Sigrún Davíðsdóttir's Icelog

Today, Althing – the Icelandic Parliament – in a flurry of Bills, which need to be finalised before the prime minister calls an election, changed the Law on capital controls.* Earlier, the Law was set to expire at the end of this year, meaning that the controls would expire. Now, that time limit has been removed, meaning the controls can stay forever. That is however not the intention. The Government, or rather the Central Bank of Iceland, is working on a plan to make them obsolete though it is clear it will neither happen today nor tomorrow. The appropriate minister will now have to report every six months on how that plan is going.

There are however two changes which, to my mind, are much more interesting. One is that from now on, it is not only the CBI that can give exemption from the controls. Any exemption will have to be accepted by the appropriate minister (most likely the minister of banking rather than the minister of finance though I’m not entirely sure – it doesn’t say outright), only the appropriate minister.

The other is the following (my translation; n.b. not legally binding): “The CBI can set rules on exemptions from the limitations in paragraph 1-3. The CBI can set conditions to the exemptions in the rule. These conditions can i.a. regard the origin of assets, ownership of assets, the purpose of the relevant transactions, the amount in the relevant transactions, the CBI’s supervision and reporting to the CBI. Before setting rules regarding exemption according to paragraph 1 relating to entities with a balance sheet over ISK400bn and that can have a considerable influence on the sovereign debt level and the ownership of retail banks, the minister (of finance?), as well as the minister responsible for the financial markets must be conferred with. The rules must be confirmed by the minister (of finance?).”

The reason I find this interesting is that I interpret this as the political powers wanting to meddle have a say in this matter. It could be entirely innocuous – but nothing is quite innocuous when it relates to the ownership of the two largest banks, Islandsbanki and Arion.

These two banks are now owned by foreign creditors (half of them had the mistaken belief that it didn’t matter though the banks’s balance sheet was many times the size of the economy; half have bought claims following the collapse in October 2008). There are strong forces in Iceland, very strong forces, that want to wrench the banks from “these foreigners” (as the saying goes in Iceland) and sell the banks at knock-down prices – no harm forcing more losses on “foreign banks and hedge funds” who only want to make money anyway, as if Icelandic owners would run the banks as charities. A fire-sale of the two banks would enable mostly moneyed men and pension funds to get the two banks for a song.

Those with money now in Iceland are mostly the same who had money before the collapse (with a few new names whose origin of wealth is not entirely clear) and this would enable the banks and the main businessmen and financiers to continue as if nothing had happen: own big stakes in banks and miraculously be the greatest beneficiaries of favourable loans, as was the pre-collapse custom.

This is, I admit, a rather cynic interpretation of what is going on and I would be very happy to change my mind but so far, there has not been much reason to. It is crystal clear that there is now a ferocious battle going on for assets in Iceland and the two trophy assets are these two banks: he/they who rule banks rule the country. That the political powers have now edged closer to the centre where all this will be decided is, to my mind, an indication of this ferocious battle. The battle for socially responsible banking is not lost in Iceland – not yet – but those with good political connections have won an important victory today.

*The Bill is here, in Icelandic. Earlier logs on the fate of the new banks see here.

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