Sigrún Davíðsdóttir's Icelog

The day of decision regarding the Landsbanki bonds agreement isn’t over – still too early to tell how it ends. Allegedly, Bjarni Benediktsson minister of finance and leader of the Independence party had planned to answer LBI, with some changes to previous agreement. His attempt was, again allegedly, stopped last night by prime minister Sigmundur Davíð Gunnlaugsson.

The LBI postponed its creditor meeting yesterday until today. It is now due to start at 4pm. However, it is still unclear if there will be an answer from Icelandic authorities regarding the agreement. Or not. The minister of finance has to inform the Alþingi economy and business committee of the agreement and so far, no meeting has been called in the committee.

No doubt, there are hectic meetings ongoing. Considering the fact that the agreement was made on May 8 this year the government has had ample time to analyse the matter. However, this government has so far normally decided things the very last moment (the “correction” of loans and handling of the appointment of the governor of the CBI spring to mind).

The agreement was meant to be a first step towards lifting the capital controls. If Benediktsson, who has the formal responsibility for finding a solution, is being stopped in his track now the question is if he is in command and if he stands any chance at all to progress as he wants to. As I have often pointed out earlier the solution regarding the capital controls and the three estates – Landsbanki, Glitnir and Kaupthing – is a political one. It is now an even bigger question than earlier if the two party leaders in government will at all come to necessary conclusions on key issues. Or if things will just drag on as hitherto, with state-owned Landsbankinn limping towards default next year, certainly not the sellable asset of which the government had planned to sell 15% next year and again 15% the following year.

Even more intriguing that this alleged wrestle between the two party leaders is happening on a day when the daily Fréttablaðið publishes a poll showing that Gunnlaugsson’s party, the Progressive party, now only has 8.7% of votes, compared to 24.4% in the elections in spring last year. With this result the party would lose 13 MPs. Benediktsson’s party, the Independence party, has jumped up from 26.7% to 30%. The social democrats have 23.1% according to the poll, got 12.8% of votes in the election.

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Late afternoon addition:

It now seems clear that no answer on the Landsbanki bonds agreement is forthcoming from the government today – but is apparently to be expected on Monday.

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Monday Oct. 27:

Nothing more has been heard of the Landsbanki bonds agreement today and it has, as far as I’m aware, not been dealt with today. Prime minister Gunnlaugsson is abroad and nothing seems to be moving. Last Friday, the day the earlier deadline expired, LBI extended the deadline by another week. Not all creditors were content with this leniency. However, it remains to be seen if this extension will produce the awaited answer.

If Benediktsson really planned to answer favourably his plan has so far been thwarted.

In addition: on Oct. 14 S&P’s published a new rating for the three banks with the general conclusion as follows:

• We have revised our economic risk trend for Iceland to positive from stable, and expect a continued improvement in the banking system’s asset quality.
• We have therefore revised the outlooks for Arion Bank, Islandsbanki, and Landsbankinn to positive from stable, and affirmed the ‘BB+/B’ long- and short-term ratings.

On Landsbankinn it says i.a.:  “We also anticipate that the preliminary agreement will extend the repayment profile of legacy bonds of the defunct Landsbanki Islands hf.”

Here is a thought: when the minister of finance announced this summer that the Ministry had hired foreign advisers this was mentioned:  “the investment bank JP Morgan will assist the government in connection with Iceland’s sovereign credit rating.” It does not seem too far fetched to imagine that S&P had been given to understand that the bonds agreement would be accepted. If the bonds agreement will collapse (which we should see latest on Friday) I wonder what those who possibly carried the message, if that was indeed the case, that the agreement would come into being and the S&P will feel about this whole saga.

Still too early to spell out the consequences of failure – read all about the financial and economics consequences in the latest CBI Financial Stability report and my earlier logs, see the link below*. Without being overly dramatic the political consequences will open up a whole new chapter in the life of this government and indicate what is to come regarding the perspectives in lifting the capital controls. More on that later when the final answer on the bonds agreement is clear.

*More on the Landsbanki bonds agreement here.

