Sigrún Davíðsdóttir's Icelog

Before the end of January the EFTA Court might have ruled on Icesave. The largest battle for assets ever to take place in Iceland (since the 13th century) – ultimately for the power over Arion bank and Islandsbanki – will be, by far, the biggest issue in Iceland. At the core of it are the negotiations on composition for the holding companies of Kaupthing and Glitnir, the owners of the two respective banks. The capital controls are one variable in this equation. In addition, the Office of the Special Prosecutor will continue to churn out charges during 2013.

1) It now seems likely that the EFTA Court will rule on Icesave in or around the third week of January. As Icelog has explained earlier, there really are two questions that the Court is ruling on: Did Iceland breach the Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes – Has Iceland ‘breached the prohibition on discrimination on grounds of nationality under Article 4 EEA?’

Considering the fact that deposit guarantee schemes are a contagious topic in the EU right now, with a pan-European scheme being planned as part of the European Banking Union in the making (but the Directive has been changed since autumn 2008), it seems plausible that the EFTA Court justices will rule on this issue as narrowly as possible, so as not to plant on the EU the definite understanding of this directive. But then, justices don’t always do the plausible. In any case, it is less the Directive and more the discrimination that could rattle Icelandic stoicism.

The EFTA Court is not ruling on the dispute with the UK and the Netherlands regarding the cost these two countries think they have born by paying out the Icesave deposit holders in the two respective countries (UK in full, the Dutch Government up to €100.000). If the ruling – on one or both matters (more serious financial consequences if the discrimination goes against Iceland, see the link above) – shows that Iceland was in breach, the two countries will no doubt come knocking to recover their cost. Then the Icesave dispute might start all over again, another round of negotiations – or, the three countries would agree to hold on to the last agreement.

So much for Icesave – one way or another it might be resolved this year. Otherwise, there is the 6th Icesave Christmas in sight for next year.

2) Although Icesave did take up much space in Iceland in the last few years the agreements regarding the composition of Glitnir and Kaupthing do not only revolve around assets and money but around power in the Icelandic financial sector. There is a huge suspicion against foreign ownership of the banks and this fear is being played on by those who favour a bankruptcy of the two estates and a fire sale of the two banks.

Those who whip up this fear of foreign ownership seem to ignore that nothing will happen regarding the composition except with the blessing of the Icelandic Central Bank. This is not an issue that is about to wreck the Icelandic economy. It is an issue under control, albeit without a solution so far. The CBI will focus on the stability of the Icelandic economy. The solutions sought aim at resolving a few matters at once, together with the composition: the capital controls, the overhand of foreign currency (stemming from the carry trade going on up to the collapse of the banks in October 2008) – and, as the CBI sees it, preferably selling one or both banks to foreigners, in order to have at least one bank sold for foreign currency. In addition, there is the Landsbanki bond – debt rising from the constitution of the new Landsbanki, owed to the Landsbanki estate: it has a 6 year maturity but that now seems an unreasonably short time.

This is, in short, the bundle of problems that needs to be resolved in one go – or at least all these issues need to be solved and settled considering the interaction between them. Not a trivial project – on which there is now an ad hoc working group pondering, with experts from the ECB, IMF and the EU as well as Icelandic civil servants.

3) The original plan of the Office of the Special Prosecutor was that all charges regarding the collapse of the banks should be brought by 2014. Exactly how many the cases will be is not yet clear. The Icelandic Financial Services Authority, FME, has passed on ca 80 cases the OSP, just to given an idea of numbers but the OSP makes an independent assessment of cases.

On December 28 the Icelandic County Court ruled in a case brought against the Glitnir managers, ex-CEO Larus Welding and Gudmundur Hjaltason former head of Glitnir’s corporate finance. The charges related to a complicated loan structure ultimately benefitting Milestone, one of the large Icelandic holding companies, owned by Karl Wernersson and his siblings. The OSP reckoned the loans caused Glitnir a loss of €50m and had asked for a 5 1/2 year and 5 year prison sentence. Instead, the Count Court sentenced both men to nine months in prison, six of which are suspended for two years. Legal bills are divided between the two men and the state. – The State Prosecutor is likely to appeal. The Milestone ruling is the first ruling concerning the big banks and leading bankers.

