Sigrún Davíðsdóttir's Icelog

The Icelandic media is full of news of an apparently imminent exit tax though on what exactly is less clear. I’ve dealt with it before – it is a major difference if this will be solely on the ISK assets of the bank estates or if this will be, as the plan seems to be, on all capital movements in and out of Iceland. If an all-inclusive exit tax, there still needs to be some settlement regarding the ISK assets of the estates, notably Glitnir and Kaupthing.

In spite of optimistic words from minister of finance Bjarni Benediktsson on a plan before end of the year on lifting controls and a sentence in prime minister Sigmundur Davíð Gunnlaugsson’s speech at Progressive Party meeting on Saturday I still have the feeling not much is happening when it comes down to concrete, realistic on-paper decisions. My sense is that there is more legal writ-rattling among creditors as to possible court cases than there is plan-shuffling among Icelandic authorities.

I have wondered earlier that an exit tax might be the New Year crackers this year. But there is also an Icelandic tradition for giving summer presents on third Thursday of April every year. If nothing to fill the  New Year crackers then perhaps something for a summer present when the days start to get longer in Iceland.

More on all of this in greater detail later.

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Three ex-Landsbanki bankers have been sentenced (in Icelandic) at Reykjavík County Court in an extensive market manipulation case. The bankers were charged with manipulating Landsbanki share price almost a year up to the collapse of Landsbankinn October 7 2008. The action was judged to have influenced the share price of the bank, i.e. slowed its fall and prevented the shares falling in price. Consequently, price movements were not properly reflected and the share price appeared stronger than it would have been without the intervention.

Landsbanki ex-CEO Sigurjón Árnason was sentenced to a 12 months imprisonment, of which nine months are suspended. Two others, Júlíus Steinar Heiðarsson and Ívar Guðjónsson both working on the bank’s proprietary trading desk, were sentenced to nine months imprisonment, six of which are suspended. The fourth charged, Sindri Sveinsson, was acquitted.

*The judgement is not yet on the Court’s website but will be attached here when published. – Published here.

Updated: an addition now that I have read the judgment (Nov 23 2014):

The OSP brought the case following charges to the OSP made by the FME in October 2010. The original charges were against 18 ex-Landsbanki employees for market manipulation since May 2003 (nothing less) until the collapse of the bank in October 2008.

This means that according to the regulator, Landsbanki shares were actually manipulated for over five years.

In the end, the OSP charged 4 ex-Landsbanki managers for market manipulation from beginning of November 2007 until the last day Landsbanki shares were traded on the Icelandic Stock Exchange October 3 2008.

The sentences are far more lenient than the prosecutor had asked for. The judges (three in all) thought there were two mitigating circumstances: the deeds took place at a time of great turbulence in the markets and the bankers might be seen as having tried to save the bank (as they had claimed themselves) – and the deeds took place in 2008, i.e. a long time ago.

Re the first, buying the bank’s shares and risking the bank’s own capital is not the standard reaction (or even a creative one) in turbulent times and credit crunch.

Re the long time: financial crimes are rarely visible with bare eyes. Staff at the Icelandic Stock Exchange did indeed notice some of the actions taken and reported them to the FME, which resulted in an FME investigation and charges later on.

Interestingly, the day after the Landsbanki judgment three British businessmen were convicted for fraud in a case brought by the SFO. The fraud took place in 2007 and 2008, as in the Landsbanki case. The case was referred to the SFO, which opened an investigation in August 2009. One of those convicted is Chris Ronnie, known in Iceland as a client of Kaupthing.

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The LBI has now extended its deadline “for completion of the extension and amendment of the Landsbankinn bonds to December 31, 2014. The new deadline has been determined in further consideration of the Central Bank‘s previous correspondence to LBI by which it had indicated that a final answer regarding LBI´s conditions precedent could be available no later than the end of the year.”

