Sigrún Davíðsdóttir's Icelog

Today, Fitch Ratings has raised its outlook on Iceland from negative to stable. This indicates that Fitch has concluded that the rejection of the Icesave agreement with the UK and the Netherlands will not stall the economic recovery. After steep contraction it now seems that the Icelandic economy is finding some stability, possibly even the forecasted growth of about 2% this year. Fitch affirmed its foreign and domestic issuer ratings at BB+ and BBB+ respectively.

Fitch’s Paul Rawkins, Senior Director in the Sovereign Rating Group, said in a statement that solving the Icesave issue was an important step towards the normalisation of relations with international creditors. “However, the capacity of this dispute to close off access to multilateral and bilateral funding for Iceland’s IMF financial rescue programme and put Iceland’s economic recovery at risk has clearly diminished,” Rawkins said.

Mar Gudmundsson Governor of the Central Bank of Iceland welcomed Fitch’s credit rating though he underlines that had the Icesave agreement gone through the rating wouldn’t have landed on stable but improved.

Gudmundsson was in Brussels today where he gave a talk at Center for European Policy Studies on Shocks, adjustment, recesson and recovery in Iceland.

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Today, Iceland’s Minister of Finance Steingrimur Sigfusson said to Dow Jones that Iceland is better off outside the European Union. This comes as no surprise: Sigfusson’s party, the Left Green, opposes Icelandic membership to the EU whereas the Social democrats, who lead the Icelandic Government, think Iceland should join. For the time being, polls indicate that the majority of Icelandic voters side with the Left Green.

As to Icesave, Sigfusson said: “The Icesave dispute is solely a problem between Iceland, the U.K. and the Netherlands and should not be mixed into anything else—be it the EU application process or our cooperation with the International Monetary Fund.” – The ESA might beg to differ here.

Sigfusson pointed out that Iceland isn’t in any immediate need for funding and the IMF’ fifth review of its Iceland programme is expected soon. The IMF programme, approved in November 2008, of emergency loans of up to $2.1 billion will help Iceland recover from the crisis following the collapse of the banking system in October 2008.

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The UK Financial Services Authority is working on a report into the collapse of the Royal Bank of Scotland. The report was due in March but the FSA is having some problems in coughing it up. Now it’s calling in Sir David Walker, a retired chairman of Morgan Stanley who recently wrote a Government report into failure in governance in the banking sector leading up the crisis.

It drew quite some criticism when the FSA announced in December that it had closed its probe into RBS and no one would be charged. Just keep in mind that the RBS was one of the most willing UK banks to lend to Icelandic business men such as Jon Asgeir Johannesson of Baugur fame and his Scottish business partner Sir Tom Hunter. Both of them ran into severe problems when there were no banks to keep their mills running. And like ia Kaupthing RBS grew at an insane rate from a small bank into one of the world’s largest. Since banks ideally should serve clients, not make them, the growth rate is indicative of a certain type of banking mechanism laid bare with the collapse of the Icelandic banks and the SIC report into the Icelandic banks.

According to the FT today:

“Lawyers for RBS are concerned that the draft as written could expose the bank to further litigation. The legal team representing Johnny Cameron, the former head of RBS’s investment banking arm, has also raised ­objections.”

If this wasn’t coming from the FT I would take it as a joke.

Who is writing the report, the FSA or RBS lawyers? Isn’t the FSA doing an independent probe into a bank where the state now owns 83%?

First the FSA completely and utterly fails to regulate the banks, to ask critical questions – and no change in management. Now, the FSA seems to be doing a similar job in probing the failures. To write a report that secures that no managers of RBS will be prosecuted won’t make anyone happy… except these same managers.

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Below is the summary of arguments from the Icelandic answer to ESA:

(i) The Government fully transposed the Directive into Icelandic law with the adoption of Act No. 98/1999 on Deposit Guarantees and an Investor Compensation Scheme, and following that, established a deposit-guarantee scheme (hereinafter also referred to as “TIF”) as stipulated in the Directive. That scheme is similar to that established by other EEA States and in accordance with the provisions of the Directive. Nothing in the Directive supports the Authority’s construction.

(ii)           The Government rejects the contention that the Directive imposes an obligation of result upon the Member States. This would lead inter alia to a de facto state guarantee for all deposits amounting to EUR 20,887 for each account in each and every bank. Such an unlimited obligation would be contrary to the EEA’s key objective of promoting competition within the internal market. Nor would it conform to EEA state-aid rules which prevent Member States from interfering with markets unless specifically authorised to do so.

