Sigrún Davíðsdóttir's Icelog

It turned out there was news – it just wasn’t out yet when I wrote the last blog on no changes. Már Guðmundsson has now sent an email to staff at CBI saying that he should have been informed by Wednesday about changes – otherwise his term would automatically be renewed. Well, he was informed that it now it is now “timely to review those amendments and other aspects of the Central Bank Act. It is also important to examine whether there is reason to make changes to the structure of the financial market and the Financial Supervisory Authority, in order to strengthen the collaboration between the Financial Supervisory Authority and the Central Bank and to clarify the division of tasks between the two institutions.”

Guðmundsson writes in his email that Bjarni Benediktsson minister of finance has told him this does not imply lack of trust. Further Guðmundsson writes he will consider reapplying when he sees the new arrangements put in place. “One must wait and see and it cannot be said in advance if such changes are for better or worse. There are words in favour of making use of the expertise of the CBI in the process ahead,” Guðmundsson writes in his email. – “The process” mentioned is now doubt the process of abolishing the capital controls.

Earlier, Gunnlaugsson has said there would be changes, Benediktsson has said there would not. Anyone who has been following the debate in Iceland for the last few months, especially for the last few days know that prime minister Sigmundur Davíð Gunnlaugsson has criticised the bank ferociously. Asked on Rúv on Wednesday, Benediktsson said nothing was yet decided: “As I say, if we do indeed suggest changes it will only be after careful scrutiny and we are not yet finished with any such scrutiny. That is all I have to say.”

What the government has done is to, literally, wait until the very last minute to announce… that now changes will be considered. One civil servant pointed out to me earlier this winter that if nothing had been announced by the end of January there would hardly be any changes since waiting until the last moment would make a bad impression of dithering and unclear policy.

It is said however that the ministry of finance has drafted new laws on the CBI, which stipulates three governors, like back in the days when the main political parties always had to have their people on the board. This would also mean a less independent central bank.

The CBI will soon publish a forecast of balance of payment. This is a key analysis in regard to abolishing the capital controls. The question is if this will now be done only after a new arrangement and new governor(s) appointed.

Whether this is the case or not it is difficult to see anything but a limbo for the bank for the next six months, even longer. Yet another working group, then there needs to be a new law, then there is the period for application and selection and then a new top management has to become familiar with the institution. It seems safe to say that nothing much will happen regarding the estates for the better part of the year.

This means uncertainty and unclarity for a long time, just when action and strong and trustworthy policy was needed. Ireland and Portugal are back in the market. Iceland seems to be turning into a crisis laggard after a promising start. More and more business leaders are airing frustration in Iceland locked into capital controls.

Politically it seems to indicate that the prime minister has asserted his power. The government may appear stronger, after yet another struggle to find its next step, but Iceland seems weaker: after most of last year been a year of inaction, in terms of the capital controls, due to first election and then a time of the government finding its feet (or not) most of this year will now be gone on the CBI process with the unavoidable infighting.

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This is the press release from the ministry of finance:

Central Bank Act to be reviewed

This morning, at a Cabinet meeting, the Minister of Finance and Economic Affairs presented and introduced a memorandum on the review of the Act on the Central Bank of Iceland, no. 36/2001.

Some experience has been gained of the structure implemented with the amendments to the Central Bank Act passed in February 2009. In the opinion of the Minister of Finance and Economic Affairs, it is timely to review those amendments and other aspects of the Central Bank Act. It is also important to examine whether there is reason to make changes to the structure of the financial market and the Financial Supervisory Authority, in order to strengthen the collaboration between the Financial Supervisory Authority and the Central Bank and to clarify the division of tasks between the two institutions.

The Minister of Finance and Economic Affairs will appoint a work group to make an assessment of desirable changes. The group’s objective will be to reaffirm the Bank’s credibility and independence and enhance confidence in the Icelandic economy.

Concurrent with a decision to review the Act on the Central Bank of Iceland, the Governor of the Central Bank has been notified, with reference to Article 23, Paragraph 2 of the Act on the Rights and Obligations of Civil Servants, no. 70/1996, that it has been decided to advertise for applications for the position of Governor. This is done to give the authorities increased scope in relation to potential amendments to the Central Bank Act.

The Minister of Finance and Economic Affairs will appoint a work group to make an assessment of desirable changes. The group’s objective will be to reaffirm the Bank’s credibility and independence and enhance confidence in the Icelandic economy.

Concurrent with a decision to review the Act on the Central Bank of Iceland, the Governor of the Central Bank has been notified, with reference to Article 23, Paragraph 2 of the Act on the Rights and Obligations of Civil Servants, no. 70/1996, that it has been decided to advertise for applications for the position of Governor. This is done to give the authorities increased scope in relation to potential amendments to the Central Bank Act.

Update: Viðskiptablaðið reported earlier that if the governor’s term was renewed and he was then later fired he could claim salary for the remainder of his five years. This might have pushed the government to act in the last minutes. In his email, Guðmundsson says he should have been notified Wednesday evening at the latest. He was however apparently notified only last night. – This indicates the level of planning on behalf of the government.

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