LBI seems to be acknowledging the CBI cannot be pushed to answer earlier although allegedly minister of finance Bjarni Benediktsson was all set to answer earlier but was stopped in his tracks by prime minister Sigmundur Davíð Gunnlaugsson. Or so the rumour goes. The agreement is between Landsbankinn, the new bank owned by the state and the LBI. It seems odd to think that Landsbankinn would have agreed to something its owner would be wholly opposed to but well, who knows (except those in charge)?

In Morgunblaðið today, it is assumed that an exit tax of 35% will only hit creditors of the three bank estates though it is, according to the paper, still unclear if this tax will apply to priority claimants of the LBI, i.e. notably the UK deposit guarantee scheme. There is no mention if this tax will be transparent, i.e. with a preset timeline etc.

An exit tax will contain the problem of ISK but now solve it and the authorities will have little control over how it turns out. With an exit tax the estates will literally be boxed in. Then Iceland is close to a situation described by CBI governor Már Guðmundsson in the following way at a meeting last year: assume the estates are caged in; when new investors come to Iceland they see this cage and ask who is in there; the answer is: foreigners who invested in Iceland last time around.

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If minister of finance Bjarni Benediktsson sticks to his well-publicised intension of moving towards lifting the capital controls before the end of the year a plan must be imminent; some of the foreign advisers have been visiting. One strategy being examined is exit tax on both ISK and FX. Such an exit tax will not solve the offshore króna problem and might prolong the capital controls under a different name. A new judgement by the Icelandic Supreme Court may well have effected the certainty of those pleading for the “ISK-isation” of the failed banks’ estates. Central to the coming plan is whether the government is content with lifting the controls – or if it wants to gain funds for the state coffers as well. As before, the politics count more than the economics.

As soon as they were in office both prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson said they would work towards quickly lifting the capital controls. In office since early summer 2013 the two leaders do not have much concrete to show for their oft-repeated words.

To those close to the process the reason for the sluggish pace is clear: the two ministers have diametrically opposing ideas. Gunnlaugsson has not been saying much recently on the controls but has earlier championed the idea of enriching the state with money from the foreign creditors he invariably calls “vulture funds.” Benediktsson’s speech in October indicated a willingness to avoid legal uncertainties.

An exit tax is a classic solution to capital controls as Malaysia demonstrated in the 1990s. It is also part of the three-step liberalisation strategy set out in 2011 and in its original form intended for offshore ISK. Now however the feeling is that the Icelandic government is planning an exit tax on all funds leaving the island, ISK or FX. And the percentage? Anything less than 30-35% is hardly credible given that the difference between the ISK on- and offshore rate is now 17%; as much as 50% has also been mentioned. Whether this strategy would be based on a transparent plan is not clear.

The rumour in the Icelandic echo chamber is that a plan, some plan, might be presented by the end of November and the exit tax will be a part of that plan. What else it might contain is not yet clear.

Exit tax – in theory not a new idea

As mentioned in the most recent IMF report on Iceland the 2011 capital controls liberalisation strategy included FX auctions, as the CBI has been doing and then further two steps, Eurobond swap and exit tax, not yet implemented.

This exit tax is in line with measures taken in other countries with capital controls: in order to temper outflows, which the controls were put in place to contain, there is a tax. The transparent way is to announce at the outset both the percentage and a schedule for lowering it. If things go well the easing can be accelerated as turned out to be the case in Malaysia: the plan was implemented in less time than foreseen at the beginning. Those holding the problematic currency can then choose if they want a tax haircut or if they wait; other capital movements are not affected.

However, the rumour is that the Icelandic government is planning an entirely different version of the classic exit tax, i.e. a tax on all movement of capital out of the country, whether offshore ISK or FX. This prolongs the controls in all but name. In theory everyone is equally (badly) off, which solves the problem the government is actually very worried about: equality between creditors and others.

