Sigrún Davíðsdóttir's Icelog

In two recent cases brought by the Office of the Special Prosecutor the focus has been on the defence team more than those indicted. The resignation of two defence lawyers from the al Thani case postpones the case until earliest February next year. In a case of alleged market manipulation at Kaupthing, the prosecutor asked that one of these two lawyers should be dismissed in order to prevent a repetition of the al Thani case. In a similar case against Landsbanki managers, the prosecutor asked for dismissal on grounds of conflicts of interest.

Yesterday, as one of the biggest cases, on alleged market manipulation and breach of fiduciary duty, brought so far by the Office of the Special Prosecutor came up in Reykjavík District Court for the first time, prosecutor Björn Þorvaldsson made a startling request: he demanded that Gestur Jónsson, defence lawyer for Sigurður Einarsson ex-chairman of Kaupthing, should be dismissed and Einarsson find a new lawyer.

Also Justice Arngrímur Ísberg seemed to be taken by surprise. Ísberg is famous in Iceland for what many see as a lenient grip on the infamous Baugur case where, incidentally, Gestur Jónsson acted as defence lawyer for Jón Ásgeir Jóhannesson. Ísberg was unsure if prosecutor Þorvaldsson could make this request but Þorvaldsson pointed him to a recent amendment to older law. After a deliberation for fifteen minutes Ísberg returned and refused the dismissal. The prosecutor has appealed Ísberg’s decision to the Supreme Court.

Þorvaldsson’s move was unexpected but there is a story behind it. As reported earlier on Icelog, Gestur Jónsson, also acting for Einarsson in the al Thani case, together with Ragnar Hall, acting for defendant Ólafur Ólafsson, Kaupthing’s second largest shareholder, resigned from the al Thani case just days before the oral hearings were due to start April 11. When Justice Pétur Guðgeirsson refused to accept their resignation, the two lawyers simply refused to follow the Justice’s order. Following a meeting this week with the two new defence lawyers – Ólafur Eiríksson and Þórólfur Jónsson from Logos – the Justice announced that oral hearings will not start until February next year. – In accordance with Icelandic law, the judge will rule on the lawyers’ resignation, which some see as contempt of the court, only at the end of the case.

In their letter (in Icelandic), Hall and Jónsson write that though they are convinced of their clients’ innocence they fear that the treatment of their clients so far is i.a. in breach of the European Human Rights Act. But instead of using these arguments on behalf of their clients in Court the two lawyers chose to resign. Before resigning, Jónsson and Hall had exhausted all possibilities for having the case thrown out or postponed. Ultimately, their resignation obtained just what they had failed to do through the courts: a major postponement.

As Þorvaldsson pointed out yesterday when he argued his case for the dismissal, the grounds Jónsson and Hall cited for their highly unusual move could also be invoked in the market manipulation case, which is why the prosecutor made this request. In Court, Jónsson protested that Þorvaldsson cited their letter, since it had not been presented earlier. Þorvaldsson said the letter was an open-source document, already published in the internet and did not need to be presented.

In the market manipulation case against the Kaupthing managers and employees nine are charged: chairman of the board Sigurður Einarsson, CEO Hreiðar Már Sigurðsson, director of Kaupthing Iceland Ingólfur Helgason, director of Kaupthing Luxembourg Magnús Guðmundsson, director of corporate banking Bjarki Diego, credit committee member and Kaupthing corporate employee Björk Þórarinsdóttir, director of prop trading Einar Pálmi Sigmundsson and two private business brokers Birnir Sær Björnsson and Pétur Kristinn Guðmarsson. – All nine were present in Court yesterday. All deny any wrongdoing.

In a similar case, against managers and employees of Landsbanki, which was also brought up in Reykjavík District Court yesterday, prosecutor Arnþrúður Þórarinsdóttir also asked that one of the defence team should be dismissed. Until one and a half year ago Lárentsínus Kristjánsson, acting for ex-director of brokerage Steinþór Gunnarsson, was the chairman of Landsbanki resolution committee. Þórarinsdóttir argued that this could imply conflict of interest and asked for Kristjánsson’s dismissal. Neither Gunnarsson nor Kristjánsson accepted. The Justice will rule on this at a later time. Other defendants are CEO Sigurjón Árnason, Director of Corporate Accounts Elín Sigfússdóttir, director of proprietary trading Ívar Guðjónsson and brokers Júlíus Steinar Hreiðarsson and Sindri Sveinsson. All of those charged deny any wrongdoing.

These latest events show that as elsewhere in big white-collar fraud cases, Icelandic defence lawyers know a trick or two to delay and thwart the path for the prosecutor when it comes to defending former high-flyers. The latest move by the prosecutor indicates that the OSP is prepared to play it tough. Or, as we say in Icelandic, “to converse with two rams’ horn” – not a sweet conversation.

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As so many others I’m reading with interest the debate on the 2010 article by Carmen Reinhart and Kenneth Rogoff, Growth in the Time of Debt. Apart from the issues at stake, I find it in general interesting to observe how certain theories catch on and then there are invariably people who attach their careers to these theories, thus turning into crusaders for certain ideas instead of crusading for the quest for good solutions. The debate on Reinhart and Rogoff chrystallises all these tendencies.

The article by Thomas Herndon, Michael Ash and Robert Pollin, PERI Institute University of Massachusetts Amherst, appeared April 15 (with a correction posted on April 17). Their abstract reads (emphasis mine):

Herndon, Ash and Pollin replicate Reinhart and Rogoff_ and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo_ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff_’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

Thus, their conclusions are both striking and clear, which is why this has come as a bombshell into the debate on Eurozone policies that so far and to a high degree reflect the R&R doctrine. To be fair, there has earlier been criticism from near and far on this debt-to-GDP correlation – but this seems to be the first study that picks apart the basis for the R&R doctrine.

Here is a digest of some relevant articles so far:

Michael Konczal, writing on the Roosevelt Institute’s blog Next New Deal, summarises the Hendon Ash Pollin debate. As to the status of the R&R paper he writes:

Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Posteditorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” 

So far, R&R’s data has not been scrutinised. Hendon, Ash and Pollin got the underlying data from R&R and detect selective exclusions, unconventional weighting and coding error. As to the coding error, Konczal checked it himself, with data from one of the three authors:

This error is needed to get the results they published, and it would go a long way to explaining why it has been impossible for others to replicate these results. If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.