(iii)          The so-called legal concept of obligation of result in EU law is unclear and does not suffice as legal basis for imposing a duty on Member States which would jeopardise their financial stability. Reference to the case law of the ECJ does not support the view that such unconditional principle of EEA law exists, nor that it would apply in this case. An obligation of result can only materialise – or deem to be breached – once it becomes clear that the actions of a Government did not suffice to ensure the minimum protection for deposits stipulated in the Directive. This is by no means evident.

(iv)          The Government ensured – to the extent possible while dealing with a complete collapse of a banking system – that all retail depositors in the failed Icelandic banks would receive compensation in a form of payments from the estates of those banks. Deposit claims were granted priority ranking when the collapse became unavoidable, thus making up for the obvious shortcomings of any Deposit-guarantee scheme in the event of a total banking system collapse.[1] This compensation in many instances far exceeds the minimum deposit guarantee in case of all the collapsed banks. If any obligation of result exists it has been discharged by these actions of the Government.

(v)           Should the Icelandic Government, contrary to expectations, be found to be in breach of the provisions of the said Directive, it maintains that such a breach should be considered justifiable in view of the fact that no deposit-guarantee scheme envisioned by the Directive could have dealt with a financial crisis of the magnitude experienced in Iceland in the autumn of 2008.

(vi)          Should the Government, contrary to expectations, be found to be in breach of the provisions of the said Directive, it maintains that such a breach is justifiable in view of the various unilateral actions undertaken by the United Kingdom and the Netherlands governments in breach of the EEA Agreement against Landsbanki, the Icelandic state, and other Icelandic interests and their effect on the Government’s reaction to the crisis. These actions obstructed the Icelandic Government’s efforts to efficiently reorganise and wind-up Landsbanki to facilitate payments under the deposit guarantee scheme, which efficiency under normal circumstances is now historically evident by the swift resolution of the Kaupthing Edge internet depositor’s payment from the estate undisturbed by the German Government.  These ill-advised and disproportionate actions justify any breach which the Government may have committed as a consequence.

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Today, minister of trade Arni Pall Arnason held a press conference to present Iceland’s answer to ESA. In the letter, the Icelandic Government emphasised its earlier position, ie that the EU deposit guarantee did not apply to the situation in Iceland in October 2008 because Iceland suffered a breakdown of its entire banking system. Consequently, Iceland had not other options but to treat deposits in Iceland and abroad differently. It also pointed out that the UK and the Dutch Governments had hampered economic revival in Iceland by its actions to delay the IMF programme.

The letter is quite long, over 30 pages. It remains to be seen what ESA will do but it seems that some of the Icelandic points are somewhat beside the point. ESA formulated precises complaints. Iceland’s answer offers more explanations than hard-nosed legal reasoning.

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Tonight, the Althingi Foreign Policy Committee will discuss the Icelandic answer to the EFTA Surveillance Authority, ESA. To Icelandic media minister for trade Arni Pall Arnason the indicated that the answer will be sent to ESA tomorrow.

As reported earlier on Icelog, ESA is inquiring into the Icelandic handling of the Deposit Guarantee Directive, both regarding the minimum guarantee and the fact that Icelandic authorities guaranteed all deposits in Iceland but not in Icelandic branches abroad, ie Landsbanki’s Icesave deposits in the UK and the Netherlands.

As ESA opened up its inquiry in May last year it stated:

The EFTA Surveillance Authority has the task to ensure that Iceland, Norway and Liechtenstein comply with the terms of the EEA Agreement. The Deposit Guarantee Directive forms part of that agreement. According to the Directive, Iceland was obliged to guarantee for EUR 20.000 per depositor after Landsbanki and its Dutch and British branches, called Icesave, collapsed in October 2008. …

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 its emergency response to the banking crisis in October 2008, the Icelandic Government made a distinction between domestic depositors and depositors in foreign branches. Domestic deposits continued to be available after they were taken over by New Landsbanki, whereas the foreign depositors lost access to their deposits and did not enjoy the minimum guarantee. It is not possible to differentiate between depositors to the extent they are protected under the Directive. By acting as it did and leaving the depositors in Icesave’s Dutch and UK branches without even the minimum guarantee, Iceland acted in breach of the Directive.

The Icelandic answer will be made public once it’s been sent to ESA.

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