Sigrún Davíðsdóttir's Icelog

The latest on lifting capital controls

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The latest is… that there is nothing much to report on how the Icelandic government is progressing on lifting the capital controls. For the best part of last year Bjarni Benediktsson minister of finance said there would be a holistic plan by the end of the year; none was seen. Now prime minister Sigmundur Davíð Gunnlaugsson has said action will be taken before the end of this parliament, i.e. by the end of May. However, in addition to capital controls the government is dealing with strikes and contentious issues like fishing quotas.

Bankruptcy route, exit tax and stability tax – these have been the ideas flickering in the Icelandic media and among those following the arduous course of lifting capital controls in Iceland. And as spelled out earlier, both the Central Bank of Iceland, CBI, the International Monetary Fund, IMF and minister of finance Bjarni Benediktsson have been advocating for an orderly consensual solution, which should include the assets for foreign creditors.

After so many unfulfilled announcements by the government leaders it seems difficult to believe that this government is ever going to take any decisive steps towards lifting capital controls. Indeed some long time observers of Icelandic politics have repeatedly told me that this government will take no such steps. But lifting now seems the plan, according to recent announcement by prime minister Sigmundur Davíð Gunnlaugsson, who has otherwise been quiet on the controls for some while, after big words earlier on the money that could be made.

The circle to square: levying foreigners but not discriminating

According to Icelandic media a Bill of law has been drafted and is just waiting to be presented to parliament. Such a draft has existed for a long time, I believe, but has not been presented because the two government leaders do not agree on fundamental issues. Though firmly denied by the two leaders I hear from all directions that this disagreement has been there from the beginning. Whether they are now any closer to a common solution remains to be seen.

Part of the impossibility of deciding on a plan is the strife to slam a levy on creditors without hitting Icelandic pension funds, other Icelandic entities and last but not least the UK Treasury, which holds claims stemming from Icesave. Whatever the measure it has to, or should, fulfill some legal parameters such as not discriminating between domestic and foreign entities. This has proven to be the real hindrance, as far as I understand.

At the behest of Glitnir Winding up Board, two Icelandic academics recently published a report outlining possible solutions. It has been clear for a long time that there are sensible solutions to be found. Unfortunately, the sensible solutions to not include a massive transfer of money to the state, which seems to be what some are seeking. I have earlier pointed out that looking for a solution, which does not exist, might take a long time. The feeling is that a lot of time has been wasted on exactly that though Benediktsson staunchly denied this following the new report.

Political storm and strange behaviour

One reason some observers remain doubtful on any action regarding capital controls is that the government is struggling with many thorny issues. Like wood fires in dry weather strikes are springing up all over Iceland and in different sectors. And as so often with this government there seems remarkable bewilderment as to how to proceed. Yet, the strikes were of course announced months ago – already in autumn it was clear what was coming.

In addition there are several politically seriously divisive topics up in Alþingi, the Icelandic Parliament. Just today, proposals for new power plants was introduced, with some unexpected additions, which caused a hefty debate and angry words from the opposition. Recently presented changes to fishery management and quotas, mackerel quotas in particular, led the opposition to accuse the government of handing out Icelandic resources to the few against the general interest of all Icelanders. The government is introducing a new housing Bill, presented by a Progressive minister, but only part of it has been presented so far, allegedly because Benediktsson opposes his coalition partner’s plan on how to finance it.

The prime minister’s behaviour keeps drawing attention. It was noted that he did not show up at the CBI’s annual meeting earlier this year. And he made the disappearing act during a recent Alþingi question time: he showed up at the beginning only to leave unannounced before it ended, much to the anger of opposition MPs who feel they rarely get to debate with him in person.

The rising cost to Iceland of inaction

In a nut shell this is the political situation in Iceland: topics that touch a raw political nerve, such as power plants and fishing quotas, strikes, a prime minister whose erratic behaviour is much noted and an alleged disagreement between the two government leaders on the capital controls and other key issues. Under these circumstances it remains to be seen if this long awaited plan on lifting capital controls, i.e. how to deal with the estates of the failed banks, will indeed see the light of day any time soon.

While all of this is going on creditors can just quietly sell their claims. In general, as the price of claims goes down the litigation appetite goes up; so far this market is still thin and no great changes visible. As oft repeated here on Icelog the sad thing is that yes, there are indeed viable solutions to lifting the capital controls. While politicians postpone viable solutions Iceland is living with the unavoidably rising cost of capital controls: there is a cost to doing nothing.

*For earlier Icelogs on capital controls see here. I don’t think there is any angle of this issue I haven’t covered earlier so for those who are looking for particular issues do use the “search” option.

*UPDATE – forgot to mention: for the latests data on economy and the estates of the failed banks relevant for capital controls see the CBI’s latest Financial Stability report, published  in April, especially the governor’s introduction and chapter VII.

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Written by Sigrún Davídsdóttir

May 12th, 2015 at 6:53 pm

Posted in Uncategorised

2 Responses to 'The latest on lifting capital controls'

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  1. Sigrun,
    Any news on the progress of the Kaupthing trial? Tony Shearer

    Tony Shearer

    14 May 15 at 1:27 pm

  2. I guess you saw this blog: http://uti.is/2015/05/further-insight-into-kaupthinking/ – the questioning has ended; the summing up is next week, first by the prosecutor, then the defense lawyers. The judgment can be expected after some weeks; think it has to be within four weeks.

    Sigrún Davídsdóttir

    17 May 15 at 12:36 am

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