Sigrún Davíðsdóttir's Icelog

The oral hearings in the Aurum case are now over and a verdict can be expected in the coming weeks. Those charged are Jón Ásgeir Jóhannesson, for  exerting undue influence on Glitnir CEO Lárus Welding, also charged, in addition to two Glitnir employees, Magnús Arnar Arngrímsson and Bjarni Jóhannesson who managed Glitnir’s business relations with Jóhannesson and his companies. The three Glitnir employees are charged for breach of fiduciary duty.

An intriguing sub-story, surfacing during the hearings, is that during the hearings Jóhannesson told the court that he had been able to obtain information on Fons, the company of his long-time business partner Pálmi Haraldsson. Jóhannesson told the court how he had requested and obtained this information. The interesting thing is that Jóhannesson had no formal relation with Fons and yet the bank handed over to him financial information on Fons. And it was quite interesting the Jóhannesson told this to the court as if this was the most natural thing in the world.

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Prime minister Sigmundur Davíð Gunnlaugsson has time and again said that the Winding up committees of Glitnir and Kaupthing have not yet presented any composition proposals to Icelandic authorities. Both estates have indeed done so long time ago, actually in 2012. Glitnir has earlier contested the prime minister’s words in the Icelandic media.

In a tv interview with Stöð 2 yesterday Gunnlaugsson yet again reiterated his earlier and by now oft repeated statements. Following the interview the Kaupthing Winding up committee sent out the following announcement:

In light of comments made by the Icelandic Prime Minister, in a news interview with Stöd 2, an Icelandic television station, released yesterday, where it was stated that Kaupthing’s composition proposal had not been presented to the Icelandic Authorities, Kaupthing wishes to reiterate the following:

On 24 October 2012, Kaupthing’s Winding-up Committee applied to the Central Bank of Iceland for an exemption from Iceland’s capital controls on the basis of provisions of the Icelandic Foreign Exchange Act. The application included a draft composition proposal. The purpose of the exemption application is to create the necessary basis for submitting a composition proposal to creditors and thereby concluding Kaupthing’s winding-up proceedings.

The exemption application is still under consideration at the Central Bank of Iceland.

It is not clear why the prime minister keeps on repeating something that is so obviously not correct. Glitnir has challenged him more than once on this. Now Kaupthing has done the same. It remains to be seen if the prime minister will stick to his version.

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Last December, Landsbankinn announced it would need to extend its two bonds of December 2009 with maturity 2018. On May 8, Landsbankinn and the LBI, the estate of old Landsbanki, reached an agreement to extend the final maturity from 2018 to 2026. In return, creditors want a pay-out of fx cash funds with the LBI, only possible with an exemption from the Central Bank of Iceland, CBI, with the blessing of the minister of finance. – With a time clause in the new agreement there is now pressure on the government to find the holistic solution to the estates both the CBI and ministers have talked. At stake is saving the state-owned Landsbankinn or the cataclysm of a failed state-owned bank. Judging from the debate in Iceland it seems that there are those who would either favour some turmoil or do not realise the risks involved in some special Icelandic solution.

The nature of the estates of the three biggest Icelandic banks, which all failed in October 2008, is not the same. This is also reflected in the ownership of the three new banks. On one hand there is Landsbanki, on the other Glitnir and Kaupthing.

Due to Icesave, priority-claim holders, i.e. deposit guarantee schemes of the UK and the Netherlands, will get ca. 90% of the Landsbanki estate, LBI. Not until December 2009 was the ownership of Landsbankinn, the new bank, in place: the state brought equity in addition to a loan from LBI, which due to imbalance between domestic and foreign assets, mostly had to be paid in fx.

The state now owns 98% of Landsbankinn with employees holding the rest. Instead, in Glitnir and Kaupthing creditors holding general claims, i.e. myriad of banks and other financial institutions, get the lion share of the estates. After the collapse in October 2008 creditors of these two estates agreed to fund the two new banks, now Íslandsbanki and Arion, taking a stake in them. The state owns 13% of Arion and 5% of Íslandsbanki.

It was clear from early on that Landsbankinn would not be able to meet the bonds’ payment schedule; the bank is not generating enough fx funds. At the time it seemed a solvable problem for another day, certainly the bank would gain market access before crunch time and be able to refinance. Now, with capital controls still in place etc., this is not about to happen meaning there was no other way but to negotiate with LBI.

