Sigrún Davíðsdóttir's Icelog

Some Icesave aspects

with 5 comments

Now that the president of Iceland has sent the Icesave bill for a referendum, Icesave is again being debated in Iceland though I sense that it’s not the same burning issue as earlier. Here are some of the aspects that attract the greatest attention.

First of all, was the president within his legal rights to send the bill off to a referendum instead of signing it? Seventy percent of MPs, from all parties, voted for the bill, meaning that here, according to some, president Olafur Ragnar Grimsson is going against the lawful rule of parliament. However, Grimsson points at another vote in Althingi, alongside the bill: the Althingi also voted on a referendum.

Here the vote was narrower. I.a. the Independence Party, in opposition, voted for a referendum. But in an interview following Grimsson’s decision the IP leader Bjarni Benediktsson said that although he had been for a referendum he thought that it had been up to Althingi to decide on a referendum, not the president. He accepted that Althingi vote went against his wish but wasn’t happy with the president’s decision.

When the president presented his decision he spoke of two legislators, Althingi and the people. Legal experts contest this definition: Althingi is the legislator, voted in by the people. The president also pointed out that it’s the same Althingi that voted for the bill now as a year ago, as if that weakened the vote. But this is just his feeling, not supported by the constitution.

The general feeling among Icelandic legal experts is that by his decision the president has redefined his power. The president has, according the constitution, the right to send bills to a referendum. No president had done it until Grimsson, in 2004, sent a hotly debated bill on media ownership (that many saw as The Independence Party going against Baugur’s grip of the Icelandic media) to a referendum. The media bill was then consequently withdrawn. Then it was the Icesave bill last year – and now again. The move now is widely questioned since this time the Icesave bill had a wide support in Althingi.

It’s clear that the EFTA Surveillance Authority keeps an eye on the situation. The EFTA court will not rule on the Icesave agreement itself, that’s beyond its remit. Its focus of interest is the decision by the Icelandic government from Oct. 2008 to differentiate between depositors in Iceland and abroad (this decision is often referred to as being part of the Emergency Act, passed on Oct. 6 2008 but this differentiation is actually not part of the Act).

Icesave keeps on attracting attention abroad. Yesterday, WSJ wrote on the ‘Icelandic Freeze-Out’, pointing out that this time polls indicate, as pointed out earlier on Icelog, that Icelanders might vote for the agreement. WSJ then goes on:

“A yes vote in a referendum likely to be held in early April would leave Iceland in hock to London and The Hague for as long as 35 years—and this because the British and Dutch governments decided, of their own volition, to bail out their own citizens. (My underlining.)”

It’s highly questionable how long the payments will stretch out, 35 years is the maximum but it seems that the Landsbanki assets will go a long way to cover the Icesave debt though there is some exchange risk involved. It’s however completely wrong that the British and Dutch governments decided, on their own, to pay their respective Icesave depositors.

The Icelandic government kept saying that the deposits were completely save and guaranteed by the state, as did the governor of the Central Bank David Oddsson, earlier PM and now editor of Morgunbladid, an Icelandic newspaper, in early February 2008. After the collapse of the banks, Icelandic ministers met with their opposite numbers in Brussels early November 2008 and reiterated their intentions to pay. At the time, the IP and the social democrats were in government. The IT changed tone only when they landed in opposition in March 2009. The present government is led by the social democrats, with the Left Green at their side.

Many Icelanders feel that the president’s decision is highly motivated by his past: he was an energetic cheerleader for the Icelandic banking ‘Wunder,’ travelled to open bank branches and mixed with the bankers and businessmen now tainted by alleged fraud. By putting himself so firmly against the big nations who are squeezing the little one he might well be positioning himself to run for his fifth term next year, an unprecedented length of time. There is no legal limit to an Icelandic president’s time in office.

The president has pointed at the benefits that his decision had last time: a much more favourable agreement. However, it’s come at a cost to businesses but it’s a cost that’s not easy to calculate. Right now, the CDS has again shot up. There might be some Icelanders who shrug their shoulders, refusing to pay. Others might be worried about the consequences of an international isolation and the cost of being seen as a people who flip flop and doesn’t honour its words.

As to the political consequences, it’s difficult to say. If the referendum rejects the bill the government really has run out of options since the UK and the Dutch government will not try negotiating a fourth time. Could the government resign? Though nothing is impossible, it’s not terribly likely since the opposition wouldn’t be keen to wade into the Icesave mess.

For the time being, the most exciting part of the political scene is the Independence Party. Some feel that Benediktsson showed great courage to support the agreement (though admittedly the party had a hand in it, having supported Lee Buchheit to lead the negotiations). Die-hard followers of David Oddsson (now fewer than earlier from his own party but with some unexpected support from the far-left Icesave-opposition) will support his attempts to drive Benediktsson, who has stood up to Oddsson, out of office though there is no apparent leader-in-waiting. Oddsson, earlier no fan of Grimsson, is now writing laudatory editorials about him, underlined by the messianic photo of Grimsson on Morgunbladid’s front page on Monday.

