Those who understood the Eurozone correctly were those who understood that politics mattered more than economics. It might very well be the same in Iceland: in order to understand the course of events regarding capital controls, foreign-owned ISK assets and the estates of the failed banks, politics might weigh more than the economics. And as in Europe the political weight might bode messy course.
To continue with the Eurozone analogy: the (at first hidden, later more overt) agenda of all action taken by the EU was to prevent any bank in the Eurozone failing. It was deemed to be bad for the reputation of the young currency area and in the Realpolitik it counted that the strong German and French governments were adamant in sheltering their own banks from unwise lending to the debt-ridden periphery. Both these agendas were politically driven and those who understood the political dominance over sound economic thinking got their predictions right: no euro-exit, good public money thrown in to reward bad lending.
In Iceland, there might also be an agenda, other than just abolishing the capital controls without jeopardising financial stability: the Progressive Party and its leader, prime minister Sigmundur Davíð Gunnlaugsson has time and again, since the election campaign early last year and after it came to power, stated that there will unavoidably be money for the state coffers when the bank estates will be dealt with in order to abolish the controls (see more on facts and figures in an earlier Icelog).
The Independence Party, led by minister of finance Bjarni Benediktsson, has appeared to be less focused on abolition as a way to enrich Iceland. Recently though he has faintly echoed Gunnlaugsson’s view that doing it quickly, via bankruptcy rather than the more long-term composition the creditors are keen on, might be a sensible way. It is not clear though if he really believes it or is just putting pressure on the creditors.
It seems increasingly clear that the abolition of the capital controls, which needs an action plan on dealing with the foreign-owned ISK assets of the estates, might well be more dependant on political solutions than purely finding a way to secure financial stability. Both parties will want as much of the credit for a plan to abolish the controls – but the Progressive party seems also keen to create a situation where it will be seen as having won over the foreign creditors. The Progressive narrative is that it secured an Icelandic victory in the Icesave case (though the Icesave problems are alive and kicking in the unsolved Landsbanki bonds) – and now it is going to secure a victory over other foreigners, the creditors.
The necessary solutions will be conjured up in the tense political sphere between the two parties.
What, when and how?
There is probably no one in Iceland who is as yet able to answer the question what exactly is needed to resolve issues preventing the abolition of the capital controls, when action will be taken and how it will all be brought about.
Because of the Progressive’s earlier promises the government’s agenda might not be only to abolish the controls and to secure financial stability but to make sure the state profits from it. Compared to other countries fighting to abolish controls, such as Cyprus, this is a novel situation and makes it a whole lot more difficult.
How much does the government want from the process of abolition? It clearly wants at least ISK120bn since that is what it is claiming in tax from the estates of Landsbanki, Glitnir and Kaupthing, albeit over the next four years. But judging from sources close to the government it seems that a whole lot more is desired – probably all the ISK assets of the two estates (Landsbanki is in a different place due to its creditors and the bonds between old and new Landsbanki) and a slice, let’s say 10-15% of the fx assets.
If this really is the goal then this is the “what” needed to solve the controls conundrum, from the point of view of the government.
When action will be taken is unclear. On a Rúv TV talk show (in Icelandic) February 9 Benediktsson once again said that the abolition could start this year, it would not happen over night but over some years and it all depended on if there could be some harmonisation of expectations. Recently he also said it might be seen as unfair to Icelanders that the creditors were the first ones to get out with their money.
There is now a working group at work on behalf of the government on issues related to the capital controls. It first seemed it would finish its taks in February but now March or April seems more realistic. The group consists of both bankers and lawyers (led by much respected banker, Sigurbjörn Þorkelsson living in London). The group is not expected to come up with one solution but various scenarios. If their indirect remit is to show that the only viable way out of the controls is that the creditors hand over both all ISK assets and a slice of the fx then that will surely be part of their solution.
Then there is the CBI working on current account forecast, which ideally should underpin a payment forecast – how much fx will there be for paying out creditors in the coming years? The next CBI Monetary Bulletin will be out now on February 12, clearly an important event. The last CBI currency auction was deemed to have gone well for the bank and the bank has been unexpectedly active in the currency market (see here a short overview from Íslandsbanki).
It will be interesting to see if the CBI stats appeal to the government and the working group or if they will seek other ways to underpin their own plan, whenever it emerges.
The goal will determinate the road to the goal. The thing to look for is if it will be a neat solution, nested within present rules and regulations or will it be an all-Icelandic messy solution, depending on special legislation.
Difficult decisions in tense political climate
Icelandic political pundits have noticed, from early on in the life of the coalition that the two party leaders rarely are in tandem on important issues. The first great big test of the government was the execution of the Progressives’ promise on extensive debt relief. That promise was defused by the Independence Party, which cut it down from vaguely promised ISK300bn to ISK80bn – and instead of funds coming from the resolution of the estates it will be financed by banking tax, albeit partly from the estates.
However, the promise could be said to have been kept. Thus the Progressives strengthened their reputation as a party to be trusted and the leadership of the Independence Party could feel quietly satisfied that it had delivered the promise in a way it deemed viable.
The second test was another Progressive promise, abolishing indexed loans. A committee delivered a split report – majority came up with several solutions to change loans but in no way supporting the Progressive view it should be chucked out fast; a minority report suggested the loans should and could be abolished right away. (The Icelandic debate on indexed loans is truly weird from a foreign point of view: the problem rather seems the chronic inflation rather than the loans per se but that is not reflected in the debate.) Again the Progressives could say this promise was now all on track though what exactly is the track is not clear whereas the Independence Party said little other than there was now material to study.