Negotiations have been ongoing, on and off, for a year, at times in a rather frosty atmosphere. Already a year ago, the rumour was that an agreement would be reached before the end of the year; 2013 passed, no agreement – until now.

Agreement on extending the Landsbankinn bonds

Those two who negotiated were Landsbankinn, the payer of the two bonds and LBI, i.e. its Winding up Board as well as representatives of both the priority and general creditors.

According to the Landsbankinn press release “Interest rates will remain unchanged at 2.9% margin until October 2018. Thereafter, the margin steps up to 3.5% for the 2020 maturity, increasing up to 4.05% for the 2026 maturity. Each of the maturities between 2020 and 2026 will be equivalent to approximately 30 billion ISK.” – This is more or less what the other banks get offered. Improved conditions will help Landsbanki refinance.

The intriguing bit is this part of the press release: “The agreement is conditional upon the Winding up Board of LBI obtaining certain exemptions from the capital controls.”

The story here is that creditors know full well that saving a state-owned bank may be worth something. This “something” is not spelled out in the press release but it refers to the fact that LBI creditors want to make sure they will actually be paid out their assets in LBI. As it is now, they do not: LBI has i.a. not paid out ISK50bn, paid by Landsbankinn on the bond because the CBI has to grant exemptions to currency law and it has not.

In order to secure their interests, the new agreement states that conditions precedent to closing are that the CBI:

– grants existing exemption requests from the capital controls for Partial Payments to creditors,

– grants a permanent exemption to the capital controls for payments received on the Bonds, and

– grants exemption requests for future payments LBI receives on FX assets of LBI or to the extent such exemptions cannot be granted, a confirmation by the Central Bank that it will consider future exemption requests in good faith

In short, the relevant facts regarding the agreement are:

Outstanding part of the bonds is ISK226bn; eight years extension, from 2018 to 2026; tranches will be paid out every two years instead of every year; the bonds can be paid at a faster rate without any penalties; until current final maturity 2018 the interest rates are the same as earlier agreed, i.e. 290 basic points on Euribor/Libor, the 350bp 2020 ending in 406bp 2026; the agreement is made on condition that CBI grants exemptions.

From positive to negative

The first reception of the agreement was largely positive. After all, extended maturity of the Landsbankinn bonds seems broadly in accordance with CBI’s views in its financial stability reports: Landsbankinn has funds to pay the 2014 and 2015 instalments but the main burden on Icelandic balance of payment in 2016 stems from the two Landsbanki bonds. Once they are extended things will brighten up – which is just what has now been done in the new agreement, or rather the head of terms reached.

Major news regarding the estates and other matters close to the CBI has recently often been leaked to Morgunblaðið. The news of the agreement came fresh from Landsbankinn. Since the CBI position on the importance of extending the maturities was known this was reflected in the first news – a problem that needed to be solved and had been seeking a solution for a long time had indeed found a solution. Without taking a stand, Már Guðmundsson governor of the CBI said the bank would now analyse the agreement.

But after the first surprise of an agreement dissident voices were heard. Prime minister Sigmundur Davíð Gunnlaugsson has said that creditors must not be favoured over ordinary people and the new agreement must not be allowed to impair standard of living in Iceland. Other Progressive voices sounded the same warning. As often, minister of finance Bjarni Benediktsson was more cautious and Delphic.

The strongest and much noted criticism came from Heiðar Már Guðjónsson. In an article in Morgunblaðið Guðjónsson wrote that the new agreement smacks of Icesave, meaning it was too onerous for Iceland. He claims the problem is not solved with extending maturities since the interest rates are too high and that foreigners should not get an exemption from the currency laws until a holistic solution is found; in the end the Icelandic people will only pay the price for this.

Guðjónsson, introduced as an economist (he graduated from University of Iceland) in Morgunblaðið, is better known in Iceland as an investor. His family lives in Iceland but he himself is domiciled in Switzerland where he moved from London after working at Novator. Novator is the investment company owned by Björgólfur Thor Björgólfsson who with his father was Landsbanki’s largest shareholder from when they bought the bank in 2003 until the bank failed only five years later.

In 2010 Guðjónsson led a group of investors who wanted to buy the insurance company Sjóvá. He has later claimed that governor Guðmundsson personally intervened to prevent his offer being accepted. On the other side there are rumours that the CBI did not want to accept the offer because it was conditional on using offshore króna. Last year, Guðjónsson published a book about Iceland and the Artic and he has various investments in Iceland.