In particular the government does not want to be seen as aiding greedy foreign creditors to exit while Icelandic individuals and entities are still locked inside controls. Unfortunately this is partly a misconceived argument – Iceland as a whole stands to gain quite immensely by lifting the controls. This should be the focus of the government, not the possible gain of the creditors. Whether the lifting happens some months later is of a much lesser importance than Iceland getting out of controls. The Icelandic gain of lifting the controls is escaping the controls.

Interestingly, this timing problem could indeed be solved in a fairly simple way: if a composition agreement for Glitnir and Kaupthing is reached it will take at least 4-6 months to work out the details. With an agreement in place this time could be used to open up exit avenues for Icelanders.

Acting so as not to act

An exit tax on all flows seems to be a (not so?) clever way of avoiding a decision on the, for the government, thorny issue of composition or bankruptcy proceedings for the estates of Glitnir and Kaupthing (and for Landsbanki further into the future). The message to the creditors is then that they can decide whatever they want – composition or bankruptcy, no problem, make your own choice. Beyond the estates there is the exit tax.

An exit tax on all outflows does not necessarily solve the offshore ISK problem – the underlying cause for the capital controls – and it does not solve the problem of that particular part of the foreign-owned ISK in Glitnir and Kaupthing: Íslandsbanki and Arion.

The recent judgment by the Supreme Court in the case of Kaupthing v Aresbank SA (in Icelandic; here an unofficial English translation) did not come as a surprise for those who had interpreted Icelandic state and creditors v Landsbanki Supreme Court judgement from September 2013 along the lines now clarified. For those working for the “ISK-isation” of the estates this judgment is no happy tidings. Not only can the estates pay out in FX if they or creditors so wish: the estates can go out into the market and buy FX in order to pay out; quite a feisty judgment as judgements come.

Will the government act at all?

The government is no doubt working on a plan but will it actually have the courage to act? Interestingly, some hardened political observers in Iceland do believe that in spite of all the rhetoric the government will actually not be able to make the necessary decisions. They think the government will simply limp through its four years continuously finding some reasons for in-action on the controls.

Rationally, I have to say I find it difficult to believe this could be the case not least with Benediktsson’s oft repeated intention to act before the end of the year. On the other hand this government has shown some spectacular abilities for inaction or leaving things open (appointing a new CBI governor; a debt relief yes but very different from the original intentions; Landsbanki bonds agreement etc.). With this in mind it is easy to believe that the difficult issues regarding the controls will prove to difficult to solve.

Most strikingly, the government – or, to be more precise, the minister of finance and the prime minister – has not been able to act so far on the Landsbanki bonds agreement and the ISK226bn, €1.45bn, remaining for Landsbanki to pay LBI. If agreed on it will most likely be with some further restrictions for general creditors than in present agreement (though they will not get paid until the estate either goes into bankruptcy proceedings or there is a composition agreement; i.e. the agreement sets on precedence since priority creditors have been paid out in Glitnir and Kaupthing). The next deadline (the fifth) is Monday 17 November.

Regarding Landsbanki the delicate act is how to treat the main priority claimant, the UK deposit guarantee scheme. Economic Secretary to the Treasury Andrea Leadsom allegedly did not mince her words when talking to Benediktsson on his visit to London in autumn. He thought he was coming for a collegial meeting over drinks but instead got an almighty dressing down from the fearsome Leadsom. There are even rumours that the Secretary was waiving a legal writ already penned. All of this is rumours rumours and nothing more.

Political tremors

I have earlier pointed out that so far the prime minister has had an upper hand since he apparently stopped Benediktsson from agreeing to the Landsbanki bonds agreement. Now that Gunnlaugsson’s grand promise on debt relief is being carried out, to no great happiness of many Independence Party MPs, Benediktsson needs to strengthen his grip on lifting the controls his way if he wants to maintain his political credibility. The question whispered is “When will Benediktsson man up?”