 

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Minister of finance Bjarni Benediktsson discourses boldly on decisive and imminent steps towards lifting the capital controls. Prime minister Sigmundur Davíð Gunnlaugsson now rarely mentions the topic and then only in the most general terms. The next important event is the October 24 deadline* for the Landsbanki bonds agreement. The government faces strikes, the final vote on the 2015 budget is still to come and the “Correction” – writing-down of loans – is moving slower than planned. Worst of all for a government: the two leaders seem light-years apart on key issues. The question is if the two of them really can forge a coherent policy on the capital controls (as well as some other issues).

Russia watchers have Kremlinology. The equivalent in Iceland could be Arnarhvoll-ology (admittedly a word that will not flow easily off a foreign tongue): the art of observing and making qualified guesses of what is really going on in Icelandic politics.

Arnarhvoll is the imposing 1930 building, which now houses the ministry of finance, built at the time when most buildings in Iceland were corrugated-iron sheds or turf-roofed cottages. With an eye on modern Iceland – new(ish) cars, big houses and Harpan – it is easy to forget the giant steps this once so, literally, dirt-poor country took into affluence and modernity. Now Arnarhvoll nests by the Supreme Court house, the Central Bank and the National Theatre, not far from Harpan.

Below is an attempt to practice some Arnarhvoll-ology to gauge where the government stands regarding the capital controls, most of all the pressing issues of the Landsbankinn bonds agreement and of how to resolve the estates of Kaupthing and Glitnir.

Benediktsson’s knowns and unknowns

Minister of finance Bjarni Benediktsson gave a speech last week at a symposium in memory of an Icelandic economist, Jónas Haralz. In his speech, (here, only in Icelandic) Benediktsson reminded the audience of the last time capital controls were put in place in Iceland: stayed for 60 years. With new controls in 2008 Haralz said that compared to earlier Iceland was now much more connected to the outer world in addition to the support of the IMF; Haralz was sure the controls would not be allowed to fester for 60 years this time.

Although Benediktsson’s speech was fairly general it did, to my mind, include soms paragraphs, which under the lenses of Arnarhvoll-ology might give some hints on his thoughts: no, the creditors are no this main worries but, as far as I can see, his coalition partner.

As before Benediktsson said any solutions had to be financially feasible, socially fair and politically doable. It was also important to be aware of the risks implied, he said, aware that circumstances can change quickly in spite of the present positive outlook. Solutions should not be based on too much optimism regarding the coming years. In addition, circumstances abroad could change – a timely reminder for Iceland, he said, to pay off its debt (but no, he did not mention why then ISK80bn of public money should be used for the “Correction” and not to paying off sovereign debt).

Benediktsson said that since last year much work had been carried out to analyse the problems and develop solutions. Then this declaration (which sounds equally un-Icelandic as it sounds un-English in my translation; emphasis mine): “I make the demand that during this year important questions will be answered so that next steps can be taken. They (the questions) will i.a. touch on if it is realistic to solve the issues of the estates without a direct intervention by authorities.”

Benediktsson emphasised the importance of a holistic solution, taking care to respect national interest “as well as respecting law, international commitment and ensure equal treatment.” The balance-of-payments needs to reflect reality (never easy in Iceland at the best of times), also to prevent another economic down-turn. Then again, a very interesting sentence: “Actions that take less time, are simple and minimise legal risk will be favoured over more complicated ones; each action needs to be in accordance with the general solution.”

Benediktsson said the government was willing to listen to all constructive ideas, no matter where they came from, also regarding exemptions, as long as they improved the economy. But all decisions would be taken with the general interest of the nation at heart, not single interest groups – interestingly, a comment that could as easily be directed at some Icelanders as well as the creditors.

But there were also words clearly meant for the creditors: “If those seeking exemptions from capital controls do not put forward realistic ideas to meet these points of view as well as others still being worked on, things will be put in order of priority according to the needs of the real economy.” – This means that creditors must take into account issues the government has already presented as well as those not yet presented, the knowns and the unknowns; never an easy proposition.

