Sigrún Davíðsdóttir's Icelog

Today, ESA has approved of Icelandic amendments to the rescue plans for small savings banks. Further, ESA has given temporary approval of plans to recapitalise Byr, another savings bank.

The Icelandic saving banks have been part of the Icelandic financial system for over hundred years. These small saving banks are regional banks, intertwined with the local economy. However, during the boom times, they played some seriously unwise games with the Icelandic tycoons and the banks, helping the banks to get money out of the Central Bank via repo deals. Their demise has given insight into ill advised investments and unsavoury connections to local fiefdoms. Althingi has been preparing a bill to investigate the saving banks but no one seems to be in a hurry to get the bill through and start digging.

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Trade minister Arni Pall Arnason has said to the Icelandic media that Iceland will respond to ESA’s inquiry re deposit guarantee and non-discrimination in the coming 2-3 weeks. When I spoke to ESA director Per Sanderud this weekend he said ESA wasn’t setting any deadline for an answer but expected a speedy answer. I’m not sure that taking 2-3 weeks to answer will be defined as speedy.

My sources tell me that Iceland’s answer to ESA was drafted already last summer – ESA originally sent its inquiring letter in May 2010, set a deadline in July but didn’t insist on an answer as negotiations were ongoing. There shouldn’t be much need for Iceland to ponder over it. Except that, as an Icelander who lived abroad for many years, once mentioned to me: ‘Icelanders find it almost physically impossible to commit to anything, always want to leave some doors open.’

The doors to Icesave seem to be closing, one by one. But there is still the ESA door.

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President Olafur Ragnar Grimsson has taken a lead in speaking on Iceland’s behalf as to what can be done now post-Icesave no. In an interview with Bloomberg he spoke of the assets of Landsbanki, their value, and that they could and would be used to pay out Icesave. He is propagating the idea that Iceland can just pay, whatever suits Iceland, no matter what.

Here is an interesting comment – posted on an earlier Icelog by Mike, a UK Nordic financial analyst – on the president’s stance:

I have heard the Bloomberg interview and the President doesn’t do as well as you think – he keeps referring to something that has very little to do with Icesave itself, namely the residual value of Landsbanki’s assets.

At the very beginning (in 2008) an offer was made to the British and Dutch authorities which amounted to Iceland saying “There you go, take over Landsbanki and take the Icesave money from that.” The reply from the British and Dutch was a polite “No”. They pointed out that there were other claimants against the Landsbanki assets and it wasn’t a simple matter to establish that a deposit guarantee fund could jump the queue of the other claimants.

Grimsson appears to be repeating this line in the interview. In effect he is saying that the British and Dutch governments can take the money from the Landsbanki estate – but he forgets that that money is actually owned by other people. In the interview he is giving away something which is not his to give away. He is conflating the Icelandic state with the Landsbanki Resolution Committee and as we keep being told: Iceland did NOT nationalise its banks, so the government can have no say in how the Landsbanki assets are assigned to the claimants. Thus the President sounds generous but actually he has nothing to give away.

The whole situation has been made worse by the Emergency Act of 2008 which reordered the priority of the claimants – this is a highly controversial move and strong arguments can be made that it breaks a host of other laws relating to property rights and discrimination. The fact that the act is essentially retrospective makes it even worse.

The various claims against the Landsbanki estate are currently going through the courts.”

De Jager, the Dutch minister of finance, yesterday presented a letter on Icesave to the Dutch Parliament:

Dear chairman,

On April 9, the Icelandic people rejected the agreement about Icesave, signed by negotiators of Iceland, the Netherlands and the United Kingdom in December 2010. This outcome is a real disappointment both to me and to the Icelandic government. After a process of negotiations lasting two years, there was an agreement that could count on a lot of support from the Icelandic government. The agreement would have made it possible for Iceland to put an end to this ongoing issue, under favorable conditions. Sadly, this opportunity was not seized.