Interestingly, those who have sought financial power in Iceland have always sought to own/control a bank, an insurance company and a media – preferably all three. This was true in earlier decades and was still true after the privatisation of the banks.

Precedents and the glaring risk on Landsbankinn

For some reason, none of those who have opposed the new agreement mention the glaring risk that Landsbankinn – and its owner, the state – is facing by not being able to pay off the bonds in 2016. Also, the CBI has time and again called for a holistic solution.

The agreement has been said to constitute a dangerous precedent. The fact is that the LBI is still paying out to priority creditors whereas these have already been paid out in Glitnir and Kaupthing – in fx. In total, the priority creditors in the three banks have been paid out close to ISK1000bn (ca ISK700bn to LBI creditors, the rest to creditors of Glitnir and Kaupthing), amounting to more than half of 2013 Icelandic GDP. Obviously without upsetting the Icelandic economy since this has been paid from fx assets in the estates.

In total, LBI priority claims – mostly rising from Icesave – amount to ca. ISK1330bn. With extended maturity this will not have been paid out until towards the end of the extension. General creditors will most likely get ca. ISK200bn – but not until close to 2026.

Consequently, a pay-out from LBI does not set any precedent regarding pay-out to priority creditors since Glitnir and Kaupthing have already paid their priority creditors. Some people worry about the precedent it sets to give exemptions to pay-out in fx. The interesting thing here is again that this has already happened: as mentioned above the equivalent of ISK1000bn in fx has already left the country/or more likely, been paid out of accounts abroad since most of the fx is actually kept abroad.

A new and unexpected time limit for the government

What the government now faces is that the new agreement has a time limit: LBI and Landsbankinn commit to finalise documentation before June 12 and completion within three months from that time. This means that the government has a thing or two on its plate now.

The CBI grants exemptions but the minister of finance has to agree to exemptions of this magnitude. After seemingly having eternity to make up its mind as to how the estates should be wound up it now has… until September 12 (I have heard there might be a month or even three in grace period but according to a copy of the presentation of the head of terms the date is September 12).

At first glance, Landsbankinn and the LBI have no doubt had in mind to extend in line with the CBI balance of payment forecast. It is difficult to see that the agreement might threaten standard of life in Iceland as prime minister Gunnlaugsson has stated. What is however threatening Iceland are the capital controls.

The nature of capital controls is to give shelter from an imminent danger that cannot be solved imminently – in Iceland it was the situation after the collapse when more króna was seeking to be converted into fx than could be serviced without causing the króna to collapse. However, the danger is that with time the controls turn into a cosy shelter substituting the reforms and changes that need to be made to solve the original problem/danger. Exactly when this happens is difficult to estimate. With Iceland now well into the sixth year, business leaders in Iceland are smarting, complaining loudly about the lack of a credible plan to lift the controls without threatening financial stability.

The asset sale of the century

There are interesting times in Iceland. It is clear that two – and possibly three – banks will be for sale in Iceland in the foreseeable future. Ironically, an agreement on the Landsbanki bonds removes the largest obstacle for the state selling the bank, recovering its funds now tied in that bank.

The sale of two – Arion and Íslandsbanki – or even three banks will clearly be the largest asset sale in the history of Iceland. There might be foreign buyers and that is what the Winding up Boards of Kaupthing and Íslandsbanki are actively looking into, helped by creditors. Selling one or two of the banks would resolve the problem of converting the ISK assets of the Glitnir and Kaupthing into fx.

Some say that foreigners should not own any Icelandic banks, which in the light of the experience of home-run and –owned banks is a remarkably forgiving opinion.  And yes, there might also be Icelandic buyers.

There are the pension funds, which might very well be tempted/lured into (depending on the point of view) to buy a bank or two with their foreign assets. Interestingly, most major Icelandic investors, who got rich by being actively involved with the three banks in the five to eight years up to the collapse and who still have the urge to invest in Iceland, are all living abroad.

The political choice: negotiations or turmoil

The government has to make up its mind as to how to deal with the estates. It will now feel emboldened by having paved the way to debt relief – the two necessary Bills have been passed in Althing and the website for applications is up and running. The coming local elections in Iceland May 31 will most likely be bad news for the government though the successful introduction of the debt relief might pull some votes for the Progressive party in the election’s final spurt.