The outcome so far is that the Progressives have kept their promises. Although it has been done with cutting off a toe here and a heal there to make it all fit the party seems to have managed to stay its course. The Independence leadership can be quietly content that it has indeed managed to steer the toe- and heel-cutting to suit its own policies. So far so good for Benediktsson.
Some Independence supporters are feeling uneasy that the party has staked its own existence on carrying out Progressive promises that were far from the Independence line. The point of view of the Independence leadership might well be that the promises better be gotten out of the way as soon as possible in order to avoid distraction in focusing on other matters. Such as the capital controls.
In spite of smooth executions so far there seems to be quite some tension between the two parties, also regarding the capital controls. No matter the rhetoric the course so far it has been decided by the Independence party. This might indicate that Benediktsson really decides on the important issues regarding the economy. But the future is not always like the past.
Both coalition parties need to get the most out of their time in government. The Independence party because it is used to be in government; a leader who does not again firmly position the party for another term is politically dead. The Progressives need to turn their tide tangibly in order to escape what seemed to be their imminent future up until the Icesave ruling: that they would keep on hovering around 12% of votes.
Young politicians in an atmosphere of former times
The Left government put effort into breaking out of the old political mould i.a. by nominating people on merit more than for party allegiance. It seemed for a while that this was an answer to the call of the time. However, although the two coalition leaders are young their attitude seems to hark back to the olden times.
The biggest test when it comes to nominating people for leading positions is the governorship of the CBI; it expires in autumn. The position needs to be advertised six months in advance, i.e. by February 20. One rumour was that it would look bad to do it at the last moment so had nothing been done by end of January it was a sign that Már Guðmundsson would be reappointed.
Now the rumour mill is in overdrive. The Progressives are said to be hell-bent on getting rid of Guðmundsson. Allegedly they cannot forgive him for wanting to negotiate on Icesave and in addition the party would like to be able to influence the bank’s position on major matters, such as the capital controls. So much for the independence of the central bank.
However, the problem for the Progressives is that Guðmundsson is widely respected, not only in Iceland but even more importantly abroad. He has the high standing and trust that a governor of a central bank needs in order to be taken seriously and in order for a country to be taken seriously in terms of monetary policy. It seems highly unlikely, if not impossible, that the Progressives can come up with anyone anywhere near Guðmundsson’s format.
The Independence leadership has been said to be more bent towards keeping Guðmundsson, also in order to encourage trust and stability. One version has it that the government might keep Guðmundsson but make some other changes, i.a. add a vice-governor, favourable to the Progressives or change the present one, Arnór Sighvatsson, also well respected.
The new magazine Kjarninn wrote last week that the Progressives wanted to appoint a banker at MP bank, Sigurður Hannesson, for the CBI job. Hannesson is head of private wealth management and has, to say the very least, a CV that differs radically from the CV of central bankers in the neighbouring countries. But he is very close to Gunnlaugsson.
Kjarning also wrote that Benediktsson was in charge of this appointment and his idea was to appoint Ólöf Nordal, a lawyer who has just left parliament to follow her husband to Switzerland. Kjarninn pointed out that her credentials were that she practically grew up in the CBI where her father was a governor. It is not clear from the context if Kjarninn was serious about her merits but yes, yet an altogether different CV from central bankers in the Western world.
Should Guðmundsson not get reappointed the whole capital control conundrum will get postponed… until late this year. Should Guðmundsson get ousted for someone of much more inferior professional standing it bodes a return to the Icelandic past of clientilismo and political patronage. And that bodes ill for everything – also the abolition of capital controls – and everyone in Iceland, except of course those with the right connections.
The paradox of political (non-)intervention
It is not altogether a uniquely Icelandic situation that the government refuses to negotiate with creditors claiming it has nothing to do with winding up of failed private banks. This is often the case with semi-sovereign debt situations. However, the situation in Iceland is tricky because with the approval of all MPs parliament voted last year that the government should indeed be part of the estate equation.
This was what happened when parliament approved a change of the currency law stipulating that the CBI can only give exemption to the law, above certain sums (which firmly includes the estates) with the blessing of the minister of finance, after he has presented it to the parliament (which does not need to approve it but well, a minister is unlikely to go against the parliament on this issue.)
Therefore, there is this paradox that the government – or the minister in charge – denies to negotiate an agreement that cannot pass through the CBI without his political blessing.
This situation greatly frustrates creditors. They feel they are trying to do everything right, talking to the CBI, trying to figure out what write down is needed (obviously, from their point of view as small as possible) by studying the current account, studying what assets can be used to negotiate on (such as assets owned by the CBI holding company, ESÍ etc), stretching out payments and in general trying to figure out all variables that can be used in negotiations.
But so far, this is just a monologue – there is no one who wants to sit down on the other side of the table. And yet the government clearly indicates it does want certain things from the creditors – it is just not going to tell them what it wants and no, not negotiate with them. The creditors have to figure it out themselves and reach a conclusion that satisfies the government.
This is seemingly an impossible way to go about things. And it is even more impossible if the government wants not only to find a solution that safeguards financial stability and takes into account the current account balance over the coming years but, in addition, wants to secure money for the treasury.
But one day the government will, in some way, make its position clear. Until then, when, how and what are only things to be guessed. And as we know from the Eurozone crisis: figuring out the economics is easy – guessing the politics is a lot more difficult.
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