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The CBI test: who is in charge in Iceland?

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Prime minister Sigmundur Davíð Gunnlaugsson is dominating news in Iceland. First, because last week he scolded the Central Bank of Iceland for wasting time on “unasked for” work, which caused a flood of rumours on imminent changes at the CBI (which then might postpone any concrete plans for the necessary steps regarding the capital controls). Then he spent a 30 minutes interview on a Sunday chat show arguing with the journalist what he had and had not said as the journalist tried to get an answer to the question everyone is asking: will there be changes at the CBI – either because governor Már Guðmundsson will not get another term or the government will add two governors at his side – or will Guðmundsson get another five year term? The outcome could give an indication, yet again, which of the two parties does actually lead the government. So far, it has been the Independence Party.

“I’m not denying it but I didn’t say it would happen.” This is the Delphic utterance prime minister Sigmundur Davíð Gunnlaugsson gave when asked if there would be any changes at the CBI following both the prime minister’s own harsh criticism of the bank last week. In the 27 minutes long interview (in Icelandic) the prime ministers time and again argued with the journalist, Gísli Marteinn Baldursson, accusing him of twisting his words when the journalist took great care to read the prime minister’s own words.

From the beginning of his term as a prime minister Sigmundur Davíð Gunnlaugsson has made sure to answer his critics. After only a few weeks in office he found time to write an article in Morgunblaðið where he lambasted journalists and the media that he felt did not do him and his party much justice.

Unleashed wrath

This tone of irritation has come up regularly but this week, at the Annual Business Forum of the Icelandic Chamber of Commerce, his wrath was turned not to the media but to the Central Bank of Iceland. And not for the first time either. In November, the CBI chief economist aired worries, as others had done, that the, according to the prime minister, “most radical debt write-down in the world” would increase inflation. The prime minister, who had escalated his description of the coming debt-relief to this what turned out to be a hyperbole (the debt-relief broke no world records) called the bank’s approach “remarkable,” accusing it to be more devoted to politics than running the economy. Morgunblaðið, often the prime minister’s trusted ally, ran a disparaging front-page article on the economist and his words.

Last week, the CBI again incurred the prime minister’s wrath, expressed in a speech at the Annual Business Forum of the Icelandic Chamber of Commerce. That same day the CBI had published its Monetary Bulletin criticising, albeit very mildly, the debt relief (introduced by the prime minister and the minister of finance Bjarni Benediktsson last November). Almost all economists, except those linked directly to the government have been critical of the plan, i.a. for increasing inflation. Not unsurprisingly, the CBI saw the same dangers:

Measures to reduce households’ indexed debt will have some effect on the medium-term economic outlook. Other things being equal, they will stimulate private consumption and imports, and reduce national saving and the current account surplus, which will contribute to a weaker króna than would otherwise result.

This unleashed scathing comments from the prime minister, calling the review of the measures “unasked for,” criticising the bank for doing this instead of its balance of payment prognosis, which Gunnlaugsson said was long overdue. A measured spokesman for the CBI later pointed out that the review of the debt relief was i.a. a prerequisite for the balance of payment calculations.

The headline of the Business Forum was “Open for Business – Strengthening Iceland’s International Sector“  – in English since there were foreign guests present. At the end of his speech, the prime minister took it upon himself to answer this question, even in English in his speech in Icelandic by saying: “Yes, Iceland is open for business, but the store is not for sale.” – One commentator pointed out that this was a tasteless jibe at those who do not agree with him, meaning that they were willing “to sell” Iceland, a treasonous activity echoing Halldór Laxness’ Cold War novel The Atom Station.

It came as a huge disappointment for business leaders at the Forum that Gunnlaugsson’s speech was long on irritation and short on any vision for the future, a criticism repeatedly heard over the winter following the prime minister’s diverse appearances.

Gunnlaugsson’s harsh tone has been widely seen as an indication that governor Guðmundsson’s days in office were now numbered. Following the Forum speech news Eyjan, a news website (often well-informed on coalition politics) owned by a former Progressive politician Björn Ingi Hrafnsson, reported that Guðmundsson would be informed that he would not get another term and a new bill of law, now being written, would stipulate that there would now be three and not just one governor – or two “over-coats” as one commentator put it because Guðmundsson could reapply. This changed organisation at the CBI was widely seen as harking back to the bad old days when all major positions would be divided evenly between the political parties.

It was following this speech and the ensuing rumours that Gunnlaugsson was questioned about these issues on Sunday. The prime minister’s rather inelegant discourse could be understood to indicate that yes, he was in favour of an independent central bank but only when the bank agreed with his policy and that is what the journalist asked him about back and forth. Ungracefully, the prime minister tried irony and belittled the journalist, accusing him of political slant.

