Sigrún Davíðsdóttir's Icelog

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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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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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/uti.is), 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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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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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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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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Everyone who follows Icelandic affairs will be interested in the activities of the Rowlands, David and Jonathan, who took over Kaupthing Luxembourg, turned it into Banque Havilland and who are now Kaupthing’s administrators through the ‘bad debt’ structure Pillar Securitisation.

A further insight into earlier contacts with Iceland, in this case Straumur Investment bank, have transpired through a court case in London. As Rowena Mason has reported in the Telegraph, Jonathan Rowland is now being sued by Straumur. Three years ago, shares in a company called Xg Technology were transferred to Rowland but the £2m payment never arrived. According to the Rowland camp it turned out that sale of these shares was restricted, Rowland hadn’t been informed and they were consequently worth a lot less than the sum demanded. Straumur now claims that the money is owed by Rowland, no matter what.

There is a whole story out there about Xg – they claimed they had developed a sensational radio technology that has never been realised and their value has plummeted from earlier heights. There is a blog with Xg stories – it makes a riveting read and goes some years back. One of Xg’s directors is an Icelander called Palmi Sigmarsson who was connected to a Swedish company, Spectra, also operating in Iceland but without any apparent success.

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According to the Icelandic daily Frettabladid, earlier owned by Jon Asgeir Johannesson but now by his wife, Johannesson has been questioned this week by the Office of the Special Prosecutor. He met up there with his solicitor Gestur Jonsson who lead his defence team in the so-called Baugur case, 2005-2008. Johannesson denied any information as to the subjects he was questioned on.

Others who have been called in this week, Katrin Petursdottir a former member of the Glitnir board and Oskar Magnusson an ex-CEO of the insurance company TM, have both said they were asked questions about dealings regarding TM involving Johannesson.

As far as is known this was the first time that Johannesson was called in for questioning by the OSP. In Iceland, Johannesson is generally seen as one of the main players in that part of  Icelandic business activities that came crashing down with the banks in October 2008.

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Following the course of events in Ireland – a struggling government, the national sentiment refighting an old war of independence, the international media descending on Ireland – is a déjà vu for an Icelandic observer. Iceland went through it all two years ago. The events then and events and development since provide some interesting points of comparison.

Through 2008, the Icelandic government tried to raise money abroad but to no avail. The Bank of England offered assistance to disentangle the crisis that, according to the bank, was far too large to be solved with the couple of billions of dollars that Iceland was seeking. At the US Fed Tim Geithner told Icelandic officials that a loan of a couple of billions would indeed only make things worse since it would demonstrate to the markets that Iceland didn’t realise the extent of its problems. Nothing less than ten billions would do and the US Fed wasn’t a willing lender.

Towards the end of September 2008, Glitnir, the smallest of the three Icelandic banks, turned to the Icelandic government for help. Glitnir couldn’t meet its repayment. The government’s first step was to attempt saving the bank by taking over 75% of its shares. It didn’t take more than a few days to make it crystal clear that even the smallest Icelandic bank was too big for Iceland to save. And anyway, it wasn’t enough: the two other banks collapsed as well. Later, some smaller banks and building societies have gone the same way.

Because of the enormous size of the Icelandic banking sector, compared to the Lilliputian country, the government couldn’t save the banks. That it would have liked to is clear but Iceland really didn’t have the choice: bankruptcy was the only viable option. It took a heroic effort to make the transition from the old banks to the new ones as smooth as it was. The payment system didn’t go down and deposit holders had access to their money all along.

The three Icelandic banks were split up: the foreign debt was stacked into the bankrupt banks, under the auspices of resolution committees, the domestic debt went into the new banks founded on the ruins of the old ones.

In this way, deposit holders were safe and saved, bond holders felt the pain and the loss. And why not? Bond holders, those who lent money to the Icelandic banks, are mostly other banks and financial institutions. They should have known better than to heap loans on banks in a tiny country. But they probably didn’t even need to worry too much about their losses. In most cases their loans will have been insured. There must be some smarting insurance companies out there.

‘What’s the difference between Ireland and Iceland? One letter and six months.’ This joke circulated when Iceland collapsed two years ago and has now been widely quoted. ‘One letter’ is correct, the time wasn’t exact (Ireland had actually declared some weeks earlier that it would save the banks, gave them all a guarantee in January 2009 but it never was enough) but the major difference is that Ireland saved its banks, Iceland didn’t.