So far, managers from Kaupthing and Glitnir have been charged by the OSP, as well as major shareholder in the two banks, respectively Olafur Olafsson and Jon Asgeir Johannesson, but no one from Landsbanki has (yet?) been charged.

Updated:

It’s worth adding that the Icelandic economy is growing – not like during the pre-2008 boom years but at around 2%. Here is the latest IMF report on Iceland, with an overview of the Icelandic economy.

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The Landsbanki Winding-up Board is suing not only PwC Iceland but also PwC LLP in the UK for damages caused by incorrect and misleading accounting of Landsbanki from mid 2007 until the collapse of Landsbanki in October 2008. The WuB is demanding in total a payment of ISK83bn (almost €490m), $11m and €65m. According to the WuB writ, not yet published but seen by Icelog, PwC LLP in the UK was responsible for Landsbanki’s accounting, which is why not only PwC Iceland is sued but also PwC LLP. Both PwC Iceland and LLP refute all allegations and will defend themselves vigorously.

The WuB two main claim are 1) that PwC incorrectly over-estimated the bank’s own capital – and 2) that PwC used international accounting standards incorrectly thereby allowing the bank to break its own rules, i.a. by not listing loans to related parties, i.e. the bank’s largest shareholders father and son Bjorgolfur Gudmundsson and Bjorgolfur Thor Bjorgolfsson. This enabled the bank to lend to father and son far beyond legal limits. Since lending to related parties was, according to the WuB, not announced in published account, other shareholders were unaware of the situation.

For those who think that the role of accountants in the banking crisis has been mostly ignored this case is an interesting test case. The case will come up in Reykjavik County Court next year.

Updated – in addition:

The relationship between PwC Iceland and Pwc LLP on one hand and Landsbanki was close and extensive and had been for many years. PwC was the auditor of Landsbanki, both in Iceland, the UK and Luxembourg as well as advising Landsbanki on tax, auditing standards and carrying out due diligence for Landsbanki.

PwC has refused to hand over material relating to its Landsbanki auditing to Landsbanki WuB. The Landsbanki WuB brought PwC to court to get access to this material. In 2011 the High Court in Iceland ruled that PwC should hand over the material. When the Landsbanki WuB writ against PwC was served in June 2012 PwC had not yet complied with the ruling of the High Court.

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Free flow of capital is one of the four freedom pillars on which the European Union rests. A country with capital controls cannot become a member of the European union. Ossur Skarphedinsson Iceland’s minister of foreign affairs is wholly aware of the problem the capital controls cause. And it is also clear to Stefan Füle EU’s commissioner for enlargement, both of whom I interviewed in Brussels Tuesday following the EU and  Iceland 8th intergovernmental conference on accession.

The EU negotiations are going well. Six negotiation chapters were opened this time, one was provisionally closed. In total 27 out of 33 chapters have now been opened and 11 are provisionally closed. The negotiation is moving beyond matters included in the European Economic Area. One chapter now opened concerns the environment where Iceland has stated 14 topics of particular interest. One of them is whaling, which arouses heat and passion on both sides of the negotiation table. Skarphedinsson, holding a folder made of seal skin, underlined that whaling is not of much economic interest to Icelanders but was of cultural importance, as is seal hunting and gathering eiderdown from the eiders.

However, no matter how well the negotiations proceed the capital controls are well and firmly in the way of membership. In September, an ad hoc working group was set up, with Icelandic civil servants and representatives from the IMF, the ECB and the EU Commission, from Directorate General for Economic and Financial Affairs and from DG Enlargement. This group will now work together with the Icelandic Central Bank to find a viable way to abolish the capital control. Or, as Skarphedinsson said, the best brains in this field will now be working to solve this problem.

There is continuous political rumbling in the Althing, among eurosceptics, against the negotiations. It was probably no coincidence that today, on the day of a successful intergovernmental conference, MPs in the Althing foreign affairs committee discussed putting up for a vote that the negotiations should be stopped until the nation had voted on continuing the negotiation or not. The coalition Government is, and has been from the beginning, split on this issue with the social democrats in favour of joining the EU and the Left-Green against.