Anyway, both Kaupthing and Glitnir have tried: Kaupthing has had no answer; Glitnir has had an answer after which it amended its composition draft. There are simply far too many possibilities and variables for this silly game to continue. The government cannot claim the estates are none of its business when it is the final arbiter in the process of the estates’ resolution.

And last but not least some edifying words for those working on lifting the capital controls: “For those responsible for moving these issues forward it is at last important to realise that it will not be possible to calculate all potential outcomes, eliminate all risk and foresee investor behaviour far into the future. What is needed, after the necessary preparation, is simply to make a decision.”

Benediktsson’s message according to Arnarhvoll-ology

From all directions it echoes that Benediktsson and Gunnlaugsson are light-years apart on the key issues of the capital controls. Each side appointed people in the all-Icelandic advisory group at work last winter – in the end it allegedly only came up with a mish-mash of various and to some degree conflicting ideas. In the group now at work each side also appointed its representatives, which means, I am told, that there is not much momentum to solve the underlying and fundamental disagreement on composition vs bankruptcy re Kaupthing and Glitnir. Glenn Kim, the foreign advisor in charge of this group is apparently not much seen in Iceland these days (though yes, with modern means of communication presence is not all).

Reading Benediktsson’s speech with this in mind, it is difficult to avoid the feeling the Benediktsson really is talking to his opponents in the government and not so much to creditors. He is telling his opponents that rather than embarking on the risky road of bankruptcy, simple foreseeable routes are preferable. Or, as the IMF put it: composition is an orderly legal route, bankruptcy a disorderly route.

Benediktsson prefers the simple to the complicated and he also prefers solutions that take less time than long time. And Benediktsson is also well aware of reputational risk: my friends (if he still uses that word for his coalition members), lets keep in mind the rule of law, international law and equal treatment for all, both Icelanders and foreigners. An all-encompassing certainty can never be achieved in this world: those who have the painful role of deciding must in the end… eh, make up their minds.

The Progressive Party has over the years been good at securing good deals for chosen party members. The feeling is that some would like to steer Íslandsbanki and Arion, now owned respectively by Glitnir and Kaupthing, into Icelandic hands. If so, this goal could influence their thinking on the issues at stake in lifting the control.

As tried and tested Kremlinologists know the interpretation is only as good as the political understanding it is based on. But no matter what: it is politics and not economy that decides on the vital issues regarding the lifting of the controls.

The best of times

In its recent Financial Stability Report the CBI came out with its so far most clear warning on the “steadily increasing” cost of the capital controls and their detrimental effect on the economy (emphasis as in the FS report):

There are numerous costs associated with the capital controls. The most obvious is the direct expense involved in enforcing and complying with them. But more onerous are the indirect costs, which can be difficult to measure. The controls affect the decisions made by firms and individuals, including investment decisions. Over time, the controls distort economic activities that adapt to them, ultimately reducing GDP growth. The direct costs associated with liberalisation centre primarily on the possible lack of confidence in liberalisation and the associated risk of disorderly capital outflows, which would weaken the króna, stimulate inflation, and result in higher interest rates.

If liberalisation is not carried out successfully, these costs will make themselves felt quickly. On the other hand, liberalisation will lead to increased efficiency over time, as decisions will be made without consideration of the capital controls. Measures aimed at making it easier for some parties in the economy to tolerate the controls reduces the incentive to lift them, with the associated expense for the general public. 

The FS Report is equally clear on the present favourable economic conditions:

At present, economic conditions are favourable for large steps in liberalisation. The economic outlook is better in Iceland than in its main trading partner countries, interest rates abroad are at a historical low, Iceland’s interest rate differential with its main trading partners is positive, GDP growth is stronger in Iceland than in most trading partner countries, domestic inflation is close to target, Iceland has an established trade surplus, the fiscal budget is estimated to be in surplus next year, the spread between the official Central Bank exchange rate and the offshore exchange rate has narrowed significantly in recent months, and the Treasury has demonstrated repeatedly that it has access to foreign credit markets. Therefore, it appears that current economic conditions are conducive to successful liberalisation of the capital controls. It is important to remember, however, that these conditions could change for the worse later on.