The debt relief, though carried out by the Ministry of finance, is the Progressive’s big project. Its realisation will greatly strengthen the party’s credibility in the eyes of the voters. It will also strengthen the party in government, which again might strengthen the party’s view on the estates. Its former views on money accruing to the state from the estates have not been heard much lately. It is however clear that some of the government’s local advisers are of the same view though it is safe to say that if this were an easy route it would already have been taken.

Anyone bringing fx to Iceland in order to buy assets now gets ca. 20% discount, compared to those with investors holding króna in Iceland. The rumours in Iceland are that if the government chooses some unconventional way in resolving the problems related to the bank estates, releasing legal action and other unforeseen consequences, the resulting turmoil might drive down prices in Iceland. Turmoil might benefit those intending to buy assets in Iceland but it will certainly not benefit the average Icelander who would yet again see the economy in jeopardy.

The CBI has preached the importance of keeping an eye on financial stability. The IMF still keeps an eye on Iceland and certainly has all the expertise needed to deal with the situation. Lately, some international advisors, specialised in sovereign debt issues have been visiting Iceland. If the government hires such advisors it might make it more likely that the route of negotiations will be chosen. By following the example of how other countries have escaped capital controls and how big financial estates are dealt with, the CBI goal of financial stability and market access might be within reach. Or as the CBI writes in its last financial stability report:

The next stages of the winding-up proceedings must safeguard financial stability and ensure that domestic entities have access to foreign credit markets. Finding a comprehensive solution to the estates’ affairs is a prerequisite for lifting of the capital controls.

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Last week, the Office of the Special Prosecutor initiated criminal proceedings against three Kaupthing managers for breach of fiduciary duty. The managers are Sigurður Einarsson formerly chairman of Kaupthing, its CEO Hreiðar Már Sigurðsson and Kaupthing Luxembourg managers Magnús Guðmundsson.

At stake are loans to four companies, in total €510m, owned by Ólafur Ólafsson, the bank’s largest shareholder, Conservative party donor and at one time a Kaupthing board member Tony Yerolemou and two big clients of the bank, Kevin Stanford and his ex-wife Karen Millen. The loans were used to fund two companies, which traded in Kaupthing’s CDS, in order to encourage a fall in the CDS and reduce the bank’s financing cost. These CDS deals were done in cooperation with Deutsche Bank. None of the clients nor Deutsche are under investigation at the OSP in relation to this scheme.

The loans were issued to BVI companies with little or no other assets than the financial assets, which were being funded. In some cases Kaupthing issued loans to these companies without the knowledge of their owners. According to the claims, the loans were not taken up in the bank’s credit committees nor were credit committees told of previous loans to these companies.

Although there are higher sums at stake in two large market manipulation cases against Kaupthing and Landsbanki managers – cases that consist of actions stretching over some time, this latest case is the largest single case so far and is likely to remain so. So far, all the OSP cases relating to the collapse of the banks are stories already known from the SIC report, published in April 2010 and this CDS case is no exception.

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In recent weeks Icelandic business leaders have voiced concern on the isolation of Icelandic businesses behind capital controls and by breaking off EU access negotiation. In order to lift the controls – or rather, start the process towards that goal – it is necessary to negotiate the payment schedule of the Landsbanki bond and the ISK assets of Glitnir and Kaupthing. Possible solutions are in sight but it is ultimately a political question and not about economics. So far, it is unclear if the government is seeking to lift the controls or if it also seeking to fatten the state coffers. Another – and in the long run possibly a more serious problem – is a short-term plan with no perspective on the future. As the CBI points out in its latest Financial Stability Report the solution has to be holistic, safeguard financial stability and pave the way for Icelandic public and private entities to international credit markets.

The word among those involved in the winding-up of the estates of Glitnir and Kaupthing is that these are by no means difficult cases but the weirdest process they have been involved in. The “weirdness” stems from the fact that although the minister of finance has the last word on the winding-up of the two estates, there is no one to negotiate with. One of those involved complained that they keep coming to Iceland, for meetings and presentation, but there is no one with a mandate to make any decisions.

The process has been rambling, with a committee that then was not really a committee and had no chairman. The prevailing assumption in Iceland seems to be that Iceland has all the good cards on its hand and can afford to wait as long as it pleases, “to make the creditors sweat” as some have been whispering. But that may be a slight misconception.

