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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