The main problems relating to liberalisation have been identified as the stock of offshore krónur owned by non-residents, Iceland’s balance of payments, and the settlement of the failed banks’ estates. The narrowing of the spread between the Central Bank’s official exchange rate and the offshore rate, increased access to foreign credit markets, deleveraging of foreign loans, and the persistent trade surplus diminish the effects of the first of these two risks. The remaining problem, the settlement of the failed banks’ estates, is the largest factor complicating the liberalisation process. 

The same views are widely heard throughout the Icelandic business community, most recently expressed in an article (only in Icelandic) by Þorsteinn Víglundsson managing director of SA, the employers’ organisation.

One way of managing life under controls would be to give more exemptions to domestic entities. Were that route to be used increasingly it undoubtedly means that the government is planning for the controls to be in place for a long time – no good sign.

Landsbanki bonds agreement

According to rumours the Landsbanki bond agreement is yet another battleground between the two coalition leaders. Benediktsson has been in favour of agreeing to it. It seems the prime minister sees the agreement as giving too much to the creditors. (See here for further details regarding the agreement).

Some prudent voices claim the agreement sets precedence for the general creditors. Others claim that the main importance is to abolish the uncertainty Landsbankinn with no agreement poses. The CBI points clearly out the risks for Landsbankinn and Iceland as a whole unless the bonds’ maturities are extended:

Other things being equal, if the Landsbankinn bonds are not extended, domestic demand would have to contract and the currency would have to depreciate in order for the domestic economy to generate enough additional foreign currency to service the debt. Analysis using the Central Bank’s macroeconomic model indicates that, in comparison with a scenario providing for the lengthening of the bonds, the exchange rate would have to decline temporarily by up to 8%, private consumption would contract by up to 2%. Inflation would rise and, according to the model, Central Bank interest rates would have to be kept higher in the near future in order to bring it back to target. In order to prevent this, the State or the Central Bank would have to provide Landsbankinn with long-term foreign-denominated funding, with the associated implications for the Treasury debt position and the Bank’s foreign exchange reserves.

If the bonds are lengthened and external conditions remain unchanged, it is likely that the trade surplus will suffice to cover resident entities’ unfunded debt service burden in foreign credit markets in coming years…

Landsbanki estate, the LBI, has not been able to pay out to priority creditors for over a year now, see its financial statement here. With time and no explanations from the authorities it will make the UK government increasingly frustrated as well as other priority claimants. Again, does not bode well for Landsbankinn. Also, it prepares a case for creditors that the Icelandic authorities are withholding their funds.

The worst of times – in sight

In addition to the good times in Iceland there are positive circumstances abroad. As Benediktsson pointed out in his speech nothing lasts forever. In Iceland, an ominous winter is ahead.

Coalition MPs disagree wildly over tax – Benediktsson proposes to put VAT on food up from 7% to 12% and offsetting this by lowering VAT on i.a. kitchen appliances. This is a thorny issue for the Progressive Party. Sigmundsson himself wrote some years back on the unfairness of putting up VAT on food, an opinion widely shared by his fellow MPs. The question is if Gunnlaugsson will side with his fellow party members or with Benediktsson and the Independence Party when the budget coms up for a final vote in Althing: a truly impossible choice unless Benediktsson helps him out, which in turn hurts Benediktsson and cements his reputation as a ditherer.

Because of this the budget might not go down smoothly in Althingi. In addition, the “Correction” is still not in people’s pockets and so far unclear when it will happen.

Physicians got the right to strike some thirty years ago but have never gone on strike so far. That might be about to change: the Icelandic Medical Association now threatens a strike on October 27. Other strikes could follow in the coming winter.

The times for lifting the capital controls may be as good as they get. Objectively, Benediktsson has excellent reasons to be optimistic about decisive steps in sight. There are solutions in sight, tickling the finger-tips. But as long the underlying discord and clear-cut disagreement is unresolved the good economic circumstances do not help. The truly frustrating thing is that because of the work carried out by the Icelandic authorities those who, like Benediktsson, favour a quick and simple solution really do see various ways to reach the goals set forth by Benediktsson. Above, nothing is said about the unknowns related to possible creditor action against Icelandic authorities – hopefully an unknown Benediktsson is working on understanding and then explain possible risk to those who take a different view on how to proceed, also the fact that no action on behalf of the Icelandic authorities is not entirely risk-free either.