The intense, and incredible, attention on Icesave has detracted attention from other issues that should have been discussed more, such as the state aid to the banks and later to other financial institutions. If lucky, the Icelandic state might have to fork out ISK50bn, to foreign Icesave deposit holders (but more if less lucky and the exchange rate falls). So far, the government has put ca ISK26bn, €162m, into VBS, a bank that survived Landsbanki by 8 months because Landsbanki had financed it far too lavishly (another story). Eight months later, VBS was bust. ISK12bn went into the insurance company Sjova (any national harm that an insurance company would go bust?) and now enough billions into collapsed building societies, bringing these numbers close to a possible Icesave payment. I leave it to the readers to contemplate whether paying foreign deposit holders is more of an issue than saving Icelandic financial fiefdoms.

Icesave isn’t formally linked to Iceland’s EU application but EU can’t disregard the issue. Most people I’ve spoken to do think that EU will want to see an end to the dispute before the application is processed further. At a press conference yesterday morning, Denmark’s foreign minister Lene Espersen aired her concern if the referendum would put an end to an agreement. Iceland would have to settle the dispute with the Dutch and the UK.

The IMF seems to be indicating that the currency restrictions can’t stay in place forever and should be lifted as soon as possible. With Icesave in limbo it won’t happen. It can be argued that the Icelandic currency (or the non-currency as a friend of mine says) is now artificially high, making the Icelandic business environment a Wonderland, cut off from reality. The currency restrictions were seen as a temporary necessity for Iceland to adjust after the crash. At some point, Iceland will need to adjust to the real world.

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Written by Sigrún Davídsdóttir

February 24th, 2011 at 11:24 am

Posted in Iceland

5 Responses to 'Some Icesave aspects'

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  1. I have to confess that I’m somewhat confused! Perhaps you can help me sort it out:

    It was my understanding that the decision of the British goverment to invoke the terror laws and freeze the Icesave assets, was a reaction to a statement made by Geir Haarde, suggesting that the state of Iceland would only guarantee deposits made by its own citizens. From what I could gather, this then led the british goverment to issue a claim that they would cover the deposits of all british citizens.

    However, if I’m reading you correctly, you are saying that it was only after Johanna & co. took over that official icelandic standpoint became that they would only cover for their own? How then did Iceland get into this mess with the britsh and dutch goverments?

    Thanks in advance frá útrásar íslendingi sem finnst erfitt ad fylgjast med 😀


    24 Feb 11 at 2:09 pm

  2. Hi traveller, you wouldn’t be the only one not to understand:) We still don’t quite know why the British government felt it didn’t have any option but to freeze the Landsbanki assets. It might have been, as you mention, because the Icelandic government led by Geir Haarde decided to differentiate between depositors at home and abroad. It might also have been because of general lack of trust – remains to be seen.

    No, it wasn’t the stance towards this issue that changed with the government that came to power in early 2009. What changed was the position that the Independence party took. In government, they had declared their will to pay the €20.000 minimum deposit guarantee. However, they never got so far as to finalise any Icesave agreement.

  3. A short note on Iceland today on Krugman’s blog –

    Rajan P. Parrikar

    26 Feb 11 at 5:01 pm

  4. Thanks Rajan, hadn’t noticed – more on Iceland Ireland coming up…

  5. It is widely thought that the British Government was very quick to promise to bail out their citizens mainly for this reason:

    The Government knew full well that Landsbanki, despite the excellent reports they had ‘experts’ and academics produce and despite the AAA ratings, was short of liquidity.

    It is easy and common practice in these days of unscrupulous Bankers to pay for the sort of report the Bank needs.

    The whole reason the Icesave scheme was conceived, was to get foreign currency liquidity FAST.

    Once the irresponsable, wreckless banks inevitably started to fail, the British government could not at that late stage start disclosing the Capital Adequacy Ratio insufficiency, nor could they say that the Landsbanki liquidity had fallen below the prescribed regulatory minimum at that time.

    the British Government had to promise to pay all the British in order that they should not find out what the Governement had been aware of and had turned a blind eye to.

    This will surely come out in the Icelandic Investigations.

    It does seem very unfair that the Icelandic people should have to pay for the Bank robbers.

    If they are not punished, the whole system will continue and there will be another crisis in the East next time.

    America and Britain should be ashamed of what they have allowed their Bankers to get away with.

    Iceland should set the example and shame America and Britain, by punishing their Bankers!

    Ordinary hard-working people across the world should have the courage to stand up and say NO to the greed of the Bankers.

    Rachael Williams

    1 Mar 11 at 6:31 pm

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