Sigrún Davíðsdóttir's Icelog

Again and again prime minister Sigmundur Davíð Gunnlaugsson has been asked about his exact plans for the abolition of the capital controls. But so far, it is entirely unclear how the government plans to proceed on debt relief, the estates of Glitnir and Kaupthing, the issues concerning Landsbanki and ultimately the abolition of the capital controls. There are by now some indications that the two coalition parties find it difficult to advance on these issues because the two parties disagree much more fundamentally than has appeared hitherto.

During the election campaign Sigmundur Davíð Gunnlaugsson leader of the Progressive Party and now prime minister said there was scope to get a considerable sum of money out of the estates of Glitnir and Kaupthing. These funds were to be used for a “correction fund” to finance debt relief for those whose loans had gone up but who had not profited from the extensive debt relief, the so-called 110% way (explained here), put in place by the previous government.

The voters seemed untroubled by the fact that the Progressive Party never clarified in detail how exactly this considerable sum could be extracted from the estates, which after all are the estates of two failed private banks. The fact that the government needs to agreed to terms of the composition of these two banks – due to the foreign-owned ISK assets (not enough foreign currency to exchange the ISK assets) – has been presented by the Progressive Party as a way to create this, in Progressive-speak, “scope” to gain funds.

In the coalition agreement the following (in my translation) is stated:

As indexed debt increased and asset prices fell, i.a. because of the effect of the collapse of financial firms and because of their appetite for risk leading up to the collapse, it is right to use the scope – which will most likely be created parallel to the winding down of the estates (of the collapsed banks) – to assist borrowers and those who put their savings towards their homes, just like the Emergency Law (passed on October 6 2008) secured that the assets of the estates were put to use to defend financial assets and to resurrect domestic banking. The Government keeps open the possibility to set up a special correction fund to reach it goals.

This was neither elegant nor clear (the clunky prose reflects the Icelandic original). Then came the opening speech of the prime minister as Althing gathered in early summer but the speech threw no light on how this “scope” would be created.

Last week, the prime minister was interviewed on Rúv’s morning programme where the two journalists asked the prime minister if he could clarify what people could expect in terms of debt-relief, the funding of the “correction fund” and how the estates would be treated. The prime minister said he now was much more optimistic than earlier, the “scope” was much greater than he had expected but unfortunately he did not share with listeners what his exact plans are. He did say that he had by now talked about these issues so often that it should be clear what he had in mind but as the journalists pointed out it is still not clear because it has never be clarified.

Yesterday, Althing gathered again after the summer recess. In his speech (in Icelandic) there was one sentence on the capital controls (my translation):

New plan on the abolition of the capital controls is forthcoming. A special consideration will be given to minimising the possible negative influence of the winding-up of the collapsed banks and to strengthening the framework of the financial system, which is one of the prerequisites of a successful abolition of the controls.

Tonight, the prime minister was interviewed on Rúv and yet again he was asked about the by now usual topics: the “correction fund,” the capital controls and what people could be expect in terms of debt relief. Again, no clarity, no detail but the prime minister said one rather remarkable thing: if people wanted to understand better what to expect they could calculate it from the coalition agreement. – Having read the agreement back and forth, I can’t possibly find anything in the agreement that gives any clear indication as to what people can expect. (I have sent an email to the prime minister’s spokesman asking what part of the agreement the prime minister is referring to and how that part can be used in the way the prime minister indicates.)

Clear what the creditors want – unclear what the government wants

During the election campaign earlier this year Bjarni Benediktsson leader of the Independence Party and now minister of finance repeatedly said that abolishing the capital controls was easy and would not take long. That might be true if there were a plan in place to abolish them. That plan does not seem to exist – or at least, nothing credible has been heard of it.

The Central Bank of Iceland has clearly done extensive work in terms of clarifying the macro economic aspects of the economy. The estates of Glitnir and Kaupthing, as well as the creditors have also done extensive analysis of the financial situation of the estates.

The prime minister has indicated that he is now waiting for the creditors to make a move. However, he seems to ignore that the creditors have already made a move: both Glitnir and Kaupthing have presented a detailed draft of composition to the CBI – but so far no answer. It is abundantly clear to the CBI what the creditors want. The only unclear thing is what exactly the government wants to do and how it wants to proceed.

Keep Icelandic banks Icelandic

The CBI has indicated that if one of the two new banks – Íslandsbanki and Arion, owned respectively by Glitnir and Kaupthing – could be sold to foreign investors the sale, in foreign currency, would facilitate solving the problem of the foreign-owned ISK assets. There is already news that Hong Kong investors have shown interest in buying Íslandsbanki and other offers might surface.

Without intending to launch some conspiracy theories it is safe to assume that parts of the political establishment and parts of the Icelandic business community want to keep ownership of the Íslandsbanki and Glitnir on Icelandic hands. If the government listens to these voices, as it well might do, it is highly likely that part of its equation is not only how to create the “scope” for finding the money for the “correction fund” but also how to keep the two banks in Icelandic ownership.

This angle of the whole controls conundrum does not make it any easier to solve and it adds yet another political non-financial hurdle to the process.

Landsbanki – a special case

Landsbanki is owned by the Icelandic state because the two major creditors of old Landsbanki – the Dutch and the UK government (harking back to the old Icesave saga) – were not willing to assist in setting up the new bank, in the same way the creditors of Glitnir and Kaupthing agreed to when Íslandsbanki and Arion came into being. Therefor the state had to step in to capitalise the new bank.

There is now the problem that new Landsbanki owes the old one ca ISK270bn, €1.67bn, in two bonds, due in foreign currency by the end of 2018. The first step towards resolving the capital controls is to find a solution to the Landsbanki bonds, i.a. extending maturity of the two bonds, changing interest rates etc. The new bank has mentioned it needs a “few years” – 15-20 years seems a more realistic solution but nothing near this number has been mentioned officially.

Is there really a majority for the Progressive’s debt relief?

As explained in an earlier Icelog, many have criticised the debt relief ideas but that does not deter the prime minister from advocating this with great fervour. However, there is also strong criticism from some members of the Independence Party parliamentary group. The last few days I have heard musings that there really might not be a majority in parliament for the kind of debt relief the Progressive Party has been advocating. At least one IP parliamentarian, Vilhjálmur Bjarnason, has aired his views openly, saying he could not support the kind of debt relief the Progressives have in mind.

In addition, there seems to be disharmony at the core of the coalition government as to how to proceed regarding the capital controls. Some weeks ago it was announced that the government was just about to appoint “abolition coordinator” who would oversee the process towards abolishing the capital controls. Two names were mentioned as the most likely ones, one from each party. So far, nothing has been done because it seems the two parties cannot agree on whom to choose.

So far, there is a complete lack of clarity as to how the government will go about solving the problems that have to be solved in order to abolish the capital controls. The feeling is that since the government does not know where it is going it is not likely to get there any time soon.

*Here is an earlier Icelog explaining the financial aspects of the capital controls.

 

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