Konczal concludes in an update on his blog:

UPDATE: People are responding to the Excel error, and that is important to document. But from a data point of view, the exclusion of the Post-World War II data is particularly troublesome, as that is driving the negative results. This needs to be explained, as does the weighting, which compresses the long periods of average growth and high debt.

Next new Deal has a further digest to the debate but got the brilliant idea of getting an econometrician to read the article by Massachusetts trio. A colleague of the trio Arindrajit Dube took the task on with a zest, pondering on Growth in a Time Before Debt. I.a. he throws up a graph of Past and Future Growth Rates and Current Debt-to-GDP Ratio, concluding:

As is evident, current period debt-to-GDP is a pretty poor predictor of future GDP growth at debt-to-GDP ratios of 30 or greater—the range where one might expect to find a tipping point dynamic.  But it does a great job predicting past growth.

This pattern is a telltale sign of reverse causality.  Why would this happen? Why would a fall in growth increase the debt-to-GDP ratio? One reason is just algebraic. The ratio has a numerator (debt) and denominator (GDP): any fall in GDP will mechanically boost the ratio.  Even if GDP growth doesn’t become negative, continuous growth in debt coupled with a GDP growth slowdown will also lead to a rise in the debt-to-GDP ratio. 

Besides, there is also a less mechanical story. A recession leads to increased spending through automatic stabilizers such as unemployment insurance. And governments usually finance these using greater borrowing, as undergraduate macro-economics textbooks tell us governments should do. This is what happened in the U.S. during the past recession. For all of these reasons, we should expect reverse causality to be a problem here, and these bivariate plots are consistent with such a story.

His conclusion is:

All in all, these simple exercises suggest that the raw correlation between debt-to-GDP ratio and GDP growth probably reflects a fair amount of reverse casualty. We can’t simply use correlations like those used by RR (or ones presented here) to identify causal estimates.

R&R have now responded to the critique, on FT Data Blog ­– with FT Chris Cook’s own digest, i.a. comparing date from R&R and the Massachusetts trio. R&R admit to the coding error – but deny it has the dramatic results as the Massachusetts trio claim:

On the first point, we reiterate that Herndon, Ash and Pollin accurately point out the coding error that omits several countries from the averages in figure 2. Full stop. HAP are on point. The authors show our accidental omission has a fairly marginal effect on the 0-to-90-per-cent buckets in figure 2. However, it leads to a notable change in the average growth rate for the over-90-per-cent debt group. The median growth rate we report is the right order of magnitude.

Our interpretation of the errant data point in figure 2 was fortunately tempered somewhat by the parallel weight given to the median GDP growth rate for the various levels of debt in our discussion, an issue HAP selectively ignore.

Further, R&R deny selective exclusions and defend the weighting – and they stand by their earlier conclusions:

So do where does this leave matters on debt and growth? Do Herndon et al. get dramatically different results on the relatively short post war sample they focus on? Not really. They, too, find lower growth associated with periods when debt is over 90 per cent. Put differently, growth at high debt levels is a little more than half of the growth rate at the lowest levels of debt.

On The Daily Beast Megan McArdle digests the material so far, concluding that the R&R doctrine still has merits:

This doesn’t overthrow the broader scope of their work, such as the finding that you tend to get slow growth after financial crises.  They certainly seem to have called that one right.  

There is now a deluge of comments and of course Paul Krugman has a thing to say here, pointing out that actually the pundits should indeed be blamed. Not only R&R – after all, they have not been the only economists peddling austerity. Krugman cites a recent article in the Washington Post:

If [debt projections are] even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.

Krugman concludes:

Not “some economists”, let alone “some economists who have been sharply criticized by other economists with equally good credentials”, but “economists”.

This is deciding what you want to believe, finding someone who tells you what you want to hear, and pretending that there are no other voices. It’s deeply irresponsible — and you can’t blame Reinhart-Rogoff for that mistake.

*Professor Simon Wren-Lewis, Oxford, has just posted an aside (read the whole piece, it’s short, with a telling graph) to the R&R debate, An understandable mistake, further underlining the importance of government spending in the time of recession. But first to the R&R debate:

No, I’m not talking about coding in excel – as someone who has in the past done plenty of empirical work, my overriding reaction is empathy with the researchers concerned. There – not so much by the grace of god but because no one bothered to check what we did – go us. What I’m talking about is the weak global recovery and a primary reason for it. But there is a link, which I will come to at the end.

Wren-Lewis wants to draw the attention to a new blog on Vox EU, Why is this global recovery different?, from the latest IMF WEO by Ayhan Kose, Prkash Loungani and Marco E Terrones. According to Wren Lewis “…it tells a story in pictures (particularly comprehensive and clear pictures) that I and others – most notably Paul Krugman – have been telling for some time.”

In the spirit of their study – and much in the spirit of Wren-Lewis, Krugman and others, Pollin and Ash have now written an article for the FT, most topically on Austerity after Reinhart and Rogoff, where they conclude (emphasis mine):

The case for austerity has never relied entirely on Prof Reinhart and Prof Rogoff. But the other major claims made recently by austerity hawks have also not held up well. Focusing on the US case, austerity supporters circa 2009-10 consistently argued (frequently in this newspaper) that the large US deficits would lead to dangerously high inflation and interest rates. Neither of these predictions came true. In fact, both inflation and the interest rates on US Treasuries were at historic lows in the four years, 2009-12, during which government deficits were at their peak.

 It is also not true that the large deficits have created an unsustainable burden on US government finances. In fact, since 2009, the US government’s interest payments on debt have been at historically low levels, not historic highs, despite the government’s rising level of indebtedness. This is precisely because the US Treasury has been able to borrow at low rates throughout these high deficit years.

We are not suggesting that governments should be free to borrow and spend profligately. But government deficit spending, pursued judiciously, remains the single most effective tool we have to fight against mass unemployment caused by severe recessions. Recent research by Prof Reinhart and Prof Rogoff, along with all related arguments by austerity proponents, does nothing to contradict this fundamental point.

Only a few years ago social unrest, rising from horrendous unemployment in debt-ridden European countries, was a state  of affairs few people expected to see. Keeping in mind that the brutal focus on austerity and little else is only aggravating the situation, the study by Massachusetts trio is such a timely and weighty addition to the debate. It cannot be said any clearer:

… government deficit spending, pursued judiciously, remains the single most effective tool we have to fight against mass unemployment caused by severe recessions.

*The update is this post from Simon Wren-Lewis.

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The coming elections in Iceland are characterised by greater voter volatility than previously seen. Fifteen parties – up from five in the present Parliament – are courting the voters. In spite of turning the economy from recession to growth in record time the coalition Government has lost trust. Voters, sticking to the two parties that have been the mainstay of Icelandic politics for decades, seem to long for the past.

The Government and its unrewarded and squandered success

In spite of extensive write-down of private debt, orchestrated by the present Government of social democrats, Samfylkingin, the “Alliance, and Vinstri grænir, “Left Green,” private debt is the main election issue in Iceland. Framsóknarflokkurinn, the “Progressive Party,” has earlier promised to write down all private debt by 20% but is now talking of distributing ISK200-300bn (€) to those with debt, no matter if they can repay their debt or not, meaning the party will help indebted wealthy individual. The party claims it will extract this money, not clear how, from the estates of the two failed banks, Kaupthing and Glitnir.

Judging from the debate and the enormous loss of favour suffered by the two coalition parties it could be thought that the present Government had ignored the problems rising from the surge of private debt after the collapse of the three big Icelandic banks in October 2008. But that is not the case at all. More has been done in Iceland than in any other European country in crisis. Debt has been written down – mortgages cannot be higher than 110% of the value of the property and morgages are consequently written down to that level. Bankruptcy laws have been amended, meaning that bankruptcy period is now two years (only recently have the Irish taken steps to chang their bankruptcy law).

Compared to the situation in other debt-ridden countries, i.a. Ireland, where private debt is high and no public policies have been introduced to assist indebted individuals, the enormous discontent in Iceland is a mystery. Part of the explanation is surely that Icelanders compare their lifestyle to 2007 – not to the situation in other European countries in crisis.

The present Government has been eminently bad at taking credit for the turn-around in the economy. In the summer of 2011, as recession had turned to growth, minister of finance and then leader of the Left Green Steingrímur J. Sigfússon was interviewed on Rúv. When so many of his European colleagues would have announced a growth of 2% with fanfare, Sigfússon lamented the growth was “only” 2% (it ended in 2.9% that year, 2011).

This week, when asked about the poor performance in opinion polls newly elected leader of the social democrats, Árni Páll Árnason said the party’s fate was similar to the fate of other parties in government in European crisis-struck countries, i.e. the voters punish governments for the crisis. For some reason, Árnason did not mention that there is this not so trivial difference: in Iceland, the Government has actually turned the economy around.

Fifteen parties – up from five

The “Four-Party,” Fjórflokkurinn, is the nickname often used for the four old parties: the conservative Independence Party, traditionally the largest party, the progressives, the social democrats and the Left Green. This name underlines the latent sense of many voters that there is “the same arse” (excuse my language, this is an old Icelandic expression) under all of them, meaning there is no real difference between them and that they really look only after their own interests, not the interest of the voters.

In addition to the “Four-Party” there have often been one or two new parties in the run. In addition to the “Four-Party” in Parliament there is now the “Movement,” Hreyfingin, a protest party that ran for the first time in the elections in March 2009 but which has now split.

Following the success of the “Best Party,” Besti flokkurinn, in Reykjavík in the local election in 2010, the “Four-Party” has had good reasons to worry if some unexpected surprise, in the shape of a new party, would spring up in parliamentary election and steal votes. For a while, it seemed as if “Bright Future,” Björt framtíð, a centre-liberal pro-EU party, would be the only new party.

It now turns out there are eleven new parties. Out of the fifteen parties running, eleven are running in all six constituencies. The only one of the new parties, apart from Bright Future that might get more than five per cent of votes is the Pirate Party, led by Birgitta Jónsdóttir who started her political career in the “Movement.” She became an international celebrity for her role in Wikileaks earlier but is now a well-known activist on media freedom and the Internet.

According to the latest poll, the Progressives top the list with 32.64%, Independence Party 22.88%, the social democrats 10.39%, Bright Future 9.49%, the Pirate Party 8.99% and Left Green 6.69%.

The historic loss of the Independence Party 

It is still too early to say if the Independence Party will indeed fare as badly as forecasted by the polls. After a consistent 30% or more in the polls for the last few years their luck turned following their party conference earlier this year. Their leader, Bjarni Benediktsson, was re-elected with a convincing majority but failed to rouse the spirit outside the party faithful and has been unable to connect to latent conservatives voters.

Behind the scenes the old guard has been plotting ferociously against him, meaning the Davíð Oddsson and the die-hard followers of this former leader, prime minister and Governor of the Central Bank, now editor of the once (not any more) largest and most powerful newspaper, Morgunblaðið. In spite of the party’s lacklustre performance Morgunblaðið’s editor has not used his sharp pen to rouse conservative voters. And in spite of the surge of the Progressives, quite obviously stealing votes from the conservatives, Morgunblaðið has been most sweet towards the Progressives.

Oddsson fought Icesave tooth and nail and, from his point of view, Benediktsson committed the cardinal sin of taking the opposite view: after the last attempt to negotiate with the Brits and the Dutch, Benediktsson supported the agreement, which then failed in a referendum, in spite of gathering a large majority in the Parliament. Oddsson – and the Progressives who were on his side – felt hugely victorious when the EFTA Court ruled in favour of Iceland on Icesave. Hence, the mild Morgunblaðið tone towards the Progressive Party.

Also on EU Oddsson and the Progressive see eye to eye, both being firmly against. Benediktsson used to be seen as pro-EU but has turned on that issue following the collapse and, probably more importantly, as he has had to fight the Oddsson wing of the party.

Oddsson was ousted from the post of Governor of the Central Bank in early 2009. When a report on the collapse and necessary lessons from it was presented at a party conference in 2009 Oddsson held an unannounced speech and not only shredded the report but taunted those who had written it. Many feel that by preventing a much-needed discussion of the past Oddsson caused great harm to the party. This incident still looms in the discussion now and throws a shadow, shaped like Oddsson, on the party.

When a poll was published last week, showing that half of those now in favour of the Progressives, would vote for the conservatives if Hanna Birna Kristjánsdóttir, vice-chairman of the Independence Party, would led it, Benediktsson said he needed to consider his position. This was widely taken as a hint he was stepping down but he quit the idea of quitting and showed a tougher and more resolute side than earlier. Rumours said that supporters of Kristjánsdóttir had paid for the poll and this is now seen to have been greatly damaging to her. Again, this is seen as a plot to de-throne Benediktsson, stemming from the old guard.

Morgunblaðið’s owners have always been companies and individuals closely linked to the Independence Party. Interestingly, this is no longer so. Among the owners there are now companies with strong links to the Progressives, one of them being Kaupfélag Skagfirðinga, a remnant of the once so powerful co-op movement in Iceland, always part of the Progressive’s sphere in Icelandic politics. The CEO of KS is Þórólfur Gíslason, one of the country’s most powerful men though not at all a well-known name in Iceland.

Morgunblaðið, formerly a conservative stronghold, has at present strong ties to the two parties – the Independence Party and the Progressives – which together have ruled Iceland in total for 26 years since 1944.* The editor of Morgunblaðið once led a coalition government of the two parties for nine years, from 1995 to 2004. Morgunblaðið seems to have been doing its best to shape the ground for such a coalition. Bar unexpected events, it is difficult to what could exclude a coalition government led by the Progressives, together with the Independence Party.

The leaders of the two biggest parties– and the return to the past

Sigmundur Davíð Gunnlaugsson leader of the Progressive Party is born into the party. His father, Gunnlaugur Sigmundsson, was also briefly an MP for the party. Sigmundsson was on the board of a public IT company, Kögun, which he later bought when it was privatised and became a wealthy man. Recently, Teitur Atlason, a blogger living in Norway, accused Sigmundsson of corruption in connection to Kögun. Sigmundsson sued the blogger for libel but lost. Atlason’s allegations were not new and had been published in Icelandic media more than ten years ago. Sigmundsson claims they are wholly unfounded and he has never been charged in relation to Kögun. Anna Pálsdóttir, Gunnlaugson’s wife, is independently wealthy, being the daughter of Páll Samúelsson who in 2005 sold Toyota Iceland.

Also Bjarni Benediktsson is born into his party, the Independence Party. For the most part of the last century his family has been both wealthy and powerful. As so many in his family Benediktsson is a lawyer. His father and uncle were in business with Milestone, a now failed holding company, owned by Karl Wernersson. Milestone was a big shareholder in Íslandsbanki (later named Glitnir) and the insurance company Sjóvá. Benediktsson is seen by many as being tainted by investigations into the affairs of Milestone, which is being investigated by Office of the Special Prosecutor.

It is interesting that less than five years after the collapse, two parties and two leaders seen to be closely connected to politics and businesses before the collapse are now doing immensely well in the polls – and might very well be the powers to be in Icelandic politics, thus connecting the past to the present. Possibly because this past, i.e. the 1990s, is seen as a time of prosperity and stability.

The voters seem to seek confidence in the two parties, which have been the political backbone in Icelandic politics and more than any other parties shaped Iceland in the decade before the boom, which led to the collapse that turned everything upside down in Iceland almost five years ago.

*The 26 years refers to years when both parties have been in two together in Government. In 1958-1959 and 1979-1980 the social democrats were in Government and then from 2009 to 2013 the social democrats and the Left Green. Out of the 69 years since the foundation of the Icelandic republic, the Independence Party or the Progressives or both have been in Government for 63 years. See here for a Wikipedia list (in Icelandic) of Icelandic Cabinets. The social democrats have been through many metamorphosis. Their fate, as well as the fate of left parties, has been to split at regular intervals.

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Instead of starting the oral hearings in the al Thani case – where the Office of the Special Prosecutor in Iceland has charged three former Kaupthing managers and the bank’s second largest shareholder – as planned Thursday morning, April 11, the hearings were postponed until further notice. This happened after the defense lawyers of Sigurdur Einarsson and Olafur Olafsson took the unprecedented step not to heed the judge who refused to accept their resignation of the case. In court, prosecutor Bjorn Thorvaldsson pleaded that the two lawyers would receive penalties for willfully causing delays to the case. The judge will consider any such step after the case had finally been heard.

The defendants have now appointed new lawyers who need to read up on the case. The two lawyers who resigned – Gestur Jonsson and Ragnar Hall – are two of the most experienced lawyers in Iceland. Jonsson was i.a. lawyer for Baugur’s main shareholder Jon Asgeir Johannesson in the so-called Baugur case and is also Johannesson’s defense lawyer in a case brought against Johannesson by the Office of the Special Prosecutor, the so-called Aurum case.

The defense in the Aurum case shows a similar trend to the al Thani case. – The oral hearings were due to start in January, got postponed until early April when it was again postponed, this time because documents that the defense team wanted to present were not ready. After the events in the al Thani case Special Prosecutor Olafur Hauksson expressed his worries that similar things might start to happen in other cases brought by the OSP.

The two lawyers replacing Jonsson and Hall – Olafur Eiriksson and Thorolfur Jonsson– are not at all big names in the Icelandic legal profession. The are both from Logos, the largest Icelandic law firm.

The two lawyers who resigned claim they felt forced to resign because of the way their clients have been treated. Still, they have neither filed any complaints nor taken any action. Earlier, they had made several attempts to have the case thrown out or postponed, taking their cases all the way to the Supreme Court, which has rejected their attempts. In its last ruling re the case the Supreme Court reprimanded the two lawyers, saying their case was without merit.

The strong feeling in Iceland is that the two lawyers resigned in order to gain the postponements they could not obtain via the courts. It is well known in big white-collare cases that highly paid lawyers often try all possible tricks to thwart and delay going to court. Both lawyers strongly deny any such tactics.

The judge will meet with the new defense lawyers on April 22, after which it might be clear when the oral hearings will start. Given the complexity of the case, it is quite likely that the next chapter in the case will not commence until autumn.

*Here are earlier blogs where the al Thani case is mentioned – and here is the story behind the charges in the al Thani case. 

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Just as the defense team for those indicted in the al Thani case – Kaupthing’s second largest shareholder Olafur Olafsson and managers Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson – had exhausted all means of getting the case thrown out of court or suspended, the defense lawyers for Einarsson and Olafsson, Gestur Jonsson and Ragnar Hall, have resigned from the case. They claim that the defendants are not getting a fair trial and criticise the investigation by the Office of the Special Prosecutor and how the County Court and the Supreme Court have handled their case.

Bjorn Thorvaldsson, who represents the OSP, says to Ruv that the move by the defense lawyers came as a great surprise. The two lawyers tried five different ways to have the case thrown out or suspended, all five times taking the case to the Supreme Court. In the last case, for suspension, ruled on the the Supreme Court only last week, the Supreme Court reprimanded the two lawyers in its ruling for bringing a needless case to the Court.

However, only a few hours after the two lawyers handed in their letter (in Icelandic) to the Country Court, the judge in the coming case, Petur Gudgeirsson, refused to acknowledged their resignation. The oral hearings are planned to run for eight days. Ca. 50 people are being called to give witness. Now that the latest attempt by the defense lawyers to suspend the case it seems that the oral hearings will start, as planned, on Thursday.

*Updated: In spite of the judge having refused to acknowledge the lawyers’ resignation the two defense lawyers have reiterated their intention. No one seems to know what the legal situation is here. The lawyers can hardly be pushed against their will to defend their two clients. It means that the case is now in jeopardy and might be postponed until next autumn. 

*A link to earlier Icelogs on the al Thani case.

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No one in his/her right mind would try to make a one-size pair of jeans – human beings are too varied in size and shape. It is the same for debt-ridden Eurozone countries: debt is the apparition of their problems that do however come in different sizes and shapes, making it impossible to look for any Eurozone template. As Mario Draghi emphasised, a lot of political capital is invested in the euro – and it is not a sliding door.

A good central banker never says anything that shakes the markets. Governor of the European Central Bank Mario Draghi was on central banker’s form at the ECB press conference last Thursday, April 4 with measured words, on interest rates, inflation and on Cyprus.

However, Draghi did throw in some interesting observation on two things that are a fixture in the euro debate. One is the dominance of politics vs economics in solving the Eurozone debt problems, crucial to the understanding of the Greek conundrum.  The other, brought to the surface by the Cypriot crisis, is the search for a Eurozone crisis-solution “template.”

What does ultimately decide actions in the Eurozone debt problems?

Since it took about two years (and more might be to come) to find a Greek solution that vaguely resembled a sustainable solution the coverage partly turned into febrile forecasting if Greece would leave the euro or not. Citigroup’s chief economist Willem Buiter and his Citi colleague Ebrahim Rahbari coined the word encapsulating a Greek exit – Grexit – in a research note in Februar 2012, estimating the Grexit likelihood to be 50%.

So far, the Grexit-league has not been right. But why was it that so many learned men – in spite of careful calculations, graphs and historical parallels – have, so far, been wrong on the Grexit? The simple answer is that they focused on the economics, not on the politics, of the euro.

At his April 4 press conference Draghi touched upon this topic. Showing a bit of his Italian animated character towards the end, Draghi made an interesting observation. It came as an answer to some very hypothetical questions: assume that the situation in Greece and Spain would deteriorate; is there or isn’t there some safety net in place, especially regarding derivatives?

Possibly because the question came from viewers on Zero Hedge, Draghi felt these possibly non-European viewers needed a lecture on the meaning of the euro. Saying first he had no answer to such hypothetical questions he added he might actually have a partial answer:

“These questions are formulated by people who vastly underestimate what the euro means for the Europeans and for the euro area. They vastly underestimate the amount of political capital that has been invested in the euro. And so, they keep on asking questions like “if the euro breaks down” and “if a country leaves the euro area tomorrow”. The euro is not like a sliding door, it is a very important thing; it is a project in the European Union. So, that is why you will have a very hard time asking people like me “what would happen if?” There is no plan B.”

Draghi is not the first senior European official to point this out – but his observation is succinct and strikes a few clear points. Yes, it can be difficult for non-Europeans – and indeed for economists of all nationalities – to understand the political importance of the euro and consequently the political capital invested in this political project over more than twenty years. But understanding this is necessary so as to understand that no, there is no plan B.

In the Eurozone, the Euro is the alfa and omega. There is no other option – and therefore no plan B. All solutions are about mending and fixing, not shrinking the Eurozone, even though bright economists suggest various solutions to the Eurozone woes by calculating certain countries out.

Unfortunately for the euro and the Eurozone, more and more Europeans have lost sight of the euro’s political importance. Practicing politics is partly about waking up every morning, assuming that everything said yesterday is now totally forgotten and therefore needs to be repeated.

Too little is been heard about the gains brought by the euro in countries like Germany where cost of bailing out others is indeed dwarfed by years of euro-gains. And politicians in debt-stricken countries are too often been too focused on saving their own reputation after years of bad policies by blaming the euro for the situation.

Will any country every leave the Eurozone?

The pondus of Draghi’s words is a good reference when it comes to gauging and forecasting measures in debt-stricken countries. Of course, the economics matter in concrete terms – and after all, the IMF and the ECB both are part of the troika, forming the solutions – but the policies do follow the over-arching Real-Politik of the Eurozone, which is to hold onto the Eurozone, no matter what.

From this logic it follows that the answer to the question above has to be “no.” If any one country leaves – no matter for what reason – the euro spell will be broken and the endlessly and chronic nagging doubt will be hanging over all other countries, which might be seen, according to some calculations, likely to leave. As Draghi said: “The euro is not like a sliding door…”

That said, the last few years have seen the doubt festering, partly because, as mentioned above, politicians have not always given the euro a good support. But the ECB, now under a very determined Draghi, the EU and the IMF (so far, always led by a European though that might to change one day), have shown a dogged grit and resolve to stick to the one and only euro-plan.

This is not to say the troika is blameless but the troika is only called – like the fire brigade – when the fire rages and all other solutions fail. The fire brigade may choose the wrong strategy but it would not be there if it weren’t for the fire.

A template – or tailored solutions?

The debate in every debt-stricken country always seems to centre on specific words. In Ireland it was the “Promissory Notes,” in Greece the “Grexit” – and in Cyprus the word is “template.” For some reason, and suddenly now, everyone is asking if the measures used in Cyprus will be a “template” for other countries.

It is not clear why the Cypriot measures are seen to be more of a possible template than measures in other countries. Four Eurozone countries have needed help to overcome debt problems and the troika-prescriptions have all been different, according to circumstances and the most pressing problems.

Here, Draghi also made a relevant observation. “Cyprus is not a template,” he said. “Cyprus is not a turning point in euro area policy. We have said many times that our resolution… is to resolve banks without using taxpayers’ money and without disrupting the payment system. That is why we have to have a resolution framework in place. So, it is not a turning point. That is exactly the resolution framework that all other countries have and the euro area will have.”

Draghi makes it clear that there is no template as how to do things – but there is a clear goal: “to resolve banks without using taxpayers’ money and without disrupting the payment system.”

This goal was not clearly formed when the Irish Government felt compelled to pass a legislation issuing a blanket guarantee to safeguard the Irish banks. Quite interesting to read minister for finance the late Brian Lenihan’s speech and the following debate in the Irish Dáil September 30 2008 where the word “taxpayer” figures 46 times. As Lenihan said:

“This legislation is not about protecting the interests of the banks; it is about the safeguarding of the economy and everyone who lives and works in this country… The guarantee provided by the State is not intended to insulate the shareholders of these financial institutions from the risks attached to the investments they have made, as much as they may have benefited from significant rewards over the years… The guarantee is not free and the taxpayer who ultimately underwrites this support will be remunerated for the value of the support provided. The terms and conditions on which the guarantee is provided will ensure the taxpayer gets value for money.”

Unfortunately, the taxpayer got more burden than value in January 2009 when the Irish Government had to shoulder the bank debt it had guaranteed. Thus began the crippling Irish debt saga. The goal – to avoid using public money – springs from avoiding the repetition of the Irish saga, to avoid transforming bank debt into sovereign debt. It is still too early to tell if Cyprus will be a success – the situation there doesn’t quite look like a success for the moment (but neither did the situation in Iceland in October 2008 resemble a successful beginning).

Although repeatedly asked, Draghi did not give any clear answers regarding the unfortunate intention to collect necessary Cypriot funds by putting a levy on insured depositors. He could only be drawn on admitting that it “was not smart, to say the least, and it was quickly corrected in a Eurogroup teleconference on the next day. But that is what is past.” – Not quite the past since this has now become part of a perceived template for fixing a debt crisis. And although it seems that the idea came from the Cypriot government it is still inexplicable – and unexplained so far – that no one in that room on March 16 saw what Draghi admits “was not smart, to say the least…” – and prevented that idea from being let out in the open.

Politics, not economics, ultimately govern the euro

In spite of all the talk about “Super Mario,” Draghi will know better than most that neither the ECB nor the IMF will save the euro. It is a political task – which is probably one of the reasons why Draghi’s refrain is “within our mandate,” meaning the ECB. And as one-size jeans will never fit all, so one template cannot solve the present crisis in various Eurozone countries.

The banking union in spe is set to provide the much-needed framework to prevent the present situation where debt migrates from the private to the public sector. It will take some resourcefulness to survive the present debt debacle until the nirvana of the integrated approach that “will oversee the safety and stability of the financial system as a whole,” as described in a recent IMF report, is reached.

Maybe it is the general dominance of markets on government policy, which lead so many to conclude that the most likely solutions to the problems, caused by the deadly debt in some Eurozone countries, could be found through clever calculations leading to euro exit. Draghi’s words are a clear reminder that ultimately, the euro is governed more by politics than economics.

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Is Slovenia the next Euro-domino to fall? That is a continuously repeated forecast. But what is the outlook and what are the financial facts?

Recently I spoke to a banker familiar with Slovenian banks. He was reasonably optimistic. The new Government seemed to be taking imminent problems quite seriously – but corruption remains a problem, he said.

According to a Eurobarometer 2012 study of perceived corruption in the 27 EU countries Slovenia topped the list of perceived increased corruption: 74% of Slovenian respondents thought the corruption was increasing, with 73% in Cyprus right behind. This bodes ill for Slovenia since a corrupt country might be less likely to taka the necessary but painful initiatives. However, the new Government has already shown some understanding of what is needed. Recent development in Cyprus might also have concentrated its mind.

On February 28 Prime Minister Janez Jansa, a conservative, lost a vote of confidence due to allegations of corruption amid economic gloom. The new PM is the leader of the opposition Alenka Bratusek, a liberal former civil servant. So far, the most serious allegation of corruption brought against Bratusek is that she had plagiarised one page in her PhD thesis – recently a common vice among German politicians. There are many intellectuals in the new Government, i.a. the minister of culture, Jernej Pikalo who since 2006 has been a visiting professor at the University of Bifroest, Iceland, lecturing on globalisation. Consequently, he should be familiar with what has and has not been done in Iceland post-collapse.

Fitch and the IMF on Slovenia

In a note 22 March 2013 from Fitch Ratings the assumption “remains that Slovenia will be able to avoid requesting international financial assistance. Maintaining investor confidence and therefore the ability to borrow in the market on reasonable terms will require the incoming government to finalise and implement legislation on a bad bank solution and state asset management company. Failure to tackle these issues in a timely manner would increase pressure on the ‘A-‘ sovereign rating.” (Emphasis mine in all quotes).

In the Concluding Statement March 18 2013 of the IMF staff visit to Slovenia the summary reads:

A negative loop between financial distress, fiscal consolidation, and weak corporate balance sheets is prolonging the recession. Prompt policy actions are necessary to break this loop and restart the economy. Repairing the financial sector and improving corporate balance sheets is of the essence. The Bank Asset Management Company is an effective way to clean bank balance sheets. Banks should be quickly recapitalized. A clear and coherent plan is key to access international capital markets quickly. Fiscal consolidation should continue to reduce the structural deficit, while letting the automatic stabilizers work. Recent labor market and pension reforms are steps in the right direction.

What needs to be done?

As can be seen above the IMF statement points out that a “negative loop between financial distress, fiscal consolidation, and weak corporate balance sheets is prolonging the recession.”

