Sigrún Davíðsdóttir's Icelog

An ESA investigation into loans to VBS, Saga Capital and Askar Capital

with 5 comments

The last log, ia on the state loans to VBS and Saga Capital was timely. The EFTA Surveillance Authority has just announced that it will open an inquiry into these loans, as well as into loans to Askar Capital.

Here is what ESA announces:

The EFTA Surveillance Authority decided today to open a formal state aid investigation into loans granted to the investment banks Saga, VBS and Askar Capital.

The loans, of a total amount of 52 billion ISK (330 million EUR), were granted on favourable terms by the Icelandic Treasury in March 2009. The Authority received a complaint concerning the loans from an interested party in July 2010.

The purpose of the loans was to reschedule short-term collateral and securities loans from the Central Bank of Iceland to long-term loans. This was thought necessary because the Central Bank loans were in default.

The Central Bank collateral loans were secured amongst others with bonds issued by the three commercial banks, Glitnir, Kaupthing and Landsbanki Islands. Following the collapse of those banks in October 2008, the value of the underlying security diminished severely. The investment banks were unable to provide other security or settle the debt.

The Icelandic authorities claim that through the loan conversion, they have endeavoured to protect the interest of the state and acted in line with the conduct of a private creditor. The Authority, however, has doubts whether the terms agreed by the Treasury are consistent with commercial conditions. If  not, the loan conversion could be regarded as unlawful state aid within the meaning of the EEA rules.

VBS Investment Bank and Askar Capital Investment Bank are already in liquidation and the operating license of Saga Investment Bank has recently been revoked. The Authority nevertheless considers it appropriate to finalise its assessment of whether or not the terms of the loans are compatible with the state aid provisions of the EEA Agreement.

Should the Authority conclude that the loan conversions are to be regarded as unlawful state aid, it would be obliged to require the national authorities to recover the aid from the recipients. If the recipient of such aid is in liquidation, claims shall, if possible, be filed against the estate for recovery of incompatible aid.

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Written by Sigrún Davídsdóttir

November 23rd, 2011 at 12:41 pm

Posted in Iceland

5 Responses to 'An ESA investigation into loans to VBS, Saga Capital and Askar Capital'

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  1. Your last log claimed that the investment banks had been “propped up” with the funds and that the loans amounted to the cash being “thrown” into the ocean, in “clean and pure madness”.

    As the announcement says, in plain English, the loans were granted through rescheduling of existing debt.

    The correction from the EFTA Authority was timely indeed. But with all due respect, it would have taken you about 10 minutes to dig up the correct facts before posting yesterday’s log.

    That being said, it could be argued that the Gov’ should have enforced the debt instead of converting it to loans and prolonging the lives of the banks. Whether that would have earned the taxpayers more money than the rescheduling remains to be shown. But you are hardly arguing that the ISK 52 billion, with (to quote the press release) “severely diminished” underlying security, amounted to cash in the pocket of the Treasury, thrown into the abyss in madness?

    Kristján Birgission

    23 Nov 11 at 7:39 pm

  2. Hi Kristján, my point was twofold: to underline that Icelandic authorities weren’t completely averse to the idea of saving banks – and where this was done.

    Whatever words are used (bail out, propping up) and no matter the technicalities (converting loans etc), VBS was saved from its unavoidable demise in spring 2009. I don’t think there was any business reason to keep that bank going (and as I have pointed out, that bank was only functioning because Landsbanki funded it with loans).

    In general, there hasn’t been a clear policy as to why and who should be bailed out. And it now seems to be the same with the saving societies (“sparisjodir”).

    The fact that ESA is looking into the cases of VBS, Saga Capital and Askar Capital, is of interest as it shows that the policy wasn’t clear (if at all existent).

  3. Thank you for replying Sigrún,

    You’re absolutely correct about VBS having been saved by the Government’s actions, it was held afloat, kept alive, and then died. But you also say that by this VBS was saved from its “unavoidable demise”. Those who made the decisions argued that the bank had a fighting chance at the time and that the Treasury would also be better off financially, by making the conversion. Perhaps you have better insight into the businesses of these investment banks, but I still fail to see the foundation for your claims of this amounting to “madness” or “throwing” money away. It was bad debt converted to a bad loan. The policy and arguments for this are there. They might have turned out to have been wrong, but you completely ignored them in your 22nd November log.

    Your otherwise very good point in that post would IMHO had come off better if you’d stuck to correct facts and terms. Your description of this small part of the story made it look as if money loaned to the investment banks was taken from the Treasury and handed to these investment banks, for them to take it with them to the abyss. Good money going after bad. This was an exaggeration and perhaps you thought it necessary to better underline your point. I would have expected such flexible treatment of the truth from less experienced or more careless journalists (and ignored them), but not from you (sorry). I’ll admit that the truth would have been less juicy, made for a little bit less impressive demystification.

