Sigrún Davíðsdóttir's Icelog

Now that Greece has controls on outtake from banks, capital controls, many commentators are comparing Greece to Iceland. There is little to compare regarding the nature of capital controls in these two countries. The controls are different in every respect except in the name. Iceland had, what I would call, real capital controls – Greece has control on outtake from banks. With the names changed, the difference is clear.

Iceland – capital controls

The controls in Iceland stem from the fact that with its own currency and a huge inflow of foreign funds seeking the high interest rates in Iceland in the years up to the collapse in October 2008, Iceland enjoyed – and then suffered – the consequences, as had emerging markets in Asia in the 1980s and 1990s.

Enjoyed, because these inflows kept the value of the króna, ISK, very high and the whole of the 300.000 inhabitants lived for a few years with a very high-valued króna, creating the illusion that the country was better off then it really was. After all, this was a sort of windfall, not a sustainable gain or growth in anything except these fickle inflows.

Suffered, because when uncertainty hit the flows predictably flowed out and Iceland’s foreign currency reserve suffered. As did the whole of the country, very dependent on imports, as the rate of the ISK fell rapidly.

During the boom, Icelandic regulators were unable and to some degree unwilling to rein in the insane foreign expansion of the Icelandic banks. On the whole, there was little understanding of the danger and challenge to financial stability that was gathering. It was as if the Asia crisis had never happened.

As the banks fell October 6-9 2008, these inflows amounted to ISK625bn, now $4.6bn, or 44% of GDP – these were the circumstances when the controls were put on in Iceland due to lack of foreign currency for all these foreign-owned ISK. The controls were put on November 29 2008, after Iceland had entered an IMF programme, supported by an IMF loan of $2.1bn. (Ironically, Poul Thomsen who successfully oversaw the Icelandic programme is now much maligned for overseeing the Greek IMF programme – but then, Iceland is not Greece and vice versa.)

With time, these foreign-owned ISK has dwindled, is now at 15% of GDP but another pool of foreign-owned ISK has come into being in the estates of the failed bank, amounting to ca. ISK500bn, $3.7bn, or 25% of GDP.

In early June this year, the government announced a plan to lift capital controls – it will take some years, partly depending on how well this plan will be executed (see more here, toungue-in-cheek and, more seriously, here).

Greece – bank-outtake controls

The European Central Bank, ECB, has kept Greek banks liquid over the past many months with its Emergency Liquid Assistance, ELA. With the Greek government’s decision to buy time with a referendum on the Troika programme and the ensuing uncertainty this assistance is now severely tested. The logical (and long-expected) step to stem the outflows from banks is limit funds taken out of the banks.

This means that the Greek controls are only on outtake from banks. The Greek controls, as the Cypriot, earlier, have nothing to do with the value or convertibility of the euro in Greece. The value of the Greek euro is the same as the euro in all other countries. All speculation to the contrary seems to be entirely based on either wishful thinking or misunderstanding of the controls.

However, it seems that ELA is hovering close to its limits. If correct that Greek ELA-suitable collaterals are €95bn and the ELA is already hovering around €90bn the situation, also in respect, is precarious.

How quickly to lift – depends on type of controls

The Icelandic type of capital controls is typically difficult to lift because either the country has to make an exorbitant amount of foreign currency, not likely, a write-down on the foreign-owned ISK or binding outflows over a certain time. The Icelandic plan makes use of the two latter options.

Lifting controls on outtake from banks takes less time, as shown in Cyprus, because the lifting then depends on stabilising the banks and to a certain degree the trust in the banks.

This certainly is a severe problem in Greece where the banks are only kept alive with ELA – funding coming from a source outside of Greece. This source, ECB, is clearly unwilling to play a political role; it will want to focus on its role of maintaining financial stability in the Eurozone. (I very much understand the June 26 press release from the ECB as a declaration that it will stick with the Greek banks as long as it possibly can; ECB is not only a fair-weather friend…)

Without the IMF it would have been difficult for Iceland to gather trust abroad in its crisis actions – but Greece is not only dependent on the Eurozone for trust but on the ECB for liquidity. Without ELA there are no functioning Greek banks. If the measures to stabilise the banks are to be successful the controls are only the first step.

*Together with professor Þórólfur Matthíasson I have earlier written on what Icelandic lessons could be used to deal with the Greek banks. – Cross-posted at Fistful of euros.

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Today, the Reykjavík District Court ruled in the most extensive banking case so far, a case of market manipulation and loans to Kevin Stanford and other businessmen to buy shares in Kaupthing, alleged to have part of the market manipulation by Kaupthing senior managers.

This is a complicated case, where the Office of Special Prosecutor went through, in court, months of trades to show a pattern they claimed was consistent with charges of market manipulation. – The judgement will no doubt be appealed by those who were sentenced.

Sigurður Einarsson ex-chairman of the board of Kaupthing was sentenced to a year. Hreiðar Már Sigurðsson, the banks CEO at the time, was found guilty but not sentenced to prison because he has already been sentenced in another case, the al Thani case. According to Rúv, Einarsson sentence will be added to the four years he was sentenced to in the al Thani case. Ingólfur Helgason, Kaupthing manager of Icelandic operations was sentenced to 4 1/2 year. Magnús Guðmundsson manager of Kauphing’s Luxembourg operations was acquitted as was another employee, Björk Þórarinsdóttir member of Kaupthing’s credit committee. Bjarki Diego credit officer at the time was sentenced to 2 1/2 year. Three employees, who carried out the relevant trades, got suspended sentences of 18 months to two year.

One thing, which has proved valuable in this case as in other similar cases, is phone tabs. Interestingly, they have all been done after the collapse.

A complicated case – and contrary to what some seem to think Iceland has a similar legislation regarding market manipulation and other financial fraud as other Western countries. The difference is that there is a will to prosecute these cases: they are time-consuming to investigate but it is perfectly doable and the stories are simple. The fact that big banks are too big to investigate in other countries is only because there is a lack of appetite among authorities and politicians – there really is no other reason, no other explanation.

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The waiting for Godot turned into a theatrically staged presentation at Harpa by the prime minister and minister of finance, assisted by their two main Icelandic experts. The grand plan to lift capital controls has now seen the light of day. If realised as planned the future looks bright for Iceland. But there are still political risks until the planned good deeds are indeed done.

Here are the main points of the new plan: the size of the problem is ISK1200bn, $9bn, ca. 60% of Icelandic GDP where ISK300bn, $2.2bn, is the original overhang from October 2008 (mostly carry trade funds, which flowed to Iceland in the years before the collapse) and then ISK900bn, $6.7bn, in the estates of the failed banks: ISK500bn, $3.7bn, is pure ISK assets, ISK400bn, $3bn, is debt paid in FX by Icelandic entities.

According to the new plan, there are “non-negotiable stability conditions” the estates of the three failed banks have to meet. These conditions are defined in the plan, but not spelled out in króna. On the basis of these conditions the estates have to pay a “stability contribution,” as part of the composition agreement; again, the amount of the contribution is not stated.

The composition agreement has to be in place by the end of the year. If not, the estates will be forced into bankruptcy and will then have to pay a 39% “stability tax,” a one-off tax, of ISK850bn, $6.3bn, due on 15 April 2016. However, there is a deduction to the tax, meaning it will be, according to the presentation, ISK680bn, $6.3bn.

This is all stated in the plan – but in interviews afterwards Bjarni Benediktsson minister of finance the contribution, which he aims at and not the tax, will be ISK500bn.

The rhetoric used implied that the state could, on the basis of emergency and imminent danger, overrule private property rights, i.e. of the creditors. This sounded somewhat bombastic given that Iceland is a thriving country and well capable of solving the problems related to the foreign-owned ISK. Also, there was emphasis on solving the problems for the “real economy” – all of this was interesting, clearly used to create a sense of the danger the government is averting with its plan. This is the rhetoric in the world of staged politics and the Icelandic government is no exception here (except that its spin is always rather visible, i.e. not very professional as good spin should be invisible).

According to the presentation “For seven years there were no realistic proposals from the estates” – given the fact that Glitnir and Kaupthing presented their composition draft in 2012 and 2013 and have waited for answers and clear guidelines this is again part of the rhetoric. The government’s tactic has so far been like inviting the creditors to a game of dart without telling them where the dartboard was.

The numbers

As already explained, I doubt the size of the problem as related to the estates: I estimate it being ISK500bn, not ISK900bn. The higher number is, as far as I can see, again to underline the danger and justify the means. But again, this is part of the staged performance; the numbers were flashed up again and again.

Will the stability contribution be ISK500bn? From calculations I have seen the likely contribution is in the range of ISK300bn to ISK420bn, $3.1bn, – reaching ISK500bn does not seem likely. The contribution will be paid over time, most likely two to three years. It depends on values of assets etc that change over time, therefore the uncertainty. Further insight into the numbers can be gauged from the letters received from the three estates, see here. Whatever the estates agree to 60% of creditors have to vote for it.

A tax of ISK682bn, $5bn, as stated in the press release, is also, as far as I understand too high a number; ISK620bn, $4.6bn, would be more likely.

The old overhang will be resolved by the CBI in the classic way of auctioning and offering long-term bonds, no surprise there as this plan is already on-going.

Tax (= stick) or contribution (= carrot)?

What does the government want, a tax or contribution? Interestingly, the tax was the main focus of the presentation and little time and attention given to the contribution. The same in the press release, where composition and contribution is merely mentioned en passant whereas the tax is spelled out in great detail.

This however seems to have been part of the show. I understand that the advisers are wholly on the side of composition and contribution, as are the creditors. The emphasis on the tax would then be wielding the stick to make sure the creditors go for the carrot (another matter if a stick was needed).

While emphasising tax and bankruptcy, the refrain was that the capital controls liberalisation is NOT a money-making scheme for the treasury but to lift the controls and nothing else.

The government’s chief negotiator Lee Buchheit also stressed this aim to the Icelandic media but he did put a number on the outcome. His number was ISK650bn, $4.8bn, (see here, at 9:55 min; the number comes up at 15:49) in spe for the government. As far as I can see, an unrealistically high number, closer to the tax, which no one officially wants, than the desired contribution.

Buchheit had earlier mentioned another thing: that lifting the controls would take a short time, only about six years. This may not be what most people understand as “a short time” but it is a realistic time frame: it will take some time to carry out this plan.

In spite of the emphasis on giving priority to the “real economy” easing of controls for people, businesses and pension funds will only come later. On this, the presentation gave no dates. According to my sources, new Bills in parliament coming autumn or winter will clarify this issue.

Moral hazard and political risk

In spite of the government rhetoric of big funds to come, the debate in Iceland has mostly been characterised by relief: at last a plan, which seems realistic. The opposition has embraced it, pointing out that this is very much what had always been the plan.

There have been some voices asking why Greece and Argentina are struggling with their creditors while Iceland has so effortlessly negotiated with its creditors. The answer is of course that creditors in Iceland are not creditors to the state, contrary to Greece and Argentina, where the problem is sovereign debt; not the case in Iceland.

As stated earlier it is clear that the government aims at composition and contribution, not tax and bankruptcy. There is however always a political risk and the possibility of panic politics. The Progressive party has fallen from 25% of votes in the election in 2013 to 9% in the opinion polls in spite of successfully carrying out the promised “debt correction.”

The party very much got elected on the basis of its promises to fight the “vulture funds,” mentioning ISK800bn days before the election after talking about “only” ISK300bn to ISK400bn. And this was a promise of funds right into the state coffers, not to pay down sovereign debt as is now the plan; a plan that might annually free up ISK30bn, $200m to ISK40bn, $300m, otherwise used on interest payments.

The government had been adamant about not negotiating with creditors. Since talks have been going on over the last months the government has now defined these as “conversations,” not negotiations. No matter the word used it is clear that the largest creditors agree to the plan – and what they agree to is the outlined composition. Tax is a different matter.

For some reason, the old Roman saying “Pacta sunt servanda” has never quite reached Iceland. Icelanders and Icelandic governments over decades have repeatedly understood agreement made as being only valid until they have a different idea as to what they want. This will now again be tested.

Could the composition fail if an agreement on composition is not in place by the agreed deadline at end of the year? My understanding is that this is not likely: if needed, the deadline will be extended but that would of course only happen if things are moving in a realistic way.

Having had their patience tested over the last few years, creditors and the winding-up boards are no doubt both eager and well-prepared for the coming negotiations. Unless there will be a political itch to pick a fight, serving either political interests and/or special interest groups, things could look really bright in Iceland by the end of the year, otherwise the darkest time in Iceland.

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There were negotiations and changes until last minute. So much, that the various press releases published after the presentation of the plan to lift capital controls do not have the same numbers as to the percentage of a possible tax.

The tax percentages agreed on, as far as I understand, in negotiations with representatives of creditors is the one published in the press releases referring to Kaupthing, Glitnir and LBI:

The Task Force’s preliminary analysis suggested that to achieve the goal of neutralizing a threat to the balance of payments, this Stability Tax would be set at a rate of 37% of the total assets of each estate (measured as of end-June 2015), with an automatic exemption of ISK 45bn for each estate, which would bring the effective tax rate down to about 35%. 

Tax of 37%, de facto 35% after exemption, on the assets as they are at the end of June this year – was then changed and the automatic exemption was removed. The changes were the tax as it was presented at the press conference and in a general press release following the presentation:

A new bill of legislation on a stability tax imposes a one-off 39% tax on the total assets of the failed commercial or savings banks in accordance with their assessed value as of 31 December 2015.

This indicates that the tax was in the end higher than had been negotiated with representatives of the creditors, who were not amused, or so I hear, when they saw the changes.

*I am writing this ca. 8 hours after the press releases have been published but this has not yet been corrected.

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In a heavily staged appearance, prime minister Sigmundur Davíð Gunnlaugsson told Icelanders that ISK850bn, ca 45% of Icelandic GDP would fall into the state coffers, used to reduce the public debt, not for pet projects as earlier announced. With

The size of the problem to solve amounts to ISK1200bn, i.e. this is the sum of ISK, in the estates of the banks and Glacier bonds etc., that cannot be converted to FX and therefore cannot be paid out to creditors right now. What amounts to ISK850bn, or 39% of the assets of the estates at the end of this year will have to be paid off in a stability “contribution” if composition is negotiated and then this amount will be reduced – or tax and bankruptcy if no composition, to fulfil what the government calls “stability conditions.”

Glacier bond-holders and others will either be able to take part in auctions in autumn or buy long-term bonds. All of this is done under the auspice of a phrase repeated over and over again: “National interests takes precedence over interests of private parties.” Here is the English press release, carefully worded and not very clear.

After dealing with this amount, pension funds and ordinary Icelanders will have greater movement. Some quick thoughts on some of the topics du jour:

Size of the problem:

It is clear that the ISK300bn (actually ISK290bn) of the remains of the old overhang (see my last blog before this one on the barest essentials) cannot be paid out in FX – so this amount is clearly a part of the problem. But this is already being dealt with and that action will now continue: the CBI will hold auctions in autumn and those ISK-owners can also buy long-term bonds to come, either in ISK of FX.

That leaves ISK900bn – and this is a more questionable size: ISK500bn (ISK507bn exactly) is the number I have been posting earlier as the size of the problem because these are ISK assets. The remaining ISK400bn are FX assets in Iceland, i.e. assets in Iceland paid off in FX, which I would think was a more debatable size but this is how the government defines the size of the problem.

Stability “conditions” – contributions and tax:

So the problem that needs to be solved amounts to ISK1200 – and by reducing it by 39% the rest can be paid out. Or that seems to be the calculation.

The conditions, i.e. the numbers, are non-negotiable, as was repeated again and again. If the estates negotiate a composition by the end of the year they do not pay a tax but a “contribution”: in fact the same numbers, i.e. 39% or ISK850 but – as far as I understand this will be some reduction so the amount will be ISK500-600bn.

If they do not negotiate a composition the estates go into bankruptcy and pay the full amount: 39%.

This leaves some angles since the ISK850 is well above the ISK500bn but not quite the ISK900bn and well, the ISK300bn is outside of this equation. How these numbers were found I do not know but well, this is how the non-negotiable numbers look like.

The non-mentioned dates

Apart from foreign creditors smarting from controls there are the Icelanders: here, pension funds will be able to invest for ISK10bn a year, more or less what they have asked for, until 2020, unclear from when. And ordinary people will at some non-mentioned date be able to feel liberalisation on certain transactions.

What will creditors do?

Some creditors have already been negotiating with representatives of the government so the plan is indeed not quite out of the blue. According to a Glitnir announcement today, 25% of their creditors agree to this.

Kaupthing’s situation is different, less ISK assets, which might mean that Kaupthing creditors will be less happy to pay. However, no chance to tell until there is an announcement. Everyone might be happy to see an end to this and possible payout in sight.

Either this will all go well, composition beckon and much good will. Or not and the future is legal wrangling in multiple jurisdictions for a decade, like in Argentina. Today, the Icelandic government has taken the country on a journey along a very narrow road above a precipice. If all goes well, everyone reaches the final destination on the other side and there will be much rejoice.

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There are many misconceptions floating around regarding Iceland and capital controls. Here are the barest essentials:

Iceland introduced capital controls on November 29, seven weeks after the official collapse date October 2008. The reason was not money flowing out of banks, as in Cyprus but because foreigners, mostly those who had invested in Icelandic bonds, so called “Glacier bonds”, were converting their Icelandic funds into foreign currency, rapidly draining the none-too large currency reserves. At the time, these holdings amounted to 44% of GDP.

Over time, this original overhang of 44% of GDP has been reduced and now amounts to 16%. This is a process overseen by the Central Bank of Iceland, CBI, which has held auctions to match in- and outflows. The original overhang is further being worked on; the Central Bank of Iceland recently announced measures and more will come as part of a plan to lift capital controls.

The controls are on CAPITAL, meaning that capital, i.a. for investment can not be moved in our out of the country. This means that Iceland no longer adheres to the four freedoms of European Economic Area, EEA, i.e. freedom on goods, services, people and capital.

However, the controls are NOT on goods and services, meaning that money to pay for goods and services can move freely.

With time however another reserve of foreign-owned ISK has formed, i.e. ISK in the estates of the three failed banks. Since foreign creditors hold ca. 95% of the claims to these three estates the ISK assets of the estates are another pool of foreign-owned ISK, now ca. 25% of GDP. FX assets of Glitnir amount to 63% but the FX ratio in Kaupthing is 72%.**

These two pools of foreign-owned ISK holds the controls in place, which is why a plan needs to tackle both of them. As said earlier, the old overhang is already part of a process. What now needs to be tackled is the ISK pool within the estates of the three banks.

The simple and classic way to solve this kind of a problem (Iceland certainly is not the first country to face this problem) would be to negotiate with creditors on a haircut of the ISK assets in the estates. This is what the creditors have been hoping for and this is what the Icelandic government has not been willing to do.

The government’s reasoning has been that engaging with creditors was none of their business and could expose the government to legal risk. After all, the estates are of private companies, no relation to the state. However, the estates cannot be resolved unless it is clear how to deal with their ISK assets and since they cannot be taken out of the country the creditors cannot be paid out, i.e. the estates cannot be resolved. Which means that really, the government holds the threads, i.e. because it has put legislation in place regarding the estates and so, the government is already part of this equation.

Now it seems that the creditors will get some sort of an offer – maybe with a scope to negotiate, maybe only a take-it-or-leave-it offer. Remains to be seen until all the government’s cards are on the table, probably Monday afternoon.

What complicates matters is that the government seems to want not only to get a cut of the ISK assets but of the foreign assets as well. There is no balance-of-payment reason for taking foreign funds though the government refers to “stability tax.”

Further, the Icelandic capital controls are NOT a sovereign debt problem, such as lie at the core of the Argentinian dispute with creditors nor is it parallel to the Greek situation, another sovereign debt problem. And the Icelandic capital controls are not comparable to the Cypriot controls, which were put in place to keep money in the banks and prevent them from collapsing as funds flowed out.

*For data regarding the estates and capital controls see the latest CBI Financial Stability report.

**UPDATE: sorry, I wrote earlier that this was the ISK ratio – it is of course the FX ratio!

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The Icelandic government, or some parts of it, keep on its game of leaking key information always to the same journalist. Now it is the first big step towards lifting capital controls. As could be expected, this seems more about political posturing than a convincing solution. The coming measures may however provide creditors with their long awaited break to negotiate. If not, Iceland faces the same as Argentina: years of wrangling with ever more aggressive creditors – as the chief foreign adviser to Iceland should be able to inform the government on, from first hand experience.

In March, the Ministry of Finance published three links to regulation and documents regarding duty of silence of advisers, parliamentarians and civil servants who might be in possession of information related to the lifting of capital controls. This was part of a concerted effort to keep under wraps anything related to the lifting of the capital controls – until that day came when the government announced its plans. Whatever the source, DV’s journalist Hörður Ægisson, who over the last few years has been a diligent receiver of government information, published on Friday the outline of this plan, introduced at a cabinet meeting that day, most likely to be made public at a press conference on Monday. The question is if the Ministry of Finance will now look into this leak, considering the measures it took in March.

The Icelandic media landscape is a sorry sight: independent media is weak, the money is where the special interests are. This will no doubt be made clear yet again in the coming weeks as the details of the capital controls plan-to-come will be discussed and debated.

The estates will now have a few weeks to negotiate a composition agreement. If creditors do not accept the parameters the government has in mind the estates will be put into bankruptcy proceedings. So far, the estates and their creditors have been hoping for a composition, since creditors can then run the estates and resolve it when they deem best contrary to bankruptcy proceedings, which are time-limited. Both proceedings do though have the same aim: to maximize the creditors’ recovery.

The problem at the core of this is the foreign-owned ISK: assets worth ISK320bn in Glitnir, ISK160bn in Kaupthing, which means that the size of the ISK problem is different for the two banks – also making it respectively a different case for the two estates for find a solution. The Icelandic government seems to want to get hold of these ISK assