Sigrún Davíðsdóttir's Icelog

Archive for September, 2014

Now that the Dutch have sold their Icesave priority claim in LBI…

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Admittedly, the Dutch have been fortunate with the €/ISK trend, which no doubt tempted them to waive good-bye to their LBI priority claim. For the UK deposit guarantee scheme the £/ISK trend has been the opposite, making a UK sale less likely (but not impossible especially if British authorities see no imminent sign of LBI payout and only a rising political risk). Though the Dutch exit is logical it also hints at what some other creditors might be thinking: that the Icelandic government seems to be tackling the capital controls sub specie aeternitatis.

For quite a while it’s been rumoured that De Nederlandsche Bank, the Dutch Central Bank, DNB, intended to sell its priority claims in LBI, the estate of the old/failed Landsbanki. Dutch authorities were from the beginning adamant to recover the whole amount and there has been political pressure to bring the Dutch Icesave saga to an end. As the €/ISK trend has been favourable to the Dutch it is no wonder that Dutch authorities decided not to tempt their luck any longer and instead rid their books all Icelandic risk.

With the Dutch sale and the fact that summer is over it is appropriate to ponder on the prospects of Iceland lifting the capital controls. More than one coalition insider has told me recently that “decisive steps towards lifting the capitals controls will be taken this winter.” I certainly do not doubt the will – in addition to strong pressure from the business community.

However, the government’s grip on major issues so far and the tension within 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 nothing tangible will be done this winter, it seems safe to conclude that decisive steps towards lifting the controls will not be taken by the present government.

The Dutch numbers

As pointed out in the DNB press release earlier this week the Dutch State paid out 1.428bn and Dutch banks 208m to Icesave depositors. DNB held these claim on Landsbanki and has over the years recovered 932m; it had expected to collect further 623m and that is the batch the DNB has now sold.

It seems that DNB sold at just over 0.93. The reason it can claim it has made a full recovery stems from the €/ISK trend since April 22 2009. That day, the €/ISK rate stood at I69ISK against the euro; August 27 it was 154ISK. Given that the Dutch sold at 0.93 their price based on the €/ISK is 1.02.

Based on this simple calculation it made a lot of sense for the Dutch to sell. Instead of waiting until 2018 – or longer if the maturity on the Landsbanki bonds is extended (further here re the LÍ bonds) – the funds are in hand or, more likely, in the DNB.

With this calculation in mind the British case is just the opposite. On April 22 2009 the pound stood at ISK190.6 but was on August 27 ISK193.2 against the pound. If the British were offered 0.93 for their claim their real price would be 0.917, i.e. a loss and not a gain. (The Dutch and the British authorities are still trying to recover their cost from Iceland as seen from a claim filed in Iceland earlier this year against TIF, the Icelandic deposit guarantee fund).

Who bought the Dutch claim?

I don’t know, is the short answer. Deutsche Bank was an intermediary in the sale. There was more than one buyer. No doubt, the buyers already hold claim in the LBI. If the króna is strengthened recovery by priority claim holders increases and general creditors get less; vice versa if the króna moves the other way. With this in mind it makes sense for any general creditor in LBI to buy the priority claim as a hedge.

In addition, it makes even more sense for general creditors in LBI to buy the Dutch claim in order to strengthen their influence in LBI. Put bluntly, the LBI has something akin to a stronghold on the government given that the state-owned Landsbankinn is short of fx funds to pay on the Landsbankinn bonds next year. – For some reason, this stronghold is hardly ever mentioned in the Icelandic debate.

Interestingly, many of LBI major creditors are creditors to Glitnir and Kaupthing. With greater weight in the LBI they could try to influence course of events in Glitnir and Kaupthing through the LBI.

The Icelandic authorities the Dutch sale is not necessarily happy tidings as it fractures the creditor group. For other LBI creditors losing the Dutch might be bad tidings because both the Dutch and the British authorities can be assumed to have greater pondus than other creditors. Whether the outcome of the Landsbankinn bond agreement might have been different without them is another matter but the Dutch sale will hardly simplify matters in the LBI.

The Dutch view on the Iceland risk

The favourable €/ISK trend made sale an attractive option, in addition to political pressure for the Dutch government to exit the Icesave affair with positive numbers and not a loss. I cannot claim having an insider view on what risks the DNB feels it now has sold off but it is easy to make some inferred guesses.

Both the Dutch and the British authorities have understandably been focused on the political risk. Since last year the LBI has not been allowed to pay out to creditors (i.e. priority creditors who are paid first; having already paid priority claims Glitnir and Kaupthing are waiting impatiently for the government to make up its mind on the legal paths towards resolution in order to start paying general claims). The CBI is vested with the power to issue exemptions for a payout but needs the blessing of the minister of finance which has not been forthcoming since last year.

It is hardly a coincidence that the LBI hasn’t been allowed to pay creditors. The Dutch might well have come to the conclusion that no LBI funds would be flowing their way any time soon; better to act than to wait. In addition, there is the agreement on the Landsbankinn bonds, which the government needs to agree to. It was supposed to answer in early August but its deadline has now been extended to end of September.

Again, this deadlock regarding the Landsbankinn bond agreement could be seen as a negative factor since it seems fairly obvious that the CBI, which followed the negotiations, must favour the agreement. One might also surmise that Landsbankinn’s (the new bank) owner, the state, would have been in favour of it though the minister of finance claimed at the time he was not familiar with the agreement.

In addition, the Dutch must have evaluated the general political situation: is it likely that this government is going to solve the issues related to the capital controls in the foreseeable future? Although the Dutch might have valued the positive numbers above the political outlook the Dutch sale is never the less food for thought.