The numbers do not look promising. “Real GDP declined by 2.3 percent in 2012 as domestic demand shrank severely.” Here, Slovenia is in league with the worst performing countries such as Greece and the forecast for this year is a further contraction by 2%. However, growth is in sight for next year, depending on implementation of promised reforms, continued market access and – most elusive of all – growth in the Eurozone.

Quite promising, Slovenia has already set up the Bank Asset Management Company (BAMC) and a sovereign state holding company. This is the necessary framework to tackle much needed bank restructuring, debt overhang of corporate debt, improved governance and cutting back on state involvement in the economy. If all of this would be pushed in the right direction much could be achieved. Again, this “if” might prove elusive.

Fiscal consolidation, downsized public sector, labour market reform and more friendly attitude towards foreign investors (Slovenians seem even more hostile than Icelanders to foreign ownership in their economy) are all areas that are being worked on and need more.

The sick part of the economy: banks

No surprise here – the banks are under severe distress. That is of course ominous since we have seen banks causing severe problems in a country after country in the Eurozone (and of course beyond, Iceland being a case in point).

The rapid rise in non-performing loans is a sign of danger and distress in the Slovenian banking sector:

The share of nonperforming claims in total classified claims increased from 11.2 percent at the end of 2011 to 14.4 percent in 2012. The three largest banks saw their ratio increase from 15.6 percent to 20.5 percent in the same period with about ⅓ of their corporate loans non-performing. Meanwhile these banks have repaid the bulk of their debt with foreign private creditors, while increasing reliance on the ECB.

With BAMC the first steps towards a spring-cleaning of balance sheet have been taken but now the brooms and detergents have to be put to a ruthless use. To its relief, the IMF mission notes that international experts have been appointed as non-exec members on the BAMC board.

But the corporate sector – intertwined with banks – is not too healthy either

If the Slovenian corruption is similar to what is coming to light in Cyprus, the danger is that some of these non-performing loans have been given more on grounds of cosy relationships than business rationale, which might then indicate that the collaterals are not water-tight. Again, of course this can be handled professionally if the political powers stay away and the experts are allowed to deal expertly with the problems.

Cross ownership between large corporations, financial holding companies and banks is reminiscent of Iceland pre-collapse. It is a very bad sign indeed. “The debt to equity ratio is among the highest in Europe.” Primitive bankruptcy law make bankruptcy procedures lengthy and are a serious obstacle in dealing with debt. – Hopefully, the new Government gives priority to new bankruptcy legislation since this a mundane but often overlooked problem.

And then there is this:

Viable publicly-owned undercapitalized companies should be recapitalized by the state or attract private capital. However, the mission cautions the authorities against taking actions on debt restructuring or recapitalization that can lead to ineffective use of public funds. Finally, Slovenia has to address corporate governance weaknesses. A Report of Standards and Codes on Corporate Governance by the World Bank and the OECD could help in this respect.

To me this looks like a loud and clear corruption warning without the C-word mentioned.

Funds needed

But even experts cannot be expected to make something out of nothing. The IMF mission points out that transferring bad assets to BAMC is no substitute for real money needed to recapitalise the banks. The three largest ones need around €1bn this year – and if economic conditions deteriorate more might be needed.

Financing requirements are particularly pronounced in summer, with bank recapitalization needed soon and a large 18-month T-bill coming due in June. In all, financing needs for the remainder of the year (excluding the bonds to be issued by the BAMC) could reach some € 3 billion, and possibly more depending on bank recapitalization needs. A large part of this financing need should be met via external borrowing, given banks’ inability to absorb large amounts of government paper, but also to improve the maturity structure of government debt and reduce rollover risk. This highlights the importance of safeguarding market access in the near term.

To give context to the figures above the Slovenian GDP in nominal terms amounted to €35,466m in 2012. The uplifting figure is that debt to GDP was, in 2012, 52.5%.

Over at least 18 months Cyprus had plenty of warnings, its banks were in ECB intensive care for months and yet nothing was done until the patient was almost thrown out of the intensive care, also called “Emergency Liquidity Assistance.”

The key issue is that Slovenia is ok as long as it manages to remain on good terms with the markets – or as long as the markets are keen and willing to be on good terms with Slovenia. And if not… Well, we all know – it ends with an all-night meeting in Brussels, a bail-out at sunrise – or more recently a bail-in – and since that is never enough, it is followed later on by easing of terms and an uncertain future.

But perhaps Slovenia will show that this time it can be different.

*Here is a link from Global Finance to key figures of the Slovenian economy such as GDP, debt, unemployment and all these things that make a nerdy heart beat faster. Here is a link on the economy from the Slovenian Statistical Office.

*Update May 2: here is a Bloomberg article from yesterday when Moody’s cut Slovenia’s rating to junk.

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As Cypriots get used to the idea of capital controls, the first indictments in a big alleged capital control fraud case surface in Iceland. But why did Iceland need capital controls?

Capital controls have been in place in Iceland since November 28 2008, almost two months after the emergency legislation was passed, on October 6 2008, marking the beginning of the collapse of the Icelandic financial sector. With its own currency, the krona/ISK, access to liquidity was not a problem but dwindling foreign currency reserve posed an acute problem.

“Glacier bonds” and other foreign-owned assets in Iceland

With high inflation and high interest rates in a world with low inflation and low interest rates in the years 2005 to 2008 Iceland was a popular destination for money looking for a place to collect interest rates. Foreign banks, notably Toronto Dominion, offered so called “glacier bonds” issued in ISK. At the time of the collapse, ca. foreign-owned ISK680bn, now €427m, were nesting on bank accounts in Iceland – the Icelandic GDP is now around 1600bn. This number is now believed to be about ISK400bn, 25% of GDP (CBI, see p. 12 here).

Although a part of these inflows were “patient money,” i.e. money being placed in Iceland to gather high interest rates for longer term, the sense was that ca. ISK 300bn was short-term investment. Foreseeing rapid outflow, causing major instability and draining the foreign reserves of the Central Bank of Iceland, the capital controls were put in place – and money could no longer flow freely in and out of the country.

Much of this money is in short and long term Icelandic sovereign bonds and other sovereign papers and on accounts with the CBI or the retail banks. Following recent change in the laws on capital controls the offshore krona investments are now greatly restricted.