    Aside from not sticking to the facts, I think you’re putting yourself on a rather high horse when describing something that you don’t think was any business reason in as “pure madness”. Especially when you don’t even mention the reasoning put forth for it. Perhaps you weren’t aware of it?

    As for the policy in general, as far as I can see, the “bailout policy” has been to save what is absolutely essential and aside from that, rescue efforts have been played by hand, i.e. the Government has done whatever could be done from time to time with the limited funds available. In fact not throwing any money away but disposing of funds to protect deposits’ holders or safeguarding essential systems (the three banks and Housing financing fund being the best examples). Granted, there is not a statement written in stone concerning the savings banks which you can put your money on. Is it at all possible in your mind that it has taken this much time to sort out the mess there, to get a clear picture of what can reasonably be done? Perhaps this is a better policy than “save all and their creditors” or “let all go to hell”?

    From where I stand this seems to be the policy concerning the savings banks: They will be held afloat if a feasible solution is found to their problems. If not, they won’t. Time certainly isn’t as pressing in those cases as it seems to have been with the investment banks.

    I have to strongly disagree with you on your last point. ESA’s press release concerning the investigation shows that it “has doubts whether the terms agreed by the Treasury are consistent with commercial conditions.” There’s nothing there suggesting the policy concerning these banks having been unclear. But perhaps you know more about where ESA is going than the rest of us?

    I hate to pester you with these long rants but when correcting a myth, you need to have all your facts straight. Not some straight and some twisted.

    Kristján Birgission

    29 Nov 11 at 9:16 am

  4. Kristján, in my log I say: “With documents from Landsbanki, I have already shown that many years before the crash, Landsbanki kept VBS afloat.” – This refers to a piece I did for Ruv/Spegillinn: – As is mentioned there, I had documents from Landsbanki showing the loans to VBS the last years before the crash.

    My conclusion was that VBS was kept afloat by Landsbanki. With Landsbanki funding gone there was nothing. It’s because of this information, which should have been available for the authorities in spring 2009, that I simply can’t understand why ever VBS got this state

  5. It is undisputed and needs no documentation that VBS was a poorly run business. That however does not in itself make a prolongation of its existing debt a bad business decision. You know that, or at least you should know that. The fact that somebody is not doing well does not mean that he can not get better. Things can change.

    It can of course be debated whether the Government should have given the company breathing room to reorganise itself, or should have just gone after whatever it could of the VBS debt inherited from the Central Bank. The latter option would have resulted in less money for the Government, and would have spared the other creditors of VBS their outrage against the Government:

    As it turned out, VBS’s reorganisation failed. It seems quite reasonable of you to criticize the Government’s action, to call it a mistake. To call it something nasty even. “Lacking business reason”, that’s not unjustified at all. But “clean and pure madness”? Throwing money away? Does that not imply that something more was wrong than bad business sense. That there was actual insanity involved or corruption even? My point about VBS above was just that it would have been more professional in my humble opinion to put out the actual facts (Government thought it would lose less money and that VBS had a fighting chance). Attack the facts, not make up juicy ones, that’s just scandal-mongering.

    It is interesting that you mention your Ruv/Spegillinn piece from 2010. In that you say:

    “… ríkissjóður ákvað sumsé í fyrrasumar að veita VBS þetta einstaklega hagstæða lán upp á um 25 milljarða. Til samanburðar má nefna að það er verið að skera niður fjárlögin um 30 milljarða.”
    (In short: the Treasury decided to grant VBS a very favourable 25 bn loan. In comparison the ongoing budget cuts amount to 30 billion.)

    That perspective is very misleading and almost earns a “yellow journalism” stamp. Either your research was bad and you actually were under the impression that this loan amounted to money that otherwise could have been collected (which could perhaps have lessened the blow from the budget cuts) or you wanted people to believe that this was the case. The first would be an excusable mistake, the latter a sensationalistic distortion of the facts.

    Did it occur to you to explain to the public what this “generous loan” actually was? Or were people supposed to do their own research?


    PS. Don’t get me wrong, you certainly are not an exception when it comes to the VBS story. Most Icelandic journalists have taken the bait that these “loans” were somehow new money granted to the three banks by the Government. The fact that this was only a question of either postponing payments or collecting without delay, seems to have eluded the press. Just today, jolly Egill Helgason repeated the misrepresentation of the VBS facts:

    Since you’re on a mission of replacing fiction for facts, I felt obliged to comment on the parts of your story where the facts or wrong (or misrepresented).

    Kristján Birgission

    30 Nov 11 at 11:13 pm

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