The time of negotiations is now over. The lack of a solution forces us and Iceland to let the law take its course. Now that it is clear that the parties involved will not be able to come to a solution, the EFTA Surveillance Authority (ESA) will probably resume its infraction procedure against Iceland. On May 26 2010, the ESA ruled that Iceland is obliged by the EU guidelines regarding deposit insurance systems to compensate the Icesave account holders up to the sum of €20,887. From this it can be concluded that Iceland is obliged to repay the Netherlands and the United Kingdom, who have advanced this money.

When the Iceland government decides not to adhere to the ruling of the ESA, we will go to the EFTA Court. The Netherlands and the United Kingdom will support the ESA in this case, if so desired. The Netherlands itself does not have a legal position at the EFTA Court.

This week there will be a meeting between my Ministry and representatives of the ESA. In this meeting, we will also call attention to the complaint filed at the ESA by the 100,000+ group, about which there has been no reaction from the ESA so far.

The Netherlands will remain in close contact with the United Kingdom about steps to be taken regarding Icesave.

Together with the UK we are also studying the procedure for an out of court settlement made possible by article 111 of the Treaty. In this procedure, the Commission will play a key role.

The outcome of the referendum has no influence on the payment of funds from the assets from Landsbanki to priority creditors (among them the United Kingdom, the Netherlands, public authorities and the 100.000+ group). The Icelandic government expects that a first payment can be made later this year, that would cover 30% of the amount owed to priority creditors. The curators estimate that they will eventually be able to pay 90% of the nominal claims of priority creditors from the assets. 
Apart from the financial implications for the United Kingdom and the Netherlands, the Icesave file can also have grave consequences for the functioning of the internal market for financial services. Therefore I have faith that both the ESA and the European Commission will do all they can to find a good solution for this issue.

Sincerely,

Mr. drs. J. C. de Jager 
Minister of Finance

Yesterday, Prime Minister Johanna Sigurdardottir presented an Icesave report in Althingi, concluding:

“The Icesave dispute will be solved in the end, whether in one, two or three years. And when the possible responsibility of Iceland is clear, Icelanders will do everything possible to honour their obligation.”

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This morning, Danske Bank’s chief economist Lars Christensen introduced the bank’s latest report on Iceland, Iceland: Recovery in Uncertain Times. The key points are:

* The Icelandic economy is now recovering after the collapse of the Icelandic banking sector in October 2008. We believe that the recovery could prove sustainable, as macroeconomic imbalances have been reduced significantly.

*We expect Icelandic GDP growth of around 3-4% y/y in the coming two to three years, but growth could surprise on the upside if certainty about the Icelandic funding situation increases.

*While the recent “no” vote in the second Icesave referendum adds to the uncertainty surrounding the Icelandic recovery, we think it is unlikely to derail the recovery.  *Inflation is likely to continue to ease and should stay below the Icelandic central bank’s inflation target of 2.5% through 2011-13.

*PPP estimates indicate the ISK is around 25% undervalued versus the euro on an onshore basis. The offshore ISK rate is much more undervalued.

In his address this morning, Christensen made fun of president Olafur Ragnar Grimsson who has been on a roll on Bloomberg e.a., berating the rating agencies. It doesn’t improve the situation to scold the rating agencies and say to foreign investors that they aren’t needed. Christensen said it was important for Icelandic officials to step forward and say they will respect the ruling of the EFTA Court.

Christensen became infamous in Iceland when Danske Bank published its report on Iceland where many of the shortcomings in the economy were underlined. That analysis turned out to be all too true. Now his message was: “Spring is in the air. Be positive.”

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In the early afternoon yesterday, Steingrimur Sigfusson Minister of Finance said on Ruv that in spite of it all, the message from Iceland was that Iceland still wanted to pay the Icesave debt and talked about the importance of this message getting through.

Later in the afternoon, the president of Iceland Olafur Ragnar Grimsson held a press conference. In his statement* he declared the Icesave referendum, which he instigated, to be a triumph of democracy, setting an example to the rest of the democratic world. Now that Icelandic voters have declared that they don’t want the Icelandic state to top up what the Landsbanki assets might not cover of the Icesave debt to the UK and the Dutch, the world should, according to the president, take notice and accept that Icelanders will pay as far as the Landsbanki assets stretch. What and how to deal with eventual outstanding debt, not to mention interest rates on the two loans, the president doesn’t say but the hint is that because this was decided by the people in a democratic way the Dutch and the British should respect this decision.