In addition to the “glacier bond” overhang foreign creditors of the holding companies of Kaupthing and Glitnir (which own the new banks, Arion and Islandsbanki) own additional Icelandic assets, ca. ISK600bn. The plan now is to solve the underlying causes for the capital controls together with negotiations on composition of the two banks – but so far, it is unclear what happens. The CBI would like to see at least one of the two banks sold to foreigners so as to make the sale “currency neutral” but as I’ve written about earlier strong forces in Iceland favour a sale of both banks at knock-down prices to Icelanders.

Icelandic capital controls – no bother in daily life except for companies and investors

To begin with, Icelanders planning to go abroad had to visit a bank, with their flight ticket to buy foreign currency. People could no longer transfer money abroad from their bank accounts, as they had been able to earlier. Otherwise, ordinary people did not much sense the capital controls. Icelanders traveling abroad can use debit/credit cards.

Unlike Cyprus, there were no caps on how much money people could take out from their bank deposits in Iceland. The Icelandic capital controls were not put in place to hinder outflows from deposits in Iceland but strictly to hinder pressure on CBI’s forex reserves and to hinder that the offshore krona – krona owned by foreigners – could flow into the Icelandic economy.

As it is now, the capital controls permit only internal trading in offshore ISK among non‐residents, i.a. they restrict capital transactions between residents and non‐residents. Companies with regular foreign interaction can seek dispensation and many companies now operate under a dispensation scheme.

But with capital controls companies in Iceland are restricted in their investments abroad, all forex earnings by Icelandic companies abroad have to be repatriated, i.e. brought back to Iceland and placed with the CBI. Of course, companies have learnt the hard way to live with it but as someone said to me recently, it is the capital controls’ mentality that is so deadening – this restriction of activities that the controls bring.

Efforts to lift the capital controls – so far, little progress

The CBI has outlined the long-term risk of capital controls. Too many krona chasing too few investment opportunities can lead to an asset price bubble and this might already be happening. Corruption may very well grow around dispensations and other forms of exemption, as well are around attempts to circumvent the laws.

The CBI policy to lift the capital controls was introduced in August 2009 but without any time limits:

This first phase of the strategy was implemented in late October 2009, but at the same time a strengthening of the regulatory framework was aimed at prohibiting inflows of offshore krónur, which were the main channel for circumvention until that time and had greatly undermined the foreign currency repatriation requirement. Subsequently, controls on long‐ term holdings – which were already held to a large extent by long‐term investors or would soon find their way into the hands of such investors (such as domestic pension funds) – were to be lifted gradually. Finally, controls on short‐term assets would be lifted, in part through auctions where market prices would determine which investors could convert ISK assets to foreign currency first. The strategy assumed that this problem would not be addressed until late in the liberalisation process, as a vast amount of highly liquid assets were owned by non‐residents likely to want to or be forced to sell them at the first opportunity. It was also assumed that the offshore krónur problem would eventually diminish to some extent through internal trading by non‐residents, where investors with a longer horizon and more tolerance for distress would acquire ISK assets from distressed investors willing to sell at lower prices.

On the introduction of this plan in August 2009 it was pointed out that it would take longer than anticipated to create the conditions necessary to lift the controls. Now, it has clearly taken much longer – because of Icesave, finalising the balance sheet of the new banks, restructuring, adverse conditions in international forex markets, Iceland’s low credit ratings etc – and there is no end in sight.

The capital controls gave rise to a manifest difference between the rate of ISK in Iceland and ISK offshore rate. As a step towards lifting the controls the CBI has held auctions where the rate is ISK/€ ~240 compared to bank rate of ISK/€ ~165. This indicates the still substantial spread between the offshore and onshore krona.

Capital controls and fraud

Shortly after the capital controls were in place it was rumoured that former bankers strategically placed both abroad and in Iceland were offering offshore krona deals too good to be legal. As the custodian of the controls CBI was to investigate alleged breaches.

It has, to say the least, taken time but last week the Office of Special Prosecutor in Iceland indicted four men who in 2009 are alleged to having facilitated trades amounting to ISK14.3bn in 748 transactions. The investigation opened in early 2010 and was announced, quite exceptionally, with fanfare and a press conference by the police. Those indicted – Karl Löve Johannsson, Gisli Reynisson, Olafur Sigmundsson, all former employees of Straumur Investment Bank and Markus Mani Maute – are all former bankers, aged between 39 and 50. Maute and Sigmundsson are living abroad, the former in the US, the latter in the UK.

According to the Icelandic media, this is the largest fraud case connected to the capital controls, but other 10-15 cases are being investigated. In the writ no mention is made of names of individuals or entities, 84 in total, that did business with the four. As I understand it, Icelanders in Iceland who made use of the service of the four would have violated the law as well but so far, it is unclear if any clients of the four will be indicted.

It seems that each of the four earned ISK164, just over €1m, on the transactions. It is assumed that the payments never came to Iceland – the charges indicate that the fees earned have not been found – but ended up in offshore companies owned by the four. It is known that a company or companies were set up on their behalf – most appropriately in Cyprus.

Cyprus and capital controls

Although Iceland is not a member of the EU it is a member of the single market through the EEA, which forbids capital controls. Iceland holds an exemption from the EEA and the IMF. With capital controls in Cyprus it is clear that many will try to find loopholes in the new law or directly violate them. If the authorities want to a) make them work b) avoid corruption the controls have been clear and easily enforceable. And it takes a specialised enforcement team to make sure the controls are not breeched. And in case of breeches, indictments have to follow.

As can be seen from the Icelandic experience, lifting capital controls is not easy. If things go as Cypriot authorities claim, there will be no reason for a deposit flight once the Bank of Cyprus has been restructured – and that is planned to take no more than a month, after which the controls can be abolished.

This sounds easy and straightforward but it remains to be seen if the plan works out. It has been indicated that the controls in Cyprus will be lifted in stages – as has been the plan in Iceland. The Cypriot authorities better make sure they know from the beginning what the aim is and how to get there. And they better take into account that fraud is an unavoidable part of capital controls.

*The two announcements from the Ministry of finance, Cyprus, regarding capital controls can be found here.

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