bookshop I counted nineteen titles. Snouts in the Trough; how we have all been betrayed by politicians, bureaucrats and bankers by David Craig tells you what many Irish think of these three social groups. I’m currently reading Fintan O’Toole’s bestseller since last year: Ship of Fools; How Stupidity and Corruption Killed the Celtic Tiger. Quite interesting to see that financial fraud is nothing new in Ireland. He writes on cases of blatant fraud going as far back as the ‘70s that went ignored, un-investigated and ultimately unpunished.

The point of interest, in a wider context, is the continuity. As to Iceland, I have emphasised that is wasn’t the privatisation of the banks, 1998-2003, that led to the collapsed of the Icelandic banks. The threads go much further back, to the unhealthy atmosphere where the political parties divided and reigned, meted out money and favours to the undeserving through the politically controlled state banks. Loans were given on a regular basis according to political allegiance not business acumen.

Iceland and Ireland are two countries badly hit by the present financial crisis – but so are Spain, Portugal and Italy. Belgium doesn’t seem to be doing too well and everyone knows what happened in Greece. Some classify these countries (minus Belgium which so far isn’t officially a country in crisis) as the peripheral countries. Belgium doesn’t really fit in there, being right at the heart of Europe.

There is, however, another criterion that fits them all: corruption. From observing Iceland and now Ireland I’ve come to the conclusion that corruption is an important factor as to why these two countries – and apparently other European countries badly hit by a financial crisis – are suddenly so badly off.

What characterises countries with rampant corruption and cronyism is that money isn’t distributed on merit but according to whom you can do favours and receive in kind. When these countries were suddenly awash with money there were no channels but the corrupt channels – and the money was to some/a large extent wasted on ill-conceived projects. All these countries are dealing with mountains of bad loans. What a corrupt country lacks is a mechanism to distribute money and projects according to merit, business sense and according to what’s best for society. There is nothing in place except the corrupt channels.

All these countries suffer from a fairly poor civic sense, if you compare them to countries like the four Scandinavian countries or Germany. Tax evasion is, if not a national sport, then something that people in general sympathise with or don’t condemn. Scandinavia, Germany and France have a fairly strong believe in the authority of the state and its right to tax and rule. In his book on the Mafia, Cose di Cosa Nostra, Giovanni Falcone wrote that the Mafia thrives where the state isn’t present. The same goes for corruption – it’s in those corners of society where the state isn’t present with its rule of incorruptible law. The weaker the state the more space there is for corruption.

Iceland – and probably the other countries as well – had been more or less able to handle its own affairs while its economy was self-contained and mostly fuelled by only its own exports. It was generally spending what it earned or when it went out of kilter it managed to regain its balance. An Icelandic bank went bust in the 70s but the country survived it. In all the crisis-stricken countries domestic banks have grown enormously by fetching money on the international markets and lending them to their local customers. When the ability to fetch money abroad arose money flowed into bad deals, lousy projects and private clients were allowed to borrow far beyond their means: Iceland wasn’t the only country where the banks rushed onto the mortgage market, offering 100% or even 110% mortgages thereby heating up the market to a boiling point.

These countries tend to have toothless, often complacent, regulators that certainly in Iceland neither had the expertise nor the proper understanding of complex modern banking. The state in these countries isn’t strong and consequently the state institutions are weak as well.

I don’t think it’s a coincidence that the European countries worst hit by the crisis are corrupt countries with weak state institutions. The crisis in each of these countries has some aspects unique to each country. The common factor, however, is corruption and money, plenty of money, coming from abroad.

The countries that have so far apparently been fairly resistant to the crisis are countries like Germany and France, Denmark, Sweden, Norway and Finland. Outside Europe it’s a country like Canada. All of these countries have a long history of strong institutions and a strong state with a strong sense of civic values.

UK and the US are somewhat in a group of its own – big economies where the banks definitely did overstretch but where the state has so far been able to prop them up with taxpayers’ money.

