Sigrún Davíðsdóttir's Icelog

Fitch on the Icelandic debt relief program

with 3 comments

Compared to the skepticism of many Icelandic economists (except those who worked on the debt relief or were somehow connected to it), it was surprising to see how positive Fitch Ratings review of the Icelandic debt relief plan is: Fitch deemed the program “appears” to be “fiscally neutral” but added that “another round of write-downs may dent investor perceptions of Iceland’s business environment, and the prospect of foreign bank creditors in the failed banks bearing most of the cost may make it more difficult to remove capital controls.” The program amounts to ISK150bn, 8.5% of GDP (see earlier report on Icelog).

As Fitch points out the government aims to “fully finance the plan, via as-yet-unspecified budget adjustments, and tax increases – primarily an increase in the levy on Icelandic banks’ balance sheets from 0.145% of total outstanding debt to 0.366%. This bank tax is levied on Iceland’s new banks as well as on its failed banks, Kaupthing Bank, Glitnir Bank, and Landsbanki Islands, through their winding up committees.”

The often-stated aim of the government was not to finance the plan itself but that is indeed what it turns out to be: government funded. The funding is to come from increasing levy on the balance sheets of banks, as pointed out earlier on Icelog, from 0.145% to 0.366% – not only on operating banks but on the failed banks as well.

The Winding-up Boards of both Glitnir and Kaupthing have both stated that they doubt the legality of posing a levy on estates as expressed in a written statement by Kaupthing. The levy will most likely be challenged. Maybe it is unlikely that the Supreme Court will dare to go against the government but the levy is by no means in the Treasury coffers yet.

Economists have also pointed out that the estimated effect on inflation in the government’s calculation is 3.7% over 4%, not a trivial number but others see this as an unlikely low number. To “correct” inflation some years ago by possibly increasing inflation in the coming years and thereby wiping out the effect seems unwise, to say the least.

The unavoidable negative effect on the Housing Finance Fund – this almost decade old unsolved disaster – makes the debt relief all the more worrying. This government, as the previous government, keeps throwing money at the fund – this year ca ISK5bn (€31.8m) – only to keep the fund going, without resolving the underlying problems.

Fitch points out that a levy could dent recovery of the estates (which is why it will most likely be challenged in court) “and may further dent international investor sentiment towards Iceland. This could have a negative impact on investment, growth, and external finances, and may make it even more challenging to unwind capital controls in an orderly fashion.”

This is of great concern for Iceland since foreign investment and expertise is greatly needed. And everything that makes it more difficult to unwind the capital controls poses a major problem for the Icelandic economy. In addition, as the Argentinians know all too well, demagogy and populism thrive in capital controls.

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Written by Sigrún Davídsdóttir

December 8th, 2013 at 9:59 pm

Posted in Iceland

3 Responses to 'Fitch on the Icelandic debt relief program'

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  1. Sigrún,
    It is good to see you back at work in your blog-vinyard, and that you did not get swept up by the IUSUK Electronic Espionage Tornado while you were working there, as some of us feared, to be carried away like Dorothy from Kansas, and put down in a desert of Negev, or the mountains of Utah, or the outback of OZ archive.
    Here is some information about winding-up committee responsibilities that the Glitnir and Kaupthing and Landsbanki ones seem to be ignoring in their desires to be more influential players than estate administrators legitimately are:
    They seem to forget that winding up committees are not new versions of the entities they are created to wind up, but are new and separate entities, incorporated at the times they are created, for the purposes assigned them.
    Winding up committees do not have the powers, the authorities or the responsibilities the entities they are created and empowered to wind up had. They do not have powers or responsibilities to continue, to carry on, or to conduct the business the entities they were created to wind up were engaged in when they failed. They do not have authority, or authorization, to “do right” what those businesses did “wrong”. They may not buy or sell or trade assets under their administrations, and they may not file lawsuits on behalf of investor ‘heirs’ to protect the values of those heirs’ interests in assets under their administrations.
    The authorities of winding up committees extend only to administrating contents of the estates that remain after the deaths of the entities they are responsible to wind up the affairs of, safeguarding and preparing for eventual distributions the assets in the possessions of the entities they are authorized to wind up at the times those entities closed up and ceased doing business.
    A winding up committee’s responsibilities include paying taxes that are levied on assets that are under the winding up committee’s administration. In such cases the winding up committee pays the taxes on behalf of the ‘heirs’ to whom the assets, or what may remain of them, will eventually be transferred. The winding up committee does not owe the tax, itself, and has no interest in the taxed property, the tax, the tax levy, or any question of the tax’s legitimacy.
    ‭ For this a winding up committee does not have legal standing to object to, or contest, a tax levied on assets under its administration.
    ‭ Note in addition that if a winding up committee has, and has had, real property under its administration, and those properties have been subject to property tax levies, and the committee has been paying the property taxes levied on those real properties, the winding up committee’s record of paying those taxes provides a record of regularity for and acceptance of taxation of properties.
    ‭ If the government of Iceland is extending its established taxing authority, under which it taxes real property assets to include also other classes of assets, it stands on fairly firm ground. Persons and entities affected by the extension of taxing authority do have right to voice objections, and have standing to raise legal questions, if they have them. But because the assets they administer are not their own, winding up committees have no such rights and no such standings.
    ‭ The Icelandic bank winding up committees seem to have some difficulty accepting the limitations of their administrating authorities. They appear to be like Æsop’s Ass Who Thought He Was A Lion.


