Sigrún Davíðsdóttir's Icelog

Archive for August, 2014

New governor of the CBI – but not an end to uncertainties

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After the government’s less than a stellar appointment process a new governor of the Central Bank of Iceland present governor Már Guðmundsson has been reappointed. This might seem to end uncertainties that the government has created by its fumbling actions. But no, not quite. It may sound like a contradiction but it could be said that effectively the new governor is being fired by being reappointed.

After much back and forth minister of finance and leader of the Independence party Bjarni Benediktsson has announced that Már Guðmundsson will be reappointed governor of the CBI for another five years. This seemed at first to indicate that Benediktsson has shown independence from the old guard in the party, which has vehemently fought to throw Guðmundsson out, not to mention the fact that prime minister Sigmundur Davíð Gunnlaugsson leader of the Progressive party has time and again criticised the bank, and thus its governor.

However, it says in the letter of appointment that since there is a committee working on revising laws on the framework of his office might change (see further here).

This has prompted Guðmundsson to publish a letter (in Icelandic) on the bank’s website where he acknowledges the possibly imminent changes. He states that he might be tempted to return to work abroad (as he did earlier, he was with BIS) and might not wish to stay in a changed CBI.

This effectively means that yes, Guðmundsson is reappointed – but things will not necessarily remain as they are for what should be his whole five year period. Or it could be said that he has been fired but at a later and unknown date.

However, the optimistic view is that Guðmundsson now has some time and could very well use this time effectively. After all, he has nothing to lose. And so far the government has not been able to make up its mind as to how to reorganise the CBI and will not necessarily jump to a rapid reorganisation.

It is clear that Guðmundsson is adamant about taking decisive steps towards lifting the capital controls and would no doubt like that to be part of his legacy at the bank. That includes having to decide on the fate of the estates of the fallen banks. The feeling is that Benediktsson is more than willing to follow the guidance of the CBI – and the IMF, which has warned against the so-called bankruptcy route (see here). Prime minister Gunnlaugsson, who feels that Iceland won an important victory over foreign finance forces in the Icesave case and is still fighting that battle, seems to take the opposite view (and the fact that Guðmundsson wanted to negotiate on Icesave most likely made him less endearing to the prime minister).

Már Guðmundsson has so far proved himself to be a capable governor, respected abroad and in Iceland. As always, not all will agree with the CBI policy, rates etc but that is as it is. Most importantly, Guðmundsson has shown independence towards Icelandic power centers and political parties. The bank is i.a. investigating alleged fraud involving foreign currency transaction by the largest fishing industry in Iceland, Samherji.

The pessimistic view is that the CBI is now, as much as before, in a limbo. And that again bodes nothing good for Iceland. While waiting, Guðmundsson might just as well make a heck of a good use of his time.

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Written by Sigrún Davídsdóttir

August 15th, 2014 at 2:24 pm

Posted in Iceland

End of central bank independence in Iceland – the pessimistic view

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The leaders of the Icelandic coalition government are struggling to appoint a governor of the Central Bank of Iceland. It now seems that the most likely outcome is that more than one will be appointed, whether it will right away or later. This spells the end of an independent central bank in Iceland. The stumbling process prompts the question how likely it is that a government that cannot agree on appointing a governor of the Central Bank will be able to chew through all the very difficult decisions needed in order to lift the capital controls.

In its last report on Iceland the International Monetary Fund sent some thinly veiled sharp messages to the Icelandic government: one was on the importance of respecting the independence of the Central Bank of Iceland; the other was the importance of an orderly path in resolving the estates of the collapsed banks, i.e. composition and not bankruptcy (more on this in an earlier blog).

It now seems that the government is just about to ignore the first advice, on the all important independence of the CBI. After mulling over the three most suitable candidates a “bizarre” selection committee put forward it now seems that the government cannot choose one candidate. Instead, it seems to be planning to change the management structure of the bank – and put more than one governor at the helm (more on the selection and its implications here).

Bjarni Benediktsson minister of finance said in a Rúv interview last night that considering the increased work load at the bank it made sense to appoint more than one governor (as if this need has suddenly become desperately clear).

The truth is that the government has been mulling over these changes more or less during the year since it came to power but apparently never could make up its mind as to what to do. This surfaced i.a. when the governorship of the present governor was not prolonged literally hours before it would have been renewed automatically.

At the beginning of May Benediktsson appointed a committee to review laws regarding the CBI. The committee was to come up with proposals before the end of this year. Those on the committee are Friðrik Már Baldursson, one of the applicants for the post of governor, Ólöf Nordal who was on the selection committee and is an ex-MP and ex-vice chairman of the Independence party. The third committee member is professor Þráinn Eggertsson at the University of Iceland.

Now there is suddenly no time to wait for the proposals of this committee as to the future of the CBI. Instead, it has all to be decided on the hoof and in a hurry before a new governor or governors will be appointed. New governor(s) has/have to be appointed before the end of August when the time in office of the present governor, Már Guðmundsson, expires.