Earlier, the president thought that Icelandic bankers and businessmen had great things to teach the world. That didn’t go all that well but now Icelanders have new great things to teach the world: democracy.

The Irish and the Greeks could put this newfound example to practice. They could hold a democratic referendum, asking if the respective countries should pay their creditors. If the voters said ‘no,’ which they just might, these two countries could tell their creditors that now there was a democratic decision on behalf of the electorates – and sorry, ‘we are only going to pay as much as we want to pay.’ It couldn’t be more democratic – and consequently, it couldn’t be more right, just and fair.

*For those of you who can read Icelandic, the Icelandic version contained peptalk to the Icelandic nation on the referendum’s beneficial effect on the nation’s self-assurance. Comparing the two versions is quite interesting. In the English version, the president i.a. points out that the Icelandic position has gained support in the FT and the WSJ.

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When all votes have been counted, 69.462 voters, 39,7%, said ‘yes’ but 58,9%, 103.207 voters, said ‘no.’ In all, 177.559 manns voted.

Superstitious Icelanders will notice that right now there is close to hurricane in Reykjavik and vicinity. With the wind blowing with amazing and exceptional force from this direction, someone pointed out on an Icelandic blog, the storm will be particularly strong at Bessastadir, the official residence of the Icelandic president.

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UK Chief Secretary to the Treasury Danny Alexander said on the Andrew Marr show* this morning that he was disappointed the the Icesave agreement had been rejected in the referendum. Now, the UK Government would have to find other means of getting the money back and would discuss the matter with the Dutch Government.

Dutch Finance Minister Jan Kees De Jager is equally disappointed with the results of the Icesave referendum. De Jager remains confident that the money will be paid and that Iceland will have to honour its international obligations. “I am very disappointed that the Icesave agreement did not get through. This is not good for Iceland, nor for the Netherlands. The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide.”

It is clear that EFTA Surveillance Authority, ESA, already in the process of inquiring into Iceland and the deposit guarantee scheme, will now continue its inquiry into Iceland’s position on the deposit guarantee scheme. As pointed out in an ESA press release in May last year, “the Dutch and British authorities stepped in to compensate most deposit holders in Icesave’s Dutch and UK branches, the Directive designates Iceland as being under the obligation to provide the minimum compensation of  EUR 20.000 per depositor. The Icelandic Government has in a letter to the Authority argued that it considers setting up a guarantee scheme to be enough to fulfill its obligations under the Directive. It has also argued that that the Directive may not be applicable if deposits are unavailable because of a major and general banking crisis. The Authority disagrees on both points.”

In much of the foreign coverage the message from the referendum is that Iceland isn’t going to pay. On Ruv, Minister of Finance Steingrimur J Sigfusson underlined that this is the wrong message. The referendum was about a top-up by the Icelandic State, where the bulk of the money comes from Landsbanki assets. Sigfusson underlines that paying out from the assets will be on track.

Sigfusson also posed the question why Icesave has captured the debate the way it has, when much weightier issues and much higher sums in other issues have been much less debated. This is an intriguing question. There is no clear answer but it’s obvious that both the former opposition and the present one have tried to profit as much from the issue as possible to score political victory.

The International Monetary Fund, IMF, is due to publish its next assessment of Iceland now on April 15. An improved outlook would help the Government against the claims by the opposition that nothing or not enough is being done regarding the economy.

The ‘yes’ side has claimed that the legal uncertainties facing Iceland will both make the situation precarious in terms of the outcome but also from the simple fact that the legal process will stretch over a long period, freezing Iceland in an Icesave limbo.

There will clearly be a financial fallout, i.a. quite clear that the rating agencies will lower Iceland’s rating but the political fallout will be no less interesting and possibly long lasting. The Government is weakened, making it difficult to tackle the major problems Iceland faces. The old power base in the Independence Party, centred on former party leader David Oddsson has fought against the Icesave agreement, thereby fighting the present party leadership. It remains to be seen how the party will deal with this rogue element at the core of the party.