    13 Dec 13 at 1:46 am

  2. R.L. Dogh,

    I am not a lawyer and know next to nothing about Icelandic law. However, as a mere former depositor and now creditor in the ongoing liquidation of a subsidiary of one of the failed banks, I’m trying to get my head around the logical consequences of your assertions.

    You appear to be saying that, although your winding-up committees have a duty to safeguard and (eventually?!) distribute the assets to the creditors, they cannot – in their pursuit of that objective – file lawsuits to protect the assets on behalf of those creditors. I find that somewhat surprising, since I know that in at least some other jurisdictions, administrators and liquidators have indeed filed lawsuits with that aim. Indeed, the Icelandic winding-up committees have also brought cases to court, effectively on behalf of creditors as a whole. So are you saying that tax is a special case? Whatever its legal standing in the matter, I for one am thankful that the Kaupthing WuC has at least expressed its opinion on the proposals which it believes, with reason, “could infringe against the legitimate expectations of general creditors”.

    You do however say that the “persons or entities affected” DO have the right to “object to or contest a tax levied”. If the winding-up committees are not “persons or entities affected”, the creditors of the banks under their administration certainly are. How would you suggest they could best exercise that right? Could the Creditors’ Committee fulfil this role? If no-one can legally object, then the logic of your argument would seem to be that the state could impose a 100% tax on the assets of the failed banks or – even worse – on the claims of all the creditors in those banks, thus wiping the assets out completely, and no-one could do anything about it. One wonders what they are waiting for!


    13 Dec 13 at 9:23 am

  3. anrigaut,

    Winding up committees are like lawyers, they are representatives. They are not the principals. They may act on behalf of the “heirs” to the estates under their administrations to perfect claims the estate owns from the company that died (to establish what is owed and who owes) and to safeguard, to clarify and to protect the contents (assets) of the estate they are responsible to administrate, including clarifying costs and objecting to unreasonable costs, fees,etc., but they cannot object to taxations, because taxations are levies by the state or entities of government. The “heirs” have to do that, and object to other fees (which may include administrators’ fees), which (except for the last) they can ask the administrators to do for them, but which they usually do through their own lawyers.

    It is not unusual anywhere for the bulks of estates to be eaten up by administration and litigation fees, with lawyers and administrators losing interest in further litigation finally when there is nothing left for them to pay themselves from. The Icelandic banks’ winding up committees are all paying themselves for their administrating activities, and their litigating, including such as the Glitnir one undertook in New York, USA, against JAJ and his “gang of white-collar criminals”, in which neither the winding up committee nor the law depended on had standing in the jurisdiction, nor did the court selected in the jursidiction, which means nothing could have come of the case however it had come out. The case just sucked money from the estate and made “doing something” noises (and set the Glitnir winding up committee up to be sued by JAJ and his “gang” for their costs, if they had wanted to)

    Yes, an estate could be taxed 100%, or even more, if a reason could be found to ‘justify’ (this is done to drugs sometimes, also evaded taxes, and to confiscate estates in some jurisdictions and situations, e.g., agrarian reform) and remedy would be recourse to the courts to object, and it would be the “heirs” who would be losing all who would be responsible to raise the objection.


    18 Dec 13 at 2:19 am

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