From the three candidates seen as equally merited by the “bizarre” selection committee – Már Guðmundsson and two professors, Ragnar Árnason and Friðrik Már Baldursson – Guðmundsson is undisputedly the best qualified. For political reasons, the government is unable to rest with Guðmundsson continuing. This seems to be accelerating the process of management changes at the CBI where one or two of the professors would be hired as well.

Benediktsson seems to be indicating that more than one could be appointed. How that is possible – i.e. to make changes and then just appoint from the present pool of applicants – seems questionable but well, remains to be seen.

Seen from the outside, imaging this whole process happening in another Western civilised country, tells a sad saga about the state of affairs in Iceland. Regrettably, the CBI has been kept in a limbo since end of February when it became clear (unexpectedly since it was done last minute) that Guðmundsson’s time in office would not be automatically extended. Bearing in mind that Guðmundsson is eminently respected and has shown himself to be a capable governor and the CBI has been doing important work towards lifting the capital controls all of this is even more regrettable.

In addition, this whole unfortunate saga of the CBI is a sad example of how this government struggles to make up its mind on important issues. The unsettling thought is that since it seems so difficult to choose a governor of the CBI how is this government ever going to agree on i.a. the tough issues that need to be dealt with in lifting the capital controls. Maybe I’m being overly pessimistic here but if things continue in this way the four years of this government in power will come to pass without any of the decisive steps needed. – A case in point is that the time to decide on the Landsbanki bonds agreement has now been extended from August 8 to end of September… because the government had not made up its mind, yet.

With nothing being done regarding the capital controls would mean four more years for Iceland in the wilderness of controls – a truly dispiriting thought. (And I sure hope I’m wrong.)

 

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Written by Sigrún Davídsdóttir

August 13th, 2014 at 9:40 am

Posted in Iceland

Two schools of thought: to bankrupt… or not – and the next governor of the CBI

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The furious battle of interest in Iceland regarding the estates of Glitnir and Kaupthing ultimately centres on the ownership of the new banks, respectively Íslandsbanki and Arion owned by the two estates. There is the IMF – some “foreign abbreviation” as prime minister Sigmundur Davíð Gunnlaugsson once said – together with some civil servants and politicians who want to find a common ground with the creditors and settle on a composition agreement. Then there are those who argue for a tough treatment of the creditors, bankrupting the estates and turning all their króna holding into fx. Choosing the next governor of the Central Bank of Iceland, CBI, will indicate who is in charge and which steps will be chosen regarding the estates and ultimately in lifting the capital controls.

Control-watchers and others who follow things in Iceland are eagerly waiting to see who will be appointed the new governor of the Central Bank of Iceland. The governor will be a key player in lifting the controls and deciding on the fate of the new banks and how the estates will be dealt with. The decision is also a test for minister of finance Bjarni Benediktsson – does the independence of the CBI matter to him or is he at ease with political meddling in the bank, contrary to the advice of the International Monetary Fund, IMF, which in its last report stressed the importance of an independent central bank.

The whole affair of appointing – or not appointing – a new CBI governor has been a bit of a drama. During winter there were continuous speculations regarding possible changes at the CBI. A few times in the course of the winter prime minister Sigmundur Davíð Gunnlaugsson criticised the bank and its staff severely, i.e. for not being in awe of his great project, the “Correction” or the writing-down of mortgages for those who are able to pay and had therefore not benefitted from earlier write-downs.

Until the 11th hour, literally, it seemed that in spite of it all, present governor Már Guðmundsson would stay in place. After all, it seemed unlikely that the government would act only at the latest moment. But that is what it did – hours before the time lapsed: if nothing had been done, Guðmundsson would automatically have been reappointed for another five years.

Then came the next step: appointing a selection committee to evaluate the applicants. Now imagine if the head of Scotland Yard would have been the head of a committee selecting a new governor of the Bank of England – does it sound far-fetched and utterly ridiculous? None the less this is what happened in Iceland: head of the Icelandic police was chosen to head the selection committee with a lawyer who is the Independence party representative on the board of the CBI and earlier an MP for the party together with – finally – a well-merited professor emeritus of economics. Out of three members only one was an economist and the other two had no special insight into central banking, apart from one being on the CBI board.

The curious outcome seems to stem for a general reluctance among some suitable candidates for the selection committee to be on it. The committee’s written decision has not been published but apparently they placed three applicants equal: Guðmundsson and then two professors: professor of the University of Iceland Ragnar Árnason whose speciality is fishing and Friðrik Már Baldursson professor at Reykjavík University who is a well-merited academic who fell out of favour in Iceland after the collapse because a much disputed report on the Icelandic economy he wrote together with professor Richard Portes.

However, to place these three as equal is rather distorting the merits of the three applicants: in terms of experience and career there is no way of placing these three as equal.

The rumour mill milling

Guðmundsson is by far the best candidate but in a country where political and personal interests matter, often obliterating professional merits, strong and clear merits are not always enough. There are now wild speculations in Iceland as to what Benediktsson will do and what the appointment will indicate in terms of domestic politics.

Árnason has been seen as the most likely candidate to be appointed because of his strong ties to the Independence party. He has i.a. been the party’s representative in various ways over the last decades, written reports etc. Also, he is thought to be favoured by the invisible power centre around Morgunblaðið’s editor ex-prime minister Davíð Oddsson. What many worry is that Árnason, having been involved in various disputes at the University, is seen as a difficult person to work with.

One speculation is that because of this Baldursson might be a compromise candidate. If it is true that Oddsson has any say in this he might not be too thrilled at the thought of Baldursson at the CBI. Baldursson was instrumental in bringing the IMF to Iceland during the days of crisis, at which time Oddsson was himself the governor of the CBI, staunchly opposing an IMF involvement. Oddsson lost that battle.

Now, does that leave Guðmundsson as the best candidate from the point of view of not only merits but also interests? Remains to be seen and it would surely be ironic since it is thought that this whole saga of appointing a new governor did indeed start because the prime minister (and probably Oddsson) wanted to get rid of Guðmundsson.

Wheels within wheels

Another twist in the CBI saga is that home office minister Hanna Birna Kristjánsdóttir is fighting for her political life due to a leak from her ministry regarding the case of an asylum seeker. A case that has been brewing for ca. a year and gets ever more convoluted and difficult for the minister. There are voices that she should simply resign, at least not be in office while there is an ongoing investigation, now involving the state prosecutor and the Alþingi Ombudsman.

While Stefán Eiríksson the head of the Iceland police, was the chairman of the CBI selection committee and working on the selection process, he was also applying for a lower-level job with the Reykjavík council as head of its welfare department, which he got just some days ago. According to Icelandic media it now seems he wanted to leave his job because of alleged pressure the minister.

Some weeks ago Morgunblaðið suddenly and apparently out of the blue attacked the Alþingi Ombudsman Tryggvi Gunnarsson for views held in an email. It then turned out this infamous email was by the Ombudsman’s namesake. This was rather incomprehensible at the time but now that the Ombudsman is on Kristjánsdóttir’s case the paper’s attempt to discredit Gunnarsson can be seen to acquire another meaning.

Benediktsson has been unwilling to criticise Kristjánsdóttir but has now given her a half-hearted support in the media. She has been his most dangerous opponent in the party and widely seen as someone who is waiting to challenge him in a leadership contest. With her gone from the political scene there would be no one he needed to fear. And those who want to keep a tight rein on him or oppose him would have no leverage against him.

Side-shows and other shows

The leak saga is very much in the Icelandic media. Another news was thrown out just before the last weekend when travels of Icelanders in Iceland traditionally peak: the minister of foreign affairs Gunnar Bragi Sveinsson (Progressive) has appointed two new ambassadors – ex-prime minister Geir Haarde of the Independence party and Árni Þór Sigurðsson MP for the Left Green (here is Rúvs report on this new appointment with a photo of Haarde, as PM, giving his “god bless Iceland” speech at 4pm on October 6 2008 where he told Icelanders that the banking system was collapsing). Haarde was found guilty by a special court regarding his part in the collapse in 2008 but not sentenced (see here some Icelogs on the Haarde trial and its aftermath).

A clever move because the left/opposition now stays silent and not a word of criticism is heard. A politician has not been appointed an ambassador since 2008 and many had probably thought that this kind of political meddling might be a history of the past. Not quite.

In order to understand the coming appointment of the CBI governor it is necessary to keep all of this in mind because these are political side-shows. Many see the CBI appointment as a test for Benediktsson: whose interests is he serving, does he really decide or does Gunnlaugsson decide on everything he deems of interest to him and his party? The fact that it is taking so long to decide – a decision was expected end of last week – indicates that the appointment is a bone of contention.

This is an important test for Benediktsson. Also because the IMF has strongly warned the government not to the diminish the independence of the CBI, most recently in its last report: “Maintaining a financially sound, independent, and accountable central bank is important for policy credibility and anchoring inflation expectations, which in turn supports stability and growth.” (See my take on the IMF report here).

Why the fuss about the governor? Because he will not only be important in fighting inflation, supporting stability and growth. The governor will be instrumental in deciding on the fate of Glitnir and Kaupthing and now the new banks, Íslandsbanki and Arion will be sold. Will there be a political horse trading in distributing the goods, i.e. the two banks, involving a fight with foreign creditors and disorderly routes – or will there be an orderly lifting of the capital controls, as the IMF is in favour of? The new governor will very much set the tone in all these issues.

*Earlier today, August 6, the Ombudsman sent a letter to Kristjánsdóttir  to enquire further re the leak, i.e. what and how often she talked about the leak to Eiríksson, the police chief. In addition, the Ombudsman sent a letter to the prime minister inquiring if ethical rules for ministers, set by the last government and expiring as it left office, have been replaced by another set of ethical rules. (A link to the two letters, in Icelandic, is here). – Further, to the Morgunblaðið’s failed attack on the Ombudsman see the end of my earlier blog, here.

Update Aug. 7: the minister of finance was expected to announce today or tomorrow who would be appointed as the next governor of the CBI. It now seems likely that no decision is forthcoming until next week. The rumour is that different factions within the government can’t agree. There clearly are strong tensions, indicating that there is much at stake.

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Written by Sigrún Davídsdóttir

August 6th, 2014 at 10:25 am

Posted in Iceland