What should focus the mind of the government is first of all the growing and vocal irritation within the Icelandic business community on lack of credible plan to lift the controls. Also, 2016 is a crunch year when the new Landsbanki cannot pay (not for lack of liquidity but of foreign currency). Uncertainty on repayment is particularly unfortunate since the new bank is owned by the state. The third issue are legal risks. The fourth issue, somewhat hypothetical in terms of time but absolutely real in terms of effect, is the relative cohesion of the creditors, contrary to what it could later.

The process

The process of abolishing the capital controls has been rambling. Under the previous government the Central Bank was working on the payment-of-balance analysis and prognosis and published a report, only in Icelandic,* in March last year as well as reports on abolition plans. In early 2013 an ad hoc working group with members from the Icelandic government, EU Commission, the European Central Bank and the IMF was set up to work on an interim report. However, when the present government announced it was putting EU accession talks on hold the EU Commission notified the government it would withdraw from the group, which then met its demise.

During the election campaign last year the Progressive party announced time and again that “unavoidably” the state would make money on the winding up the banks’ estate and these funds should be used for debt relief. When announced in November it came as a surprise that the debt relief was to be funded with a banking tax, also on the estates, not from money from the winding-up process. Much less has been heard of this fountain of funds, the winding up process, lately.

The new government announced it would appoint a “capital controls abolition director,” due to be appointed soon after the government took over. However, this position was never filled. End of November the government set up an “advisory group” with the task of making proposals on steps and overall plan of abolishing the capital controls. It was unclear if this was a committee or not (said by adversaries not to be a committee because a committee would be bound by law on gender equality) and it was too informal to have a chairman.

However, in a recent report on the abolition progress (after an Althing resolution last year a report on the abolition progress is published twice a year) Sigurbjörn Þorkelsson, a banker in London, is said to be its chairman. Other members were Eiríkur Svavarsson, Jón Helgi Egilsson, Jón Birgir Jónsson, Ragnar Árnason and Reimar Pétursson. Benedikt Árnason and Benedikt Gíslason, both from the Ministry of finance, assisted the group.

Its proposals have not been made public and the group seems to have come up with a smorgasbord of proposals but no overall plan, as far as is known. Also, there are rumours of differing opinions within the group. Recently, Benedikt Gíslason gave a presentation at Independence party’s head quarters but the scanty reporting did not indicate any firm view on the process and the immediate future. According to the rumour mill the members have been giving power-point presentation at various meetings; always the same slides but the interpretation varies according to who presents the slides.

This group has now been disbanded. It now seems it will be substituted with a new group. Also, it is rumours that international advisers of all types have been visiting the ministry of finance strutting their feathers. So far no names have been confirmed nor is it clear what the mandate will be.

The numbers

The capital controls stem from the fact that Iceland does not generate enough foreign currency, fx, to meet demand on converting ISK into fx. There are three main hurdles: pre-2008 foreign-owned ISK, mostly so-called “glacier bonds,” ISK327bn, €2.1bn – ISK assets in the estates of LBI (the Landsbanki estate), Glitnir and Kaupthing – and liabilities by Icelandic entities, such as Landsvirkjun and the state itself, in fx, directly and indirectly state-guaranteed. In a way, it makes sense to group the Landsbanki bond in this last group since new Landsbanki, shouldering these liabilities, is state-owned.

The combined assets of the three estates amount to ISK2,552bn, or 143% of Icelandic GDP. The ISK assets of the estates in Glitnir are ISK302, €1.94bn, in Kaupthing ISK148bn, €950m and in LBI ISK47bn, €300m, in total ISK497, €3.19bn. The largest part of the Glitnir and Kaupthing ISK assets are the new banks, respectively Íslandsbanki, valued at ISK132bn, €850m and Arion at ISK116bn, €750m (on latest numbers and stats see the CBI latest Financial Stability Report)

Contrary to the creditors of the three estates the foreign-owned ISK, the glacier bond-holders, are not an organised group. Some have estimated that a third, perhaps as much as half of them are indeed Icelanders. Whether this group will leave rapidly or not is difficult to say but there are indications that at least part of this money is happy to stay in the high-interest Icelandic economy.

The liabilities of indirectly/directly state-guaranteed liabilities are manageable, according to the CBI, for next year, partly because fx has been put aside against rainy days. The problem becomes insurmountable in 2016-2018 unless the new Landsbanki refinances/extends, in total ISK177bn, €1.14bn for these three years.