Oddsson, who was Governor of the Central Bank of Iceland was driven from his post by the present Government. There is no love lost between him and leading ministers who were instrumental in this action. An interesting development is that the Government is now contemplating a serious review of the role of the Central Bank in the bank collapse. The SIC throws a very unfavourable light on the CBI. A report could further deepen that understanding. Out of many questionable CBI action is a €500m loan to Kaupthing on Oct. 6 2008 when it whould have been amply clear that the bank had already defaulted.

The referendum now can also bee seen as a dress rehearsal for a future EU membership. The ‘no’ might easily stall the membership process because the Dutch and the UK will want to see their money back before assisting Iceland in the membership negotiations. But the Icesave referendum also broadly outlines the course the debate might take, where the ‘no’ to EU will hammer in that Iceland knows what it has but not what it could get being inside the EU. As the referendum showed, there is a wide scope for all hues of national pride against reason.

*Alexander’s view on Icesave is 42 mins. into the programme.

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Steingrimur J Sigfusson minister of finance said on tv tonight that the result of the referendum tonight puts an end to further attempts to negotiate on Icesave. Although both the Government of the conservatives and social democrats, in power when the banks collapsed in October 2008, and the present coalition of social democrats and left green, have said that their aim was to resolve Icesave by negotiation the results tonight put an end to that aim.

Plan B is then to go into the Efta Surveillance Authority process where Iceland has absolutely no control over neither the course or events nor the time it takes.

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The Icesave referendum ended at the 10pm Icelandic time. Reykjavik, where the yes-side was strongest hasn’t yet been counted but after some results from around the country the yes side stands at 37% with the no taking 63%.

The numbers will change but it seems unavoidable to conclude that the Icesave agreement has been voted out. Icesave didn’t end today. The limbo continues.

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It created quite a stir yesterday when news came out that Sigurjon Arnason ex-CEO of Landsbanki is saying ‘no’ in the Icesave referendum today. On the other hand, ex-president Vigdis Finnbogadottir sent out a statement yesterday that she had already voted and had voted ‘yes.’

President Vigdis points out that an agreement is always preferable to going to the courts. Her decision is based on her firm belief that saying ‘yes’ is good for young Icelanders and the country as a whole. Since her statement, Vigdis has been under severe and vicious attack by the ‘no’ side.

In an interview with DV (in Icelandic), Arnason says: “For the first, in my opinion there was no guarantee (for Icesave) and secondly, if there had been a guarantee it would have broken laws on competition and thirdly, there is less risk by saying no rather than yes, in spite of threats and such.”

As journalist Egill Helgason points out on his blog (in Icelandic), all the Icesave ads stated exactly the opposite – so was the board and management of Landsbanki lying in their ads and presentations of Icesave? If this is the case, Helgason compares Icesave to common Nigeria tricks.

But as far as I can see, Arnason’s opinion now is in contrast to what he and the Landsbanki board believed to be the case when Icesave was set up. Last September, I reported (in Icelandic) that minutes from the board of Landsbanki, on Icesave, show that Landsbanki counted on Icesave being backed by a state guarantee. According to the minutes, the board thought that the Icelandic state guaranteed the EU minimum deposit guarantee of €20.887. The only thing worrying the board at the time was depositor being unsure on this issue, i.e. that depositor should be made clearly aware of the state guarantee.

Knowing about and counting on the state guarantee, the board didn’t have the slightest worries that by opening Icesave UK as a branch, they were offloading all risk on the Icelandic state. Branch/EU pasport regulation was preferred to a subsidiary that the UK would have guaranteed. A branch made it easier to upstream the money to Iceland and lend it, as the SIC report shows, to the bank’s largest shareholders, Bjorgolfur Gudmundsson and Thor Bjorgolfsson, and the usual suspects on the Icelandic business scene.

With these conflicting announcement by Arnason and Landsbanki, shouldn’t the Serious Fraud Office be looking at Landsbanki as well as Kaupthing?

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