If the underlying disagreement remains unsolved  and if strikes and budget battles are on the horizon the best of times could easily become the worst of times… and drain the government of the political energy needed for taking the decisive steps the minister of finance is demanding. Sad for Iceland but hopefully it will not take 60 years as last time.

*Updated version. – The original version gave the LBI deadline as Oct. 26; sorry, it is indeed October 24 as stated in an earlier Icelog.

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After the banking collapse in October 2008, three things were set in motion by the government at the time (Independence Party, together with the Social Democrats): an investigation into the causes of the collapse, rewriting the constitution and an Office of a Special Prosecutor. The investigation was concluded with a report of 2400 pages published April 10 2010; so far, no country has done a comparable report on the financial crisis in 2008. Rewriting the constitution was not finished in the way intended due to a political backlash. The government now plans to review OSP’s role although the OSP was made a permanent serious fraud office in 2011 – and starve it of funds while the review is ongoing.

It did not start too well: after Althing passed an Act in December 2008 to set up an office of a special prosecutor to investigate possible fraud related to the banking collapse no one applied. Finally, Ólafur Þór Hauksson stepped forward, a sheriff (called “sýslumaður” in Icelandic) from Akranes, the village on the other side of the gulf from Reykjavík.

Though having no previous expertise in Iceland to build on, the OSP has built up the expertise and know-how in investigating fraud such as market manipulation, insider trading, embezzlement and breach of fiduciary duty. So far, six OSP cases have found their way all the way to the Icelandic Supreme Court: five ended with sentencing, one with acquittal.

The Icelandic decision to investigate possible fraud within the banks has been much noticed around the world where financial institutions often seem like holy cows, too powerful to investigate and bankers too important to jail. Examiner Anton Valukas who led the investigation into Lehman Brothers’ demise pointed out certain accounting practice, so called Repo 105, which according to the report seemed to have the sole purpose of balance sheet manipulation (see here on Valukas and the SIC report). Valukas has later clearly expressed bafflement that no charges have been filed regarding Lehman. – In Iceland, irregularities regarding the operations of the banks are being investigated and bankers prosecuted as well as other high-flying businessmen.

With the present coalition government of the Progressive Party and the Independence Party (which led the government that set up the OSP; ex-PM Geir Haarde said on Rúv tonight it had been a good step), the tone is now changed: the OSP is being starved of funds in the 2015 budget.

The government claims it is going to review the OSP operation. Interestingly, it is going to starve it first and then review it. The government seems to ignore that fact that since the law on the OSP was changed in 2011 so as to turn it into a permanent serious fraud office, there is no burning need to come up with changes of purpose and mission.

In numbers (from a recent Rúv interview with Hauksson): the OSP budget for this year is ISK900m, €5,9m; for next year its share in the budget is ISK295m, or a cut of 67%. Sixteen employees were recently fired because of the envisaged funding cuts. With the present prospect for 2015 staff will go from seventy to twenty. The number of cases now under investigation is 96; 39 of them are related to the collapse. The planned cuts also mean that opening investigations into new cases will be problematic; the outlook for seeing charges through court is uncertain.

Just to give an idea on the OSP present activity: these days, the OSP’s most extensive case so far is in the Reykjavík District where Landsbanki’s CEO Sigurjón Árnason and three Landsbanki employees are charged with market manipulation. This weekend, Rúv brought news of charges against four Spron board members and Spron CEO Guðmundur Hauksson (not related to Special Prosecutor Hauksson) relating to an ISK2bn, now €10m, loan to Exista; Guðmundur Hauksson had shares in Exista and long-time relationship with that company, the largest shareholder of Kaupthing. In January, the so-called al Thani case is coming up in the Supreme Court; appeal of the Reykjavík District Court where Kaupthing CEO Hreiðar Sigurðsson was sentenced to 5 1/2 years, executive chairman Sigurður Einarsson 5 years, Kaupthing’s second largest shareholder Ólafur Ólafsson 3 1/2 years and Magnús Guðmundsson manager of Kaupthing Lúxemborg 3 years.

On October 6 2008 Icelanders sat stunned as prime minister Haarde addressed the nation at 4pm to tell them the government was doing what was needed to prevent the collapsing banks from causing a national catastrophe. The OSP has been diligent in bringing banking high-flyers and their helpers to court. Although the task is not finished it seems the government is no longer adamant about investigating collapse-related fraud cases, let alone keeping an eye on potentially new financial fraud cases. – It is now oh so 2008…

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Extending the maturity of the two Landsbanki bonds, held by LBI, is widely seen as one of the prerequisites for lifting the capital controls in Iceland. An agreement on extension was reached in summer. In order to ensure LBI would pass payments on to creditors the agreement is dependent on exemption from the capital controls. The deadline, originally August 8, expired October 1. The agreement, which seemed a step towards lifting the controls, is now one foot forward but hovering.

“The attitude in Iceland is that an agreement is never final but can always be renegotiated,” was one comment I heard now that the Central Bank of Iceland is keeping Landsbankinn and the LBI, the estate of the old failed Landsbanki, in a limbo.

The extended deadline has passed – but the LBI has published a statement announcing the re-extending of the deadline: “According to revised terms if the transaction is not completed by October 24, the amendment agreement between LB and LBI will terminate.”

The question is what can be read out of this latest development regarding the advancement of a plan to lift the capital controls, the view within the government and the role the CBI is playing.

The CBI can play politics … or not

The procedure regarding exemptions from capital controls is that if the CBI approves an exemption the minister of finance has to confirm it, which means the process is political. This gives the CBI two options in its standpoint on exemption: it can make its own evaluation – does the exemption threaten financial stability in Iceland or not – or – it can play politics and make assessment according to how the political winds are blowing: if it thinks the minister will agree to it or not. (Once the decision has been taken it is however not necessarily clear what option it took.)

October 1 the CBI published two letters (only in Icelandic) to Landsbankinn regarding the agreement: a letter from July 14 and a letter sent October 1 to Landsbankinn.

The July letter mentions that the CBI already has in total three exemption requests from the LBI to pay out funds, kept in Iceland and abroad, to priority creditors (who have been fully paid in both Glitnir and Kaupthing). In addition, LBI has requested, in connection to the Landsbankinn bonds agreement, that any payments due to creditors from the bonds be kept outside the capital controls, meaning the LBI could pay creditors directly thus avoiding the exemption process (a clever arrangement, which I had not heard of earlier).

The CBI acknowledges in the July letter that the new agreement makes it easier for Landsbankinn to seek funding on international markets, which alleviates the Icelandic balance of payment (BoP) problem linked to the bonds repayment.

In spite of the (obviously) positive and desired effect of the agreement the CBI states that “within the timeframe given” it cannot agree to the request of keeping bond payments to LBI outside of the controls for two reasons:

“For the first the bank’s decision needs to be based on a thorough analysis of the effect of the agreement on BoP and on those privy to the agreement. The agreement needs to be compared to the present status. It is also the bank’s duty to examine if any changes in its fulfilment or other options could be both realistic and better for any single party or all those privy to the case. Here it is not being stated that this might be the case. This analysis just takes longer than the time given, in particular considering the time of the year.

Secondly, it needs to be taken into consideration that the government’s policy on lifting the capital controls is being re-evaluated, especially what role of the resolution of the estates of the failed banks will play in that process. This work is though going forward. Last April an advisory group on lifting of the controls gave an opinion and recently foreign advisers were hired who will be advising the government on forming this policy. It is however unavoidable to examine how the above request harmonises with that policy. This cannot be stated at this point.

Considering the present plans a final answer can be expected no later than the end of the year. It should be emphasised that earlier requests for partial payouts to creditors are still being considered. It should be reiterated that all exemptions mentioned in this letter need by law to be confirmed by the minister of finance in addition to the approval of the CBI.”

