Sigrún Davíðsdóttir's Icelog

The British use of the a legislation with the word ‘terrorism’ in its name to freeze the assets of Landsbanki cost Icelandic companies and other entities ISK5.2bn, (€32.6m) according to a new report, done at the behest of the Icelandic Ministry of finance. The Ministry has indicated it will use the report to prepare litigation for damages against the UK Government.

Although the sum of ISK5bn is not a trivial sum it dwarfs the potential cost that the collapse of the banks caused the Icelandic economy. A Norwegian comparison indicates that the cost might have equivalent to 18-40% of the Icelandic GDP, or ISK300-600bn. The question is who should be sued for these much more substantial damages to the Icelandic economy.

It’s clear from the SIC report and from the Ruv interview with Alistair Darling, at the time Chancellor of the Exchequer, that both the Chancellor and other UK public bodies felt they were not getting correct information on the state of the Icelandic banks. That is not to say that the Icelandic Government was misleading the UK authorities. The Icelandic banks did allegedly not provide a clear data on their positions.

Without placing any blame here, it’s well possible that if the Icelandic Government considers damage litigation the UK Government might evaluate its options. On the other hand, Icelandic issues, Icesave included, are of no burning importance in the UK Treasury. The political discussion between the two countries now mostly focuses on the prospects of an Icelandic EU membership.

With an increased insight into the collapse of the Icelandic banks it’s become clear that the banks’ financial position was already questionable in late 2007. The damages would have been less if the banks had collapsed earlier. How the messy collapse would have come about if the Brits had not stepped in, is unknown. However, any delays might have increased the cost. Seen from this angle, albeit possibly too flippant for some Icelanders, it could be argued that the UK action against Landsbanki and Kaupthing potentially lessened the cost to the Icelandic economy.

If the cost of the British action against Iceland can be estimated to be ISK5.2bn (the report points out the cost could range from ISK2-11bn but lands on 5.2bn as a likely sum), what about the cost of the collapse to the Icelandic economy? There is no direct data on this but an earlier Norwegian crisis is an indication. The Norwegian banking crisis was on a much smaller scale and was estimated to have cost the Norwegian economy around 13-22% of their GDP. Taking into consideration the scale of the Icelandic banking crisis, it can be argued that the cost to the Icelandic economy was 18-40% for Iceland, or ISK300-600bn.

If the Icelandic Government is considering litigation against the UK Government why isn’t it doing anything about the serious damages caused by the reckless banking causing the collapse of the banks? As far as I know, that’s not being looked into, not a simple case. However, the Office of the Special Prosecutor is investigating possible crimes related to the collapse, with a focus on recovering any funds obtained illegally.

But it is a greater surprise that the Icelandic pension funds, which suffered serious losses as the banks collapsed, haven’t taken a clear stance on the issue of possible damages and means to recover these damages by suing the banks’ managers and their major shareholders who also benefitted from the banks’ reckless lending.

The Icelandic pension funds, sitting on one of the best funded pension systems in the world, were very slow at admitting losses and slow at investigating their cost and connections with the bank. In the small Icelandic society, the personal relationship between bankers and pension funds were quite cosy. There is now an investigative commission, working at the behest of the Icelandic Pension Funds Association, but it’s report is delayed and isn’t expected until towards the end of the year or later.

Broadly speaking, the pension funds could investigate two things: on one hand, the advice the banks provided; on the other, the funds’ losses stemming from being shareholders in the banks, ie the losses the banks suffered by their managers’ ill-advised lending. In general, the banks advised the funds to hedge their foreign assets by being long on the ISK. Though there could have been a clear rational behind this advice it turned out to cause disastrous losses. The question is if everyone was receiving similar kind of advice or if losses were heaped on the funds because they were strong anyway.

The OSP had been investing a case related to a few pension funds, sent to it by the FME, for breach of the funds’ investment framework and incorrect FME reporting on their investment in 2008. This investigation has now been terminated with no charges brought. Other cases regarding damages is a case brought by Landsbanki’s Winding-Up Board against three of the bank’s managers for certain loans to its major shareholders just before the collapse of the bank, alleging the managers caused the bank a loss of ISK37bn.

The feeling in Iceland is still that thirty men or so, bank managers and the banks’ main shareholders, caused the collapse of the banks. For many Icelanders it’s a disturbing thought if this group, possibly causing losses of 18-44% of GDP, will be able to simply brush the dust of the collapse off their shoulders and carry on as if nothing did happen. The major shareholders still seem to be leading a good life, though somewhat scaled down compared to pre-collapse times.

Iceland has moved on after the collapse and can now positively seen to be doing better than badly hit countries in the eurozone like Ireland and Portugal, not to mention the Greek catastrophe. There might even be close to a 2% growth of GDP this year, though partly depending on external factor like the state of the European economy. But so long as Icelanders feel that this group of thirty could wreck the Icelandic economy and then walk away as if nothing had happened there is likely to be a latent and brewing discontent.

The feeling is that if those who grew their businesses because of access to favourable financing from friendly bankers are still in business it’s partly because they are still enjoying the old favours.

Follow me on Twitter for running updates.