Composition or bankruptcy?

The major question, facing the government is whether to find a solution for winding up of the estates of Glitnir and Kaupthing, i.e. composition as creditors want – or opt for filing a petition for bankruptcy straight away. Bankruptcy gives less leeway to manage assets whereas composition gives creditors much better control over the assets, which might in the long run improve their recovery. Needless to say, the creditors favour composition.

For some reason, those who speak for the bankruptcy route, have added to it the so-called “ISK-isation” of all the assets, meaning that the fx assets, mostly held abroad, must be converted into ISK, paid out and then those foreigners with bucket-loads of króna would have to negotiate an exit, participate in auctions etc. I fail to see how this route could solve anything at all or be in the interest of Icelanders. To my mind, it is chaos and risk and no solution at all. In addition to lawsuits and other legal devilry it makes the process unpredictable, possibly prolonging unnecessarily the capital controls.

Both prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson have repeatedly hinted at this possibility. Benediktsson has argued that the winding-up process is taking unduly long though not mentioning that both Glitnir and Kaupthing put forth a draft for a composition bill in late 2012. So far, Kaupthing has received no answer. Glitnir has been answered after which they put forth another draft, as yet without an answer.

The ministers have no doubt mentioned bankruptcy to scare the creditors who perceive they will lose a lot through bankruptcy with assets unavoidably going on fire sale with the usual consequences. However, that is only money, so to speak and losses for some financial institutions. The losses for Iceland is, from my point of view, much more serious: longer time under capital controls with ensuing direct and indirect cost, uncertainty and what could be seen from abroad as increased political risk, rising from instigating a process fraught with unforeseen consequences.

The legal risks

Most of the debate in Iceland regarding the capital controls and the two estates has focused on the evident balance-of-payment problem and the need to find a solution that does not put the country’s financial stability in jeopardy. The legal risks are hardly ever mentioned.

Some of those I have spoken to, advocating the bankruptcy route, claim there is no inherent legal risk in it. As a proof they refer to an ECJ ruling regarding a case against LBI in France in which Icelandic bankruptcy laws and the procedures was found to comply with EU regulations. However, this case only shows that so far Icelandic laws are in compliance. With a different route or deviation from this course the situation might be different.

So far, none of the fx assets have been paid out to creditors – it can only happen after priority claims have been paid out, as in Glitnir and Kaupthing (LBI will only finish that earliest in 2018) and either bankruptcy or composition chosen. Paying the fx would not harm Icelandic financial stability. One reason for postponing decision is rumoured to be that preventing the fx payout makes the creditors more amenable to leaving a large chunk of ISK assets to the government. From the legal point of view this might be questionable, to say the very least. By preventing payment the state can easily risk legal action.

Frustrated creditors could use Icelandic law to seek their rights. The notorious cases of creditors vs Argentina demonstrate the ample recourse creditors have internationally to seek justice. In addition to direct legal risks there is the risk that legal wrangling tends to take a long time, possibly adding years to capital controls in Iceland – again, a costly delay for Iceland.

Legal risks are well known from similar cases in other countries and it is a well-trodden path for creditors. If the creditors feel forced to take that route the consequences might be unpleasant for Icelanders and come as a surprise. However, in an international perspective there will most likely be few novelties.

The political risk

One risk assessment regarding countries is political risk. If the government keeps dithering, postponing a solution, the political risk increases. The priority claim-holders to LBI, the British and the Dutch government, no doubt have an eye on the political risk in weighing up possible actions.

For some reason media reports in Iceland on the Landsbanki bond ignore the fact that behind Landsbanki is its owner, the state. One source said to me that the state would not do whatever it takes to save the new bank. – Needless to say, letting Landsbanki fail would create quite some turmoil, to say the very least.

The Progressive party, the winner of the last elections, is now much weakened. Both the party and its leader muster little popularity and trust according to polls. A weakened party will either try to be more reasonable and responsible, in order to get re-elected. Or it can go all-out on demagogy and populism, knowing it will only get one term in power anyway so there is nothing to lose. It is still too early to tell what route the progressives will choose. So far, the prime minister has been very absent in the Althing debate, causing much speculation as to what makes him stay away.

Partly due to the prime minister’s absence Bjarni Benediktsson leader of the Independence party has at times appeared as both the minister of finance, as he is, and an acting prime minister. Within his party there is brewing discontent that the party has gone out on a limb to make the Progressives’ promises of debt relief come true. The two Althing bills needed to carry out the debt relief plan have not yet been through Althing and it is still unclear when it will happen. Icelanders have been promised that they can apply for the relief from mid-May.