Among other access-negotiating countries voting on membership negotiations is unprecedented. It remains to be seen if there really is a political will to stop a democratic process, which will end with a referendum on a negotiated treaty. This is not the first time these voices are heard among the MPs. It is not clear if or how the matter will be pursued by eurosceptic MPs.

Another aspect of the capital controls is how to pay out creditors of the two collapsed banks, Glitnir and Kaupthing. It is fair to say that these two banks are the core of the biggest wrestle of assets there ever has been in Iceland. But that is another story for another day and another blog.

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The Office of the Special Prosecutor in Iceland has charged Jon Asgeir Johannesson former CEO of Baugur and a major UK retail investor for his role in a Glitnir loan of ISK6bn (now £40m) in summer 2008. Johannesson is charged for exerting undue influence on Glitnir CEO Larus Welding and Bjarni Johannesson who was in charge of connection to Johannesson’s companies. A third Glitnir employee, Magnus Arnar Arngrimsson is also being charged. The charges related to the three Glitnir employee regard breach of fiduciary duty.

This case, called the Aurum case because the collaterals for the loan were shares in Aurum, formerly Goldsmith, the UK jewelry chain. This was essentially a series of transactions, which in the end brought ISK1bn in cash onto Johannesson’s account with Glitnir and the same amount to his business partner Palmi Haraldsson, who is not charged. According to the charges, the purpose of the loan was to find a way to settle Johannesson’s overdraft with Glitnir, in addition to cash and to enable Haraldsson to get money as well. The OSP is asking for the maximum sentence, a six year prison. Johannesson denies all wrong-doing. In the charges it is stated that both Johannesson and Welding live in the UK.

The tendency here, according to the OSP, is the same as in so many other questionable loans to the major shareholders: the loans were very favorable to the borrower and equally unfavorable to the lender.

The Aurum case has long been known to the Icelandic public, ia from the SIC report and from loan agreements, which had landed in the public domain. Earlier Icelogs on this case can be found here. A link to the charges, in Icelandic, is here. Oral hearing is scheduled to start January 7.

In addition to this case, the OSP has brought charges against Kaupthing managers in the so-called al Thani case. So far, Landsbanki managers or major shareholders of Landsbanki have not been charged.

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The Memorandum of Understanding for Cyprus seems to indicate that restructuring of banks (though possibly only a timid one) should precede any financial aid to them. If this is the case, the Cyprus bailout will be a changing course in the story European bailouts.

With every Eurozone bailout, some new lessons are learnt – but so far, not the only sensible lesson: letting banks fail if needed, aggressively writing down debt and restructuring. That is a pie in the sky for European taxpayers, until the planned banking union, with not only a banking supervision but also a unified resolution structure will come into being. Until that rosy future dawns, banks are bailed out, bondholders and the official sector paid – though, as Greece shows, not always in full now.

But the Cyprus Memorandum of Understanding, the basis of its bailout, indicates that for the first time, restructuring failing banks might be a prerequisite for the bailout. If that is the case, the Cyprus bailout might help the EU turning a page – though the MoU raises the question if the restructuring is tough enough.

How much does Cyprus need?

How much is needed from the troika this time? The first numbers I heard floated earlier this year from a Cypriot source was something like €5-6bn to recapitalise the banks and slightly less for the sovereign, in total around €11bn. The number now mentioned is €17bn. Pimco, having been called in to do an independent estimate of the need, landed on €9.1-9.6bn – while others think it’s too low and €13bn would be more likely.

Much was made of the impact of the Greek writedown in March on Cypriot banks. No doubt, the effect was a serious one but the Greek writedown was only the last straw, not the real reason for the Cypriot failure. Already in the latest available IMF report, from 2011, on Cyprus there were ominous indications (emphasis mine):

The large banking sector, with assets totaling over 8 times GDP by the broadest measure, and with significant exposure to Greece, is a significant vulnerability. Banks face significant capital needs to reflect mark to market valuations on their sovereign bond holdings and to achieve a
9 percent core tier one capital ratio, as mandated by the European Banking Authority. Non-performing loans are increasing, and further loan deterioration could add to recapitalization needs. Meanwhile, the system is also vulnerable to an outflow of deposits in the event of adverse circumstances. Cypriot banks receive significant liquidity support from the European Central Bank.

With all these significant issues further to the significant numbers:

A large banking system with heavy exposure to Greece is a major vulnerability of the Cypriot economy. Bank assets total €152 billion (835 percent of GDP), while assets of commercial banks with Cypriot parents are €92 billion (500 percent of GDP). Exposure of these banks to Greece totals €29 billion, or 160 percent of GDP, including both Greek government bonds and loans to Greek residents. They also hold €1.6 billion of Cypriot government bonds but minimal amounts of sovereign debt of other peripheral euro area countries.

And as to the Greek writedown being the lethal hit to the Cypriot banks the IMF 2011 report puts that in perspective:

Commercial banks with Cypriot parents hold €92 billion (505 percent of GDP) in assets, dominated by three large banks (Bank of Cyprus, Marfin Popular Bank, and Hellenic Bank) which together account for 97 percent of total assets of this group. They have large foreign operations through branches and subsidiaries, primarily through the Marfin and Bank of Cyprus branches in Greece. They hold €23 billion (130 percent of GDP) in loans to Greek residents and €5 billion of Greek government bonds.

Did a 50% writedown of nominal value of €5bn in total assets of €152bn cause the collapse of the Cypriot banking system? Hardly. It was, as the 2011 IMF report shows, already a system about to collapse.

To say that loans are now being negotiated with the troika makes it seem as if Cyprus is still functioning on its own. That is not the case. As the IMF report mentions already last year Cypriot banks were receiving significant support from the ECB. Last May, FT Alphaville wrote on the ECB Emergency Liquidity Assistance Cypriot banks were making use of, gauging the banks had already had €3.8bn shot, which might well be an underestimate since this had probably been going on for a good part of 2011.

Restructuring – or tinkering?

Ever since it became clear that the troika aid to Ireland was a poisonous chalice – it saved Ireland from bankruptcy there and then but burdened the sovereign with private debt – the challenge has been how to avoid this debt migration from the private to the public sector. As is always the case under these circumstances, there are only two options for Cyprus: restructuring – or to borrow to pay its creditors in full.

During the Trichet aera at the ECB the word “restructuring” was unmentionable within the bank.

Cypriot media has published the Memorandum of Understanding between the troika and Cyprus (or at least a draft of it; in a Word version, fresh with “track changes”). Interestingly, key programme objective number 1 is:

to restore the soundness of the Cypriot banking sector by thoroughly restructuring, resolving and downsizing financial institutions, strengthening of supervision, addressing expected capital shortfall and improving liquidity management;

At least the word “restructuring” is now part of the bailout vocabulary.

Then there is this paragraph:

With the goal of minimising the cost to tax payers, bank shareholders and junior debt holders will take losses before state-aid measures are granted. Before any state recapitalisation is granted, the Central Bank of Cyprus will require a conversion of any outstanding junior debt instruments into equity for the purpose of protecting the public interest in financial stability, including by implementing voluntary or, if necessary, mandatory subordinated liability exercises (SLE). In order to facilitate a voluntary SLE, a small premium can be offered in line with state aid rules. To this end, the necessary legislation will be introduced no later than [January 2013]. The Central Bank of Cyprus together with the EC, the ECB and the IMF will monitor any operation converting junior debt instruments into equity.

As far as I understand the EU is not entirely against restructuring. But so far, the ECB cannot bring itself to go further than to junior debt – which is pretty useless in terms of solving the problem once and for all and not in painful steps over many years, à la Greece.

However, compared to the Greek MoU from February, there is a significant change in the Cyprus MoU: in Cyprus, it seems that restructuring will – or should – precede any financial assistance. In the Greek one, this was not the case. How this Cypriot restructuring will be carried out is a key thing. If it is just junior debt and not something more forceful this will be a tinkering and not the really necessary cleaning up, so lacking i.a. in Ireland.

Bailing out Cyprus – (in)directly helping the Russian Mafia?

Cyprus poses a particular problem: it is awash with Russian money. The historic ties go back before the collapse of the Soviet Union, strengthened by the Orthodox church. Later, Cyprus was the predilected offshore haven for Russian oligarchs and they actually followed the money. Limassol has the nickname Limassolgrad for a reason.

According to Spiegel, the German secret service, Bundesnachrichtendienst, BND, has warned that financial assistance to Cyprus amounts to assisting the Russian Mafia. A bailout for Cyprus is bound to raise not just the usual questions of why and how and who is paying more than others – but also how it will affect the shadowy side of the Cypriot banking system.

A year ago Cyprus got a loan of €2.5bn from Russia. This autumn, it hoped to negotiate another €5bn but the loan never materialized. The existing loan apparently has a tenor of 4 ½ years, meaning it would most likely come due during the time Cyprus is under the troika’s intensive care. The troika has to ask itself how it feels about paying back the Russian loan.

Cyprus is not only a haven for Russians. The island has all the attributes of an offshore haven, including a huge flow of money of uncertain origin. It is an international finance centre, allegedly with 40.000 companies registered on the island. Active companies pay a levy of €350 but dormant companies don’t pay anything. One of the possible revenue streams now under preparation is to let all companies, active or not, pay the levy.

My feeling has been that Cyprus was mini-Greece, i.e. unclear as to the real size of the problem though with much lower numbers in a much smaller economy. My Cypriot source tells my I’m completely wrong – 17bn is the max number sought but most likely the island will use €15bn. I am not entirely convinced, given the huge and fast-growing, ballooning banks – I’ve seen too much of the Icelandic banks – not to mention the offshore environment. Qui vivra verra.

*For those who want to see an overview of the structure of the Cypriot banking system, i.e. types of banks and business areas, with thought-provoking numbers, take a look at the very informative Box 4 in the IMF 2011 report (ah, where would we be without the deliciously juicy IMF reports… and, since I’m mentioning names, enticing Eurostat data)

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In a document, seen by Icelog, sent to the Icelandic Government to underpin his project of investing up to $200m to build a highland resort at Grimsstadir in Iceland, the Chinese entrepreneur Huang Nubo mentions his first ties to Iceland: as a student he became friends with an Icelander and so warm was the friendship that the mother of his Icelandic friend knitted a lopapeysa (a typical Icelandic sweater, made from Icelandic wool in natural colours). This friend, Hjorleifur Sveinbjornsson, later married Ingibjorg Solrun Gisladottir, the leader of the social democrats 2005-2009 and minister of foreign affairs 2007-2009 – and Sveinbjornsson has been one of Huang’s ardent advocates in Iceland.

Huang Nubo is now mightily upset with the Icelandic government for not embracing his plans. According to the FT (subscription only), Huang sees this as a racial discrimination. “I think this is racial discrimination because I am Chinese,” he told the FT. “Many people have invested in Iceland in the past but no one has been treated like I have.”

This isn’t entirely true. There are serious restrictions to foreign investment in Iceland, especially when it comes to investment from outside the EU/EEA. Icelanders tend to be suspicious towards foreign investment. Ia a Canadian company, investing in energy in Iceland, at the time called Magma, now called something else, ran into similar problems, as explained earlier on Icelog. Magma found a way around this by setting up a company in Sweden. This caused hefty debate in Iceland, the investment was accepted – incidentally, this investor seems to have lost interest in Iceland, as sometimes happens.

The serious problem with Huang as an international investor is that he has nothing to show outside of China. The properties and companies he owns in the US are nothing to speak of, in terms of operations and having done something substantial. When he seemed to be losing the bid to invest in Iceland he turned his attention to Denmark, was interviewed there but again, just words and nothing seems to be moving there.

Another problem is the inconsistency in his intentions, which he has aired. He said he would fund it all himself, out of his own pocket and that wouldn’t be a problem. One day, he announced he would fund the Grimstadir operations by selling 100 Grimsstadir luxury dwellings to rich Chinese. It seemed to have escaped his attention that due to restrictions on nonEU/EEA owning property in Iceland this plan would make things very complicated. When I inquired about this with his Huang’s spokesman in Iceland this seemed just one idea out of many.

And this seems to have been a problem all along. There were many ideas and not concrete plans. So far, no independent due diligence has been done by Icelandic public sector entities, negotiating with Huang. All the information worked on comes from Huang himself. In that sense, these entities have not done a convincing job in securing public interest at stake here.

Huang Nubo makes much of the fact that he is a poet. Unfortunately, when it comes to business poetic visions aren’t substantial enough to bank on.

*A link to earlier Icelogs on Huang.

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It’s not a new story – as Deutsche Bank points out in its response – but it’s a story coming up again with more vigor and new evidence. According to the FT: “Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out, three former bank employees have alleged in complaints to US regulators.” – FT Alphaville calls it “papering over the cracks … (allegedly)”

Three Deutsche employees have resigned from the bank, after having raised concerns in 2010 and 2011 with the SEC in the US. One has settled handsomely, has been paid $900,000 to settle a case of unfair dismal, apparently after being in touch with the SEC.

It’s worth keeping in mind that Deutche is the highest leveraged bank in Europe and the US: at the end of last year total assets exceeded Tier 1 capital by 44 times – but that’s still down from 68 times in 2007, when the subprime crisis broke. The average leverage in German banks was 32 times last year and in Europe 26 times.

Watching Deutsche from Iceland, it hardly comes as a surprise that some papering was done at and following crisis crunch time in 2008. Deutsche had issued big loans to Icelandic banks and companies. In the case of the pharmaceutical group Actavis, taken off market in 2007 by Bjorgolfur Thor Bjorgolfsson the loan was huge and for some time the biggest loan on Deutsche’s books. Admittedly a loan saga, which belongs to a different age, the year 2007, as pointed out by Breaking View:

Actavis’s 2007 buyout, by Icelandic tycoon Thor Bjorgolfsson, belongs to a different age. Bjorgolfsson was then reckoned among the world’s richest people and the Actavis deal was worth $6.4 billion including debt – five times the value of Iceland’s biggest listed company today. Deutsche employed bubble-era tactics too. The loans totalled a reported 4 billion euros, including 1 billion of “payment-in-kind” notes. These are particularly risky, since instead of paying interest in cash the PIK-note debt burden expands.

This loan backfired for Deutsche – it couldn’t sell the loan on. As Breaking View points out, the loan stayed with Deutsche until it could finally sell Actavis earlier this year.

Deutsche was also a lender into some interesting Kaupthing schemes, where Deutsche advised Kaupthing to lend companies to invest in Kaupthing’s CDS, in order to lower the CDS and consequently the bank’s borrowing cost (it seems to have had some effect). According to Kaupthing documents Deutsche was also a lender, with Kaupthing, when the bank lent money to a Qatari investor to buy shares in Kaupthing. The Office of the Special Prosecutor in Iceland has brought charges against four Icelanders, as earlier reported on Icelog.* Deutsche is not implied in this case.

Deutsche’s lending to Iceland shows quite a bit of recklessness though we can’t see how reckless they were, i.e. in terms of the loan covenants, if they were lending to holding companies (like the Icelandic banks did) and not into companies with operations and more tangible assets. The feeling is that Deutsche in case of some of the Icelandic loans, i.a. the Actavis loans, Deutsche was too late in sensing changed sentiments in the market and couldn’t sell them off. If that was widely happening within the bank Deutsche had some serious issues – and then the speculations now, of the bank having covered its losses, might possibly make sense.

*The persons indicted are ex-chairman of the Kaupthing board Sigurdur Einarsson,  Kaupthing’s CEO Hreidar Mar Sigurdsson, Kaupthing Luxembourg manager Magnus Gudmundson and Kaupthing’s second largest shareholder Olafur Olafsson.  The District Court has now thrown one of the charges out, related to Magnus Gudmundsson but the OSP will most likely appeal the decision.

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I’ve earlier pointed out that Iceland can’t quite be taken as an example of a country that didn’t bail out its banks. True, the three largest banks failed – but the cost of financial assistance to other banks and of setting up the new banks is substantial. Together with Thorolfur Matthiasson professor of economics at the University of Iceland I’ve written an article on the cost, published today on EconoMonitor.

Our concluding remarks are:

We are aware that the final cost, accrued from supporting the Icelandic financial system, to the Icelandic State will not be clear for some time to come. But there is a cost – and as we have shown above it is possible to plausibly calculate the potential cost. Since Iceland has become a popular comparison for economists studying crisis-stricken European countries we feel it merits this attempt. Our calculation shows that Iceland cannot be taken as an example of a country, which did not bail out its banks.

Compared to the UK, Icelandic taxpayers will pay 5 to 7 times more for government interventions in the financial market than is the case in the UK. Hence, the widely held belief that Icelandic citizens did force bondholders, bankers and shareholders of financial firms to shoulder the burden of the collapse of the Icelandic financial sector is wrong. Icelandic taxpayers used what amounts to almost a year’s worth of taxes to recapitalise the domestic part of the financial sector. Whether these bailouts were necessary or not can be debated but the cost of 20-25% of GDP is, according to our calculations, a reality.

However, a major difference, in terms of costs to UK and Icelandic taxpayers is that foreign creditors carry the bulk of the cost of the Icelandic collapse – as the three big banks failed in October 2008 these creditors lost what amounts to 5 to 6 times the Icelandic GDP.  But that is a wholly different saga.

Here are four blogs I’ve written earlier about this myth that Iceland didn’t bail out its banks, also comparing Iceland to Greece and Ireland.

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The equity release scheme sold in France and Spain are sold by banks operating in Luxembourg. The banks in question are Danske Bank, Nordea, Rotschild Bank and, until 2008, Landsbanki. Clients of these banks have raised some serious questions regarding the legality of these loans – i.a. if these banks were at all allowed to sell these products in countries where they did not properly operate, how these banks informed their clients, if the banks did possibly promise far beyond what the schemes could sustain. And there are questions regarding the agents who sold the loans.

There now seems to be a good reason for Luxembourg, together with authorities in Spain and France to take action, to investigate all these schemes and to give these clients clear answers.

These clients have had no help from any authority. They have had to hire lawyers themselves to fight their corner. It is grotesque that in spite of all the talk EU directives on consumer protection turn out to give… errr, no protection at all to these clients.

The Landsbanki clients then have the additional problem of the bank’s bankruptcy and the lack of information from the administrator. Since the Landsbanki Luxembourg estate in reality only has two creditors – the Central Bank of Luxembourg and the estate of the Landsbanki Iceland – it raises the question why these two creditors do not seem to pay any attention to the complaints made loud and clear by the Landsbanki equity release clients.

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Equity release schemes have been causing trouble and tragedies for decades. The UK had its share of this ca two decades ago but stronger regulation put an end to the abuse of these products by its sellers. Scandinavian banks in Luxembourg have been selling the same products in Spain, causing similar harm to clients as Landsbanki caused (except the Landsbanki harm was compounded because of the how the administrator of Landsbanki Luxembourg has chosen to operate.)

Equity Release Scheme Association, Erva, is an association that aims at bringing the nature of these loans to the attention of pensioners who might be tempted by “free” cash offers, where an investment then pays off the loan. Working with the Spanish lawyer Antonio Flores they have successfully stood up for their rights against banks selling these loans. Erva members have filed claims against both Nordea and Rotschild Bank ia for mis-selling equity release loans. It will be interesting to see if actions agains these two banks and Landsbanki will put an end to these type of loan offers.

Luxembourg, as other EU countries, is obliged to follow EU directives on customer protection. The question is how diligently it’s been implemented and adhered to.

“How stupid we were!” said one Landsbanki client at the press meeting in Luxembourg. The sad thing is that banks talk people into it, by promises that don’t add up. Elderly people, often facing bad health and worries about pension have proven to be an easy pray.

The press in Belgium and Luxembourg reported on the Landsbanki action and no doubt the case will be followed with interest by the media, the authorities – and the banking sector.

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