Coalition certainly is built on compromises but since the controls are part of Benediktsson’s portfolio anything that smacks of the Progressives steering the controls policy will make Benediktsson look weak, very weak indeed. If he is forced on a path fundamentally different from the one he has outlined it will seriously harm his political credibility.

Interestingly, the political focus is firmly kept on the losses the creditors suffer from the waiting game as if none of this mattered for the interests of Icelanders themselves. The legal risks are hardly ever mentioned nor the fact that threatened Landsbankinn is indeed the state’s largest single asset, amounting to 12% of the state’s assets. Benediktsson talks about starting to sell shares in Landsbankinn next year and yet never mentions the connection between the bonds agreement and the possibility of a sale. This rather skewed picture is rarely challenged also because very few people, also politicians, have any firm understanding of the underlying facts.

A political wrestle is also taking place over the 2015 Budget. Benediktsson wants to increase VAT on food from 7% to 12%, a principal change towards simplification from Benediktsson’s point of view and therefore of fundamental importance for his strategy. Progressive Party MPs are against. The intriguing question is if the prime minister will side with his finance minister or his party. Again, any change here reflecting badly on Benediktsson’s political strength will undermine him. (Those who think ex-prime minister Davíð Oddsson still is a political force to reckon with will notice that Oddsson, in Morgunblaðið, has come out against the VAT increase yet again siding with the Progressive party and not with the leader of his own party.) Benediktsson can take some comfort in the fact that the Progressives have plunged in opinion polls whereas his own party is strengthened.

Cyprus implemented capital controls last year. Aimed at hindering outflows from banks the Cyprus controls are intrinsically different from the Icelandic ones. As in Iceland the controls were meant to be in place only for a few months. Cyprus is now far into lifting the controls, has indeed already eased them quite a bit contrary to Iceland where they have gradually been tightened. Cyprus might possibly have lifted them altogether by the end of the year.

Six years into controls Iceland seems far from lifting them – though this year the Christmas crackers might contain unexpected surprises. It remains to be seen who will then have a crackin’ good time.

*I have often gone through the underlying economic problems of the controls; also well explained in the CBI Stability Reports over the years. The last one, published in autumn, clearly underlines the cost and damaging of the controls. – The government’s basic information, in English, on the debt relief is here. (Correction: in the first published text it said the government had been in power since early 2014; that should of course be early 2013 as it now says.)

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On November 10 Icelandic Supreme Court ruled in a case Kaupthing vs Ares Bank. This ruling takes further an argument put forth in earlier ruling from September last year. The new ruling not only states that estates can pay out in fx but can actually go into the market and buy fx. Here is a piece I did for Rúv last night (all links in Icelandic). More on this later…

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No decision yet on the Landsbankinn bond agreement – except an extended deadline, now until November 17. There have been rumours that the government was not happy about the deadlines set. Yesterday, minister of finance Bjarni Benediktsson said on Stöð 2 that the deadlines had been put unilaterally by the LBI and that he considered the deadlines just LBI’s own reference. “If deadlines don’t suit us they don’t suit us,” was Benediktsson’s cryptic answer.

What he did not mention is that Landsbankinn, the other part in the deal is indeed state-owned, which means that the government is not that far removed from the process: after all, the bond agreement is between LBI and the state-owned Landsbankinn. Brinkmanship or not, time is ticking for Landsbankinn: it has funds to finance bond payments early next year but the second payment might prove tough if not impossible.

Benediktsson said the government was working on a holistic solution and progress was being made. He denied rumours that the impasse is due to a disagreement between the two coalition parties. Nevertheless, this is what I believe is the case. Among those who follow the matter the feelings range from disbelief to shrugged shoulders.

This whole affair of deadlines and extended deadlines shows a government not quite knowing what to do or prepared for action as pointed out earlier – and it bodes nothing good for the difficult issues ahead. As one observer said: “There was an invitation to a theatre performance but when the curtains were drawn the stage was empty.” The question is if there will be anything to show on November 17.

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