The EU issue – to break off negotiation, as the Progressives insist on – has turned into a poisonous topic for the Independence party. Its leaders point at polls showing that its voters are in favour but the fact is that many of the more EU-friendly voters have already left the party. The party has now a much smaller following than ever in the past when it hovered around 40% while now hovering around and well under 30%. A new conservative EU-friendly party is still in the making but not yet born.

The feeling is that the cause of inaction regarding the estates of Glitnir and Kaupthing is due to differing views within the government. As long as the course is unclear political tension and the ensuing risk of inaction is in sight.

Ultimately, as pointed out on Icelog earlier, the controls will be decided in a political wrangling. Understanding that politics is a key issue here.

Possible solutions

The worst problem for Iceland is the Landsbanki bond since the liabilities are on Iceland, indirectly a sovereign problem since the new Landsbanki is state-owned. Theoretically, the solution is simple: extending the payment schedule, with adjusted interest rates. Although simple in theory, it is clearly not that simple in reality. Here, contrary to what seems to be generally understood in Iceland, the creditors have the upper hand. Nothing is really clear until the solution here is clear.

In addition, it is clear to everyone, including the creditors, that Iceland does not create enough fx to pay out, in the near future, ISK assets held by foreigners. With focus on the estates of Glitnir and Kaupthing the question is what to do about it.

There are of course the usual. One is extending payment etc but that is not very satisfactory for various reasons, i.a. risk rising from unforeseen circumstances etc. Haircut is another way. The CBI has been in favour of 75%; Arion bank analysts recently mentioned 55% as the necessary number.

However, the CBI has lately been advocating solving the problem within the framework of the estates, i.a. using domestic held fx, asset swaps etc. – 5.7% of the claims are owned by Icelanders, in total just over ISK100bn, mostly held by the Eignasafn Seðlabankans (the CBI asset-holding company).

The creditors have pointed out that selling the two banks, Arion and Íslandsbanki, to foreigners/for fx might be the solution. As pointed out in the 2014 report on capital controls: “Sale of the holdings for foreign currency to non- residents who intend to hold these assets for a longer term would avoid such negative effects, although there might be pressure over a longer period when the banks paid dividends to their foreign owners.” – However, also regarding dividend there are possible solutions.

As it is, everyone is losing out on inaction. Creditors lose around ISK100bn, €640m, a year because of lost interest. Icelandic businesses and ultimately the country are losing, as always happens when capital controls stay longer than necessary Icelandic businesses and ultimately the country are losing both money and opportunities.

Analysts at Arion Bank have done some calculations, pointing out that the only real problem is the Landsbanki bond. Here is their interesting overview.

The risky silence on long-term perspectives

The latest CBI financial stability report states: “The next stages of the winding-up proceed- ings must safeguards financial stability and ensures access of domestic entities to foreign credit markets. Finding a comprehensive solution to the estates’ affairs is a prerequisite for lifting of the capital controls.”

In addition to a missing comprehensive view and a holistic solution is missing a vision of the future after lifting the controls is nowhere in sight. How will Iceland cope on its own after the controls have been lifted? Can Iceland survive with no controls, will controls on inflows or outflows be needed, should the króna be pegged or not, another currency found? And is the EEA agreement enough for Iceland in the long run?

In September 2012, the CBI produced an extensive and informative report, Iceland’s currency and exchange rate policy options (only small part of it in English), inducing realism in an often lofty so as not to say wholly misleading debate, on the currency options. Instead of instigating a debate it more or less ended all debate without any ensuing policy.

As far as is known the government is not working on any comprehensive analysis of future options. Some say that politician are avoiding to discuss these wider issues and the government, or rather the Progressives, is hell-bent only on finding some clever way of fleecing foreigners. Yet, if there is only that policy once they are fleeced, what next?

The solution to lifting the capital controls needs to be coherent and comprehensive – but to back it up there also needs to be a clear plan for the future after the capital controls. That is what politics should be about. The EU debate shows that there is an ongoing battle for the soul of Iceland going on – whether to dare to engage with the outer world or to withdraw and isolate, letting the forces that have ruled Iceland for the last decades rule on.

*Sorry, this is of course wrong. Here is the report in English.

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