A CBI governor half-hired, a minister half-fired

On the same day the ministry of finance announced that Már Guðmundsson had been re-appointed as a governor of the CBI, it was announced that part of the portfolio of home office minister Hanna Birna Kristjánsdóttir would be moved to another minister/ministry. Guðmundsson was told that the position of governor might change which might change his situation, meaning that he was in a sense only half-hired on the day he was re-appointed. And Kristjánsdóttir, having the major part of her portfolio removed was indeed half-fired.

As I have pointed out earlier, Guðmundsson’s half-hearted re-appointment might leave the CBI in a limbo. However, the bank has worked with full energy on issues related to the capital controls and will no doubt continue. Guðmundsson and most of the CBI staff will no doubt pay great attention to IMF’s advise on reputational risk and an orderly exit for the estates. And Guðmundsson is no doubt adamant to proceed in order to make capital controls progress a part of his legacy at the bank – a legacy, which so far is looking promising.

The spin school of staunch denial

Kristjánsdóttir’s case involved a leaked document on an asylum seeker, discrediting him, as it seems to justify that he was being sent out of the country. Later she denied any part in it or any knowledge of the case, also that she knew anything about the Reykjavík Police investigation, which ensued. It now turns out that not only did she know about the investigation but she tried to influence the chief of the Reykjavík Police during his investigation.

This has surfaced in an enquiry by the Althing Ombudsman. Despite this evidence Kristjánsdóttir staunchly denies any interference in the matter. She now has until September 10 to answer the Ombudsman.

On Facebook the minister has criticised both the Ombudsman and the police. Bjarni Benediktsson leader of the Independence party and minister of finance has supported Kristjánsdóttir thereby indirectly taken a stance against the authorities investigating the matter. All of this is rather remarkable seen from the outside but could, in an Icelandic context, be seen as yet another example of the rather lackadaisical approach to structure and form of Icelandic authorities.

Political infirmity

In other countries, a minister in the quagmire Kristjánsdóttir finds herself in, would most likely have resigned. Most ministers resign when they are told they have lost the trust of the prime minister: the only choice is then between walking the plank or being pushed.

This sorry affair has now been in the media for close to a year. When finally, late in the day, it was decided that she should be relieved of that part of her portfolio related to the police it took the best part of two weeks until new arrangement was decided (the prime minister takes on what she isn’t allow to have, leaving her with not very much).

Another example of a long-winding and inconclusive process: last year, the government announced a review of law on foreclosure, making it more difficult to foreclose on individuals in order to hinder that people were driven out of their homes. This is connected to the government’s debt relief programme, which is coming into force in November. With an on-going review foreclosures were suspended until September 1 this year. It now turns out the review is not ready, incidentally part of Kristjánsdóttir portfolio, which means that foreclosures will now be suspended until March 1 2015.

The whole CBI matter, both a new organisation for the bank and the appointment of a new governor, sadly shows the same lack of firm grip. Things seem to happen only as ministers stumble along to meet deadlines. Governmental procedures under the present government tend to look ungraceful and not terrible elegant.

Though unrelated, none of these cases bode well for the tough decisions regarding the capital controls. Nothing can be done without deciding on the Landsbankinn bonds agreement and the legal path for the resolution of Glitnir and Kaupthing. So far, there is little to inspire confidence.

“No foreign banks do yet dare to lend to Iceland”

All in all, Iceland is doing well, indeed phenomenally well compared to many European countries. With Iceland now being a major tourist attraction foreign currency is flowing into the country. Talking to an Icelandic business leader recently, he pointed this out, adding that yes, things were going well in Iceland and also for his business. All was well… except this problem with the capital controls.

The fx inflows have enabled the CBI to buy fx as never before: last year, it bought ISK1bn, this year the bank has so far bought ISK70bn. CBI is clearly bolstering its coffers for a future of lifting capital controls. With relative (though precarious) stability in the euro zone and booming tourism these are incredibly favourable times to take the necessary steps towards easing the capital controls.

Coalition ministers hardly ever mention the detrimental effects of the capital controls for Iceland. The coalition message is that the controls are much worse for the creditors than for Icelanders. The government seems to think it has all the time in the world to solve this problem; and as if there was for example nothing more natural in the world than money piling up in the estates and the creditors just waiting patiently for a solution… if and when.

Many Icelandic business leaders beg to differ that there is no hurry. United Silicon is a company building production facilities in Iceland. At an event to mark the occasion United’s CEO Magnús Garðarsson said that the equity came from abroad but the funding was entirely Icelandic. “No foreign banks do yet dare to lend to Iceland.” – His words attracted remarkably little attention in Iceland.

Steps towards lifting the capital controls will define the term of this government. After strong words on action at the beginning of its term this government will be seen as having failed miserably and catastrophically if nothing is done. The question is what will be more painful: forming the necessary policies – or – being judged as a failure.

Judging from the government’s grip on things so far nothing less than a miracle is needed for action regarding the capital controls. In politics, miracles are rare –solutions are normally born of political pressure and political necessity rather than divine intervention. Given the modern rarity of the divine the question is if there are the right political conditions for finding solutions. The problems related to the economy can all be solved – it’s the political problems, the tension in the government, which seem to hinder the steps needed.

*Earlier Icelogs, in addition to those cited above: the numbers and the tension; what needs to be done; the IMF view; further on politics and the capital controls.

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Written by Sigrún Davídsdóttir

September 3rd, 2014 at 12:27 am

Posted in Iceland