Sigrún Davíðsdóttir's Icelog

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.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

August 6th, 2014 at 10:25 am

Posted in Iceland

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  1. […] 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). […]

  2. […] the government on the core problems related to the capital controls (see earlier on Icelog, i.a. here) raise the question if the government has enough political strength and stamina to proceed. If […]

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