Although Germany and France have, in terms of their banking sector, been a model of restraint their banks have been unrestrained abroad. German and French banks, as well as UK and American banks, have gone on a lending spree abroad, lending to the countries that are now so crisis-stricken. There is a lot of anger here in Ireland towards the EU for forcing Ireland to save its banks so as not to wreck havoc for French, German and British banks. It’s always easier to be upset with others, in Iceland the anger has been vented against the IMF, but there is an element of truth in this that especially French and German banks did in some ways go abroad to do things they couldn’t do at home. – The German and French banks are like kids who at home behave impeccably but who take out their pen knifes and cut up the furniture when they are visiting their friends.

In terms of Iceland it’s inconceivable that a bank like Deutsche Bank, lending to all the Icelandic banks and thus with a certain insight into the standing of these banks, showed so little restraint. German banks are by far the largest creditors to the Icelandic banks. And it’s irritating beyond words that the banks show so little understanding of their own actions and upsetting that governments aren’t showing any move towards doing the only thing that will go some way to restrain the banks: to split them up.

In Ireland I keep hearing that the crisis here isn’t just an economic crisis but a crisis of moral and social understanding. The same can be said for the other European countries fighting with the consequences of crisis. It won’t be enough to get banks lending again. These countries will have to take a long and hard look at their institutions and their sense of civic duties. This crisis isn’t just about money but about moral.

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Written by Sigrún Davídsdóttir

December 7th, 2010 at 2:01 am

Posted in Iceland

Iceland: bubbling with creativity

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A new report, recently published shows that the creative industries in Iceland bring more to the Icelandic GDP than aluminium and other heavy industry. And there is more to Iceland than crisis and darkness as DazedTV discovered when it went to explore the cultural scene in Iceland. Watch and see the arty side of Iceland and the artists’ view on life in Iceland at the present.

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Written by Sigrún Davídsdóttir

December 3rd, 2010 at 10:39 pm

Posted in Iceland

Landsbanki ResCom makes a move against ex-managers and PwC

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At a long-awaited creditors’ meeting today, Landsbanki ResCom and Winding-up Board told creditors of investigations done by Deloitte on loans and the last months in the running of Landsbanki. They have come up with quite a bit of things that have been reported to the Office of the Special Prosecutor.

Since early this year there have been rumours about the Deloitte investigation and what it was un-earthing. At first, it seemed that Deloitte would write a report that would be published. That’s not the case so far and exactly what Deloitte discovered isn’t quite clear but a few things have emerged.

The week up to the collapse of Landsbanki the bank itself bought its own shares worth ISK40bn. In the preceding months it bought its own shares for ISK10bn. Definitely something suspicious about this since there was evidently no market for the shares. Whoever wanted to sell couldn’t find a buyer. The feeling here is that some were luckier than others. No names have surfaced but it’s easy to allege that here the bank would have bought shares of some of the major shareholders and clients.

The Resolution Committee and Winding-up Board have already initiated actions for damages against three former managers of the bank, Sigurjon Arnason, Halldor Kristjansson and Elin Sigfussdottir,  concerning events during 2008 that caused losses for the bank and its creditors of ISK 30-35 billion. The losses arose from two events: by not enforcing a bank guarantee of ISK 18 billion, provided to secure debts of the investment company Grettir, owned by Bjorgolfur Gudmundsson, one of the bank’s two major shareholders (the other being Bjorgolfur Thor Bjorgolfsson his son): The other loss stems from loans granted to Straumur Investment Bank, where father and son were the largest shareholders, at the beginning of October 2008.

According to news in Iceland tonight these loans were without a guarantee. However, there were plenty of other loans without guarantees, i.a. to Baugur and to Straumur. The question is why some loans are more conspicuous than others. In the Icelandic business paper Vidskiptabladid tomorrow there will be allegations that a Landsbanki investment fund broke its own rules by buying a bond from Gudmundsson. The OSP might be investigating this issue.

On Ruv news tonight it was also claimed that the ResCom and the Winding-Up Board will be holding Landsbanki’s auditors, PwC, responsible for giving a wrong perception of the bank’s financial standing at the end of 2007 and then later in 2008. Glitnir Winding-Up Board is i.a. suing PwC in New York for their role in Glitnir. A legal action might ensue.

The interesting thing here is that the ResCom neither seems to implicate the bank’s board nor its other major shareholder Bjorgolfur Thor Bjorgolfsson.

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Written by Sigrún Davídsdóttir

December 1st, 2010 at 11:58 pm

Posted in Iceland