The new letter refers to the July letter, saying that an answer could not be provided before August 8 but would be forthcoming no later than by the end of the year. The CBI sticks to opinions expressed in the July letter.

“Since the letter was sent the work on the issues mentioned in the (July) letter has progressed well. Yet, it has not been possible to deal with the matter before October 1 as had been requested in a letter of August 8 from the LBI. The CBI reckons however that it is highly likely that a answer to the LBI request can be provided in the next few weeks.”

An agreement with two godmothers?

It is easy to gauge the atmosphere at the LBI and Landsbankinn. Knowing Iceland and its government they are hardly gobsmacked but they can hardly be pleased. They are now left to grapple with the dilemma if there is an agreement in the making or nothing at all.

As to why the two parties thought they had an agreement there are again, theoretically at least, only two possibilities: the Landsbankinn management thought it had the acceptance of the CBI and the Ministry of finance to make this agreement with the LBI (and then it can hardly avoid feeling betrayed) – or it did not have such an acceptance and then the question is why the management thought it would get the agreement accepted.

As far as I know civil servants from both the CBI and the Ministry of finance followed the negotiations. After all the state owns 97.9% of Landsbanki and negotiating without any attention to the wishes of the owner would hardly have been prudent.

Considering the fact that the CBI has repeatedly expressed the view that extending the maturity of the Landsbankinn bonds was a necessary (first) step towards lifting the capital controls and the authorities had an eye on the negotiations this whole aftermath looks somewhat peculiar.

Priority creditors have already been paid out in Glitnir and Kaupthing; thus, allowing bond payments to be paid out to creditors in the LBI hardly sets precedence. By extending maturity from 2018 to 2026 payments to general creditors will not be forthcoming for the next many years.

The LBI double trouble and the Landsbankinn demise in sight

The creditors in LBI now have a double trouble to deal with: the fact that the CBI, for no clear reason at all has stopped payments to creditors although the waiting payments, fx cash, threaten neither Icelandic BoP nor financial stability nor do they constitute a precedence for Glitnir and Kaupthing. In addition, the LBI is set to get nothing on the bonds next year as Landsbankinn cannot pay.

Landsbankinn’s problem is that instead of being able to use the agreement to refinance in international markets it is now staring into the abyss of a possible default. Will it be forced to do a fire sale of foreign assets?

According to the government’s Budget for next year, the plan was to sell 15% of the state’s share in Landsbankinn and another 15% in 2016, for a total of ISK70bn. In addition a sale would bring a saving on interest payments of ISK12bn the next three years. With no agreement the Ministry of finance can start re-calculating the Budget.

Lifting controls is a political problem

Even in Iceland some people claim that Iceland is like a company in bankruptcy proceedings: the controls are like a Chapter 11 protection. The uncertainty is costly and can be measured in Iceland’s low credit rating meaning that the cost of financing is high, not only for the state but also for companies.

At a BICC meeting in London recently Bjarni Benediktsson minister of finance repeated three times in his speech that decisive steps towards lifting the controls would be taken this year. Prime minister Sigmundur Davíð Gunnlaugsson mentioned no date in his speech in New York that same week but gone was his belligerence and the world “vulture fund” was not heard from his mouth.

What the government will tell the IMF at the Fund’s annual meeting now in early October remains to be seen. But it will take some talent to make it look as if things are moving steadily forward because at every hurdle – be it appointing a new CBI governor or taking a stand on an issue like the Landsbankinn bonds agreement – the government seems to dither.

As I have pointed out earlier, lifting the capital controls can no longer be seen as a problem of purely economical nature: with growth and growing fx reserves there is the capacity to lift the controls if cleverly negotiated. It is however a political problem: the question is if the government is strong enough to pull this giant salmon ashore; so far, it does not seem to be pulling in the same direction.

*I have earlier explained the intricacies and details around the Landsbanki bonds and the agreement. – The quotes from the CBI letter above are my translation (and may differ from a legally formal translation). – The text above was updated Oct. 2 to include the statement published by the LBI on extending the deadline.

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