As a consequence, the cost of the Icelandic bank collapse is mostly born by foreign banks that were ignorant or reckless enough to lend far too much to the Icelandic banks (and the insurance companies that insured the loans). The cost of the Irish bank salvation is born by the Irish taxpayer. And what a burden it will be!

The most serious cost for the Icelanders is that as the banks collapsed their krona collapsed though its decline had already started much earlier in 2008. Part of the ingenuity of the Icelandic banks had been to convince ordinary people, with all their income in the local currency, to take out mortgages and loans in foreign currencies. Consequently, many Icelanders are struggling to meet repayments of forex loans that have shot up (and this problem has taken up most of the attention in Iceland).

The krona has been gaining strength but this, as well as rising unemployment (now just under 5%, staggering on an Icelandic scale, enviable for most other countries), have been the gravest cost to Icelanders. With a domestic currency that was to some extent squeezed at home by foreign currencies Icelanders were hit by a currency crisis.

What Icelanders didn’t know in October 2008 was the extent of bad loans and dubious corporate governance in the banks – the loans to the major shareholders and to bankers, often without any guarantee and on terms very favourable to the borrower but unsustainable for the banks. My feeling is that the Irish don’t quite know the extent of bad loans in their banks. The Irish state stepped in and bailed out banks without the cost being at all clear.

I’ve earlier pointed out that the same unsavoury tricks used by the Icelandic banks to help their largest shareholders and bankers have been used by at least one Irish bank. I find it profoundly improbable that this would be just a singular incidence. The Irish bankers drove the reckless lending into the property market as if houses peopled and sold themselves. The Irish bankers who didn’t see that they were playing with the financial safety of their fellow countrymen are, to a large extent running the banks. In Iceland, there have been major changes at the level of top management but many Icelanders will still feel that the changes haven’t been wide-reaching enough.

A major difference between Iceland and Ireland – and for that matter the rest of the world – is that Icelanders now have a hugely clear insight into i.a. the Icelandic banking system, the economic policy and the events that led to the demise in October 2008. There is the Althingi Special Investigative Commission’s report (unfortunately not yet translated into English except for a few chapters). No other country has, so far, probed and investigated these matters like Iceland has. Two reports have been done in Ireland but as I’ve already demonstrated these reports leave plenty to be desired and are nowhere near as thorough as the Icelandic report. It will be interesting to see that the coming Peter Nyberg report will be like.

In the wake of the Icelandic collapse some Irish politicians mentioned with horror that certainly they wouldn’t let Ireland go down the same route as Iceland. In reality, it wasn’t such a bad route and Iceland will most likely wind itself out of its bend more quickly and less painful than Ireland. Icelandic tax payers won’t have to work their socks off for foreign bondholders.

Being an Icelander, I can shrug my shoulders and say that at least Icelandic and foreign banks and bankers were taught a lesson in October 2008. It surely wasn’t a lesson that the Icelandic government wanted to teach them. It would have liked to save the banks but couldn’t – that opportunity had passed sometime in 2005. If I were Irish I would be furious that the recklessness of the Irish and the international banking world has now been rewarded by a bail-out that Irish tax payers have to fund.

But being a citizen of the world I am furious that there isn’t an outcry for splitting banks apart to make it a harmless event if a bank can’t close its books. Everything has been tried – the banks have been pleaded with, asked and begged to save the rest of the world from their dangerous activities. Instead, they raise their bonuses and keep on as if nothing had happened. And it hasn’t. The bail-outs take the risk out of the system, the recklessness can go on – and taxpayers can rest assured that they will keep on toiling away a certain amount of hours every week to keep bankers happily at what they have shown themselves to be brilliant at: playing with fire and setting the world ablaze.

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It was a misunderstanding that the Office of the Special Prosecutor had ended the questioning of high-profile individuals connected to Glitnir. Saturday, the questioning was still going on. However, it seems that the OSP has now finished questioning Glitnir’s ex-CEO Larus Welding. He was questioned over two days, the first day for eleven hours. Dozens of Glitnir’s employees have been questioned.

The board of Saga Investment Bank still has full confidence in its CEO Thorvaldur Ludvik Sigurjonsson although he seems to be suspected of participating in the allegedly illegal deals at the centre of the investigation. Many are now wondering about the soundness of keeping him since it reflects badly on the bank and its trustworthiness to have a CEO who is being investigated for financial irregularities.

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