Sigrún Davíðsdóttir's Icelog

The “Correction” – that is the nickname now given by the Icelandic government to its planned debt relief. It could potentially cut ISK150bn, ca 9% of GDP, 920m, off the private mortgage stock; the maximum amount on each mortgage will be ISK4m (cf press release here in English). Of the ISK150bn ISK80bn is expected to be written off, according to certain criteria, whereas ISK70bn is estimated to come from tax relief as the Treasury waives taxes on payments used to pay down mortgages instead of paying towards a private pension. It effectively means that the Treasury is guaranteeing to pay the mortgage companies ISK150bn over the next four years.

At a press conference today to introduce the long-awaited and much promised debt relief prime minister Sigmundur Davíð Gunnlaugsson said that these measures will herald a new beginning for Icelandic families. However, Iceland did indeed turn to growth already by mid 2011 and has been in growth since.

Minister of finance and leader of the Independence Party Bjarni Benediktsson estimated that the cost of the collapse of the Icelandic banks now amounted to ISK200bn (GDP ca 1700bn). Since the cost is so great – and more could be coming – something should be done for homes, or so he said, to correct the hit that households took when the inflation rose, as a consequence of the sinking króna 2007-2010. Much was said about justice and fairness at the meeting, less on how this is going to be funded.

So far, the focus has been on not increasing the sovereign debt or risking the Icelandic credit rating. This is what the press release states on the funding: “The action requires the Treasury to serve as an intermediary in financing and implementing it. There is no need to establish a debt relief fund, as the action will be fully financed.”

This stipulates that contrary to what the government has said before, the state is indeed responsible for financing the new plan. And contrary to what the prime minister has been saying for a long time the funding is not coming from the winding-up process of the estates of Glitnir and Kaupthing. Funds he has earlier said could easily and justifiably be within the reach of the government.

According to (as I understood it) Benediktsson and chairman of the debt relief working group Sigurður Hannesson (here are his slides, in Icelandic) the methodology is that after calculating the amount each loan can be written down by, this amount is put apart – by middle of next year – and will then be paid off over 4 years by the Treasury. Thus, from mid next year each mortgage holder, fulfilling the criteria, will only paying off the written-down mortgage.

As to the Treasury, this new liability will be paid off with a new banking tax, levied on both operating and defunct (i.e. estates) banks. For operating banks deposits are the base, for estates the claims. The tax on the estates was tentatively announced when the 2014 budget was presented this autumn. At the time, the outline was unclear. The estates have indicated that there is no tax base in estates of collapsed banks and will most likely challenge the proposed tax.

As Benediktsson pointed out, some years ago a new bank tax was put on operating banks, annually bringing ISK1bn in for the Treasury. In comparison, the proposed tax is calculated to bring the Treasury ISK37.5bn next year.

It may all come down to semantics but a plan that partly relies on a disputed tax, which might be ruled illegal, can to my mind not be judged to be funded. And since the Treasury is an intermediary in a potentially unfunded plan it is taking on some risk – some added risk. Also, if the estates are to be used as a tax base for the next four years, the government seems to be underlining that they will not be wound down and assumedly the capital controls kept in place.

As to the effect on the economy it is both said to be only mild – and to be beneficial for consumption and growth. It will add 3.7% to inflation over 4 years, not trivial in a country with chronic inflation. Greater consumption will increase imports, with the unavoidable negative impact on the current account and the króna rate. It is forecast to stimulate the property market, which some already see as showing signs of overheating. That is good for the construction sector but less for other sectors. The measures are not thought to stimulate investment and the export sectors, which is what is needed to boost the current account, which again is needed to abolish the currency controls. – So far, there is no comparative analysis of what these ISK150bn could do for the country if used i.a. to pay off sovereign debt or for some infra structure projects.

Still plenty of question marks, these are just my first impressions – and they might change as more is revealed of the plan.

As pointed out on Icelog earlier, some Independence Party MPs had earlier indicated skepticism. I have heard of some discontent within the party. An ex-leader of young conservatives has already said the plan is worse than he expected. How the plans fare in parliament will not be clear immediately since the Bills needed to put this plan into action are not yet written.

Update 1.12. 2013: 

*Clarifications: the mortgages now being “corrected” are not currency loans but indexed loans that jumped up when inflation rose 2007 to 2010. Currency loans (or some types of currency loans) have earlier been deemed illegal. Banks, which had issued these loans, have had to recalculate them and write-down substantial amounts. The two ministers introducing the new measures have said that it now is time that the banks, which behaved so badly before the collapse, should shoulder some of the burden. In reality, the banks have already been hit by write-downs resulting from the currency rulings. – The banks now functioning are not the old banks but new banks created with deposits from the old banks.

*Here is the legal opinion from the Kaupthing estate to the Icelandic parliament re taxing bank estates. Given that both Glitnir and Kaupthing doubt the estates constitute a legal base the coming measures will most likely be challenged in court. It will be intriguing to how the courts, first the Reykjavík District Court and then the Supreme Court, rule in a case where the government has already acted on its own assessment of the legality of these actions.

Update 4.12. 2013:

According to IFS Greining, the Icelandic CDS has jumped up 11% since the weekend. That is at least an indication of how market forces outside of Iceland view the ,,correction.” Unfortunately, I do not have a link to this since the IFS website is behind a payment wall. – It is most likely that the fact that the funding is not secure, that it will hit the Housing Finance Fund, already deemed a sovereign risk by IMF and others and that the Treasury is a de facto guarantor has an effect on the CDS.