As the journalist ended the interview by thanking him, Gunnlaugsson’s last jolly words to the journalist were: “You didn’t do too badly and you proved that you are not speaking on behalf of the government.” The following moments of silence indicated how flabbergasted the journalist was.

The higher political meaning of things

What does all this mean for the coming months and the work towards abolishing the capital controls? The focus right now is on the CBI. According to law, the governor needs to be told six months before his terms ends if he is not up for renewal. If he does not hear anything from the government his term is automatically renewed. The date for this information to be presented to the governor is February 20. The CBI falls under the remit of the ministry of finance meaning that formally the fate of the governor is in the hands of minister of finance Bjarni Benediktsson.

Following the Eyjan report on changes at the CBI interestingly, Rúv (the state broadcaster) stated just the opposite, i.e. that there would be no changes and Guðmundsson’s term in office would be renewed. Both reports quoted sources within the government. Did the government change its mind – or are there really two conflicting views on this matter?

My feeling is that the two coalition leaders are not agreeing here: the Progressive leadership would desperately like to see Guðmundsson go – i.a. they did not like his negotiating stance on Icesave, do not trust the bank on finding the right solution to the capital controls (i.e. a solution that brings money to the state) and do not care too much that this would cause more than half a year of uncertainty and inactivity whereas the Independence leadership seems to think that Guðmundsson is the best for the job and drastic changes at the CBI might undermine financial stability and ultimately the economy.

If this is the right understanding then who is more likely to gain the upper hand? The fact that Benediktsson has the formal power adds to his weight in this matter. Also, it has been rather remarkable to watch how he has actually been able to steer things in the direction he wants. Around New Year one well-placed source told me that if Guðmundsson should be ousted it would have to be done at the latest by the end of January because waiting to the last minute would look bad. If Guðmundsson would not get a letter by the end of January it would mean that he would continue for the next five years.

I have earlier said that the course of the capital controls abolition will eventually be decided by the politics and much less by economics. The question is whose politics will prevail. Judging from the course so far it is more likely that Benediktsson’s view will be prevail. But this time might be the exception compared to Benediktsson’s earlier success in swaying the Progressives in his direction.

If there will be changes at the CBI this turns the bank into a lame duck until a new governor or governors would be appointed, earliest in October or November. Part of the discussion in Iceland re the capital controls is what the creditors would do if this and that happened, such as a postponement. Actually, the creditors would not need to make much noise. They could just sell swiftly and silently. Those who then buy the claims are those who hover around further down the line, who are litigation-happy and prepared to sue everyone they see in their way, including governments. This is no fear mongering, just the normal course of events when resolution of failed companies stalls.

The government sees itself very much with the estates under its control. Also this might swiftly change. If the feeling strengthens among creditors that the government is in fact effectuating expropriation by not allowing the creditors to get their foreign assets, which do not touch the Icelandic balance of payment, creditors might venture into suing the government abroad.

There are many “ifs” in the present situation. Connecting the dots will require more political understanding than a skillful understanding of economics. And it is not for the politically faint-hearted.

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Written by Sigrún Davídsdóttir

February 17th, 2014 at 8:28 am

Posted in Iceland

3 Responses to 'The CBI test: who is in charge in Iceland?'

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  1. Just a quick comment, Sigrun Davidsdottir, to thank you for the valuable source of information on the Icesave dispute that your blog provides. I have taken an interest in this issue since I, from a position initially sympathetic to Iceland but finding a lot of unanswered questions, decided to look into it for myself, and becoming outraged at Iceland’s actions and the lazy reporting in the British media even by financial journalists, wrote this:

    I had not thought much more about the Icesave dispute since the – in my view outrageous – EFTA court judgement, but now, motivated by the planned tax on the Landsbanki estate and the FSCS court filing, I am trying to catch up on what has happened since then with a view to writing about it again, so your blog has been very useful to me.

    I consider it a shame that the British media does not take this issue more seriously, since the amount of money at stake could, for example, go a long way to reducing the “bedroom tax”.

    Best wishes,

    Tim Young

    Tim Young

    18 Feb 14 at 1:45 pm

  2. This is to correct an error I made in a previous post. If we are to believe this person:
    Workers in the finance industry als suffer from the “crisis”, the downturn in the economy, with the majority of the 99%


    20 Feb 14 at 1:30 pm

  3. “If he does not hear anything from the government his term is automatically renewed. The date for this information to be presented to the governor is February 20.”

    So today is the deadline! I would be interested to hear any news of the outcome.

    Tim Young

    20 Feb 14 at 5:19 pm

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