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The hacker website Cyber War News announced today that servers and domains of Vodafone, Iceland have been hacked. Vodafone has acknowledged that the company has been hacked. The hacking can potentially touch the 77.000 Vodafone accounts in Iceland. The hacker(s) have now also placed material online.

Rúv, the Icelandic public broadcaster has already reported (in Icelandic) that among the material now online there are text messages from Icelandic politicians. By looking up numbers of mobile phones it is possible to read messages from three days from three different years. Many politicians have their mobile numbers online and mobile numbers are in general not a well guarded secret in little Iceland where trust is high and few people are worried about privacy.

According to Cyber War News a Turkish hacker/hacker group that goes by the Twitter name @AgentCoOfficial has already announced on Twitter that this has happened and that he/they did it, as can be seen here.

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Press conference on planned debt relief will be broadcast live here now at 4pm, GMT, in Icelandic. The chairman of the working group responsible for the plan, Sigurður Hannesson, has said that the working group is not responsible for finding the funding for it. A priori, that is baffling since finding a plan is a lot easier than coming up with funding that does not increase the debt burden of the state. Bjarni Benediktsson minister of finance has said that he does not want to see a solution that burdens the sovereign with further debt, already 98% of GDP.

The key thing to watch out for will be the funding for the plan. Senior people at the Central Bank of Iceland have already aired their worries re the funding but have been assured that no, the funding will not fall on the state. Others struggle to understand how this could be done – but yes, soon we will know for sure.

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Tomorrow is a big day in Icelandic politics: the long awaited debt relief measures, promised by the Progressive Party during the election campaign and then taken up in the coalition government’s manifesto are ready. The plan is the work of an expert working group set up by the prime minister, lead by Sigurður Hannesson a mathematician who now works for MP Bank. In little Iceland it is known that Hannesson is a long-time friend of the prime minister. After being discussed during a cabinet meeting this morning the plan is being presented to the coalition parties today. Tomorrow there will be a press conference to introduce the new measures, which prime minister Sigmundur Davíð Gunnlaugsson has called the most radical measures of its kind anywhere in the world.

During the election campaign Progressive’s leader and now prime minister Gunnlaugsson repeatedly said that in order to wind down the estates of Kaupthing and Glitnir there would have to be “a scope” – apparently created by ISK assets, which can’t be converted into foreign currency any time soon and would then be available to the state through some never-defined way. These funds should be used for debt relief for those who have not benefitted from earlier measures. This would be a “correcting” measure to “correct” loans that shot up because of the inflation shot up after the collapse of the banks when the króna collapsed. The most common loans in Iceland are inflation-indexed loans and currency basket loans, both of which were affected by the events of October 2008.

Ever since the coalition government, Progressives with the Independence Party, was formed in summer, it has been clear the two parties do not agree on the fundamentals of a debt relief. The conservatives lean towards using any surplus to lower the public debt and are opposed to creating more debt in order to spread out money to a certain group of people. Also because the planned debt is aimed not at those who can’t pay but those who although with high debt are able to service their debt. Earlier measures by previous government were aimed at those who could not pay off their debt. The clearest disharmony between the two parties on this issue was brought to light earlier this week when leader of young conservatives urges Independence Party parliamentarians to vote against the planned measures. (Little Iceland: in Icelandic media it is noted that the leader of the young conservatives, Magnús Júlíusson has been dating the daughter of the leader of the Independence Party, Bjarni Benediktsson, for the last three years.)

The prime minister has been notoriously vague on the planned relief but has used ever grander words to describe it. To begin with the estates were the chosen source of funds. Lately – as it became clear that these funds would not be available any time soon, if at all – he has talked about tax measures, which is more in line with ideas aired earlier by the Independence Party. The prime minister has also denied these measures will somehow be funded by the government.

This morning, in parliament one opposition MP, Guðmundur Steingrímsson leader of Bright Future asked the prime minister: “Where does the money come from?” According to Rúv (in Icelandic) the prime minister “answered that it was not possible to compare the scope that needs to be created in winding down the fallen banks and the money used in direct state expenditure. The scope was created by diminishing the amount of money in circulation so the currency control could be abolished. “And when the air is being let out of the asset bubble it is natural to let the air out of the debt bubble at the same time. This is all about taking out of circulation money for which there is no funds. Such money can’t be used to buy goods and services.” Guðmundur found the answer not worth much and said he would be lying if he said he understood this and he did not intend to lie.”

The MP is hardly the only one who will struggle to make sense of this answer but as the prime minister said, people will now only have to wait until tomorrow to know all about the planned debt relief.

The big question will be how the long-awaited plan will be funded – and how the Independence MPs will react if the plan, contrary to earlier promises, does indeed rely on state funding, guarantees or anything that in any way depend on the state. As the chief economist of the Central Bank of Iceland, Þórarinn G Pétursson, said at a hearing with a parliamentary committee recently: a debt relief plan that smacks of government funding is the surest way to a rating downgrade.

*For more background on these measures and other topics related to the Icelandic economy see here.

PS Accidentally, there has been a long silence on Icelog but I now hope to be more active again. No lack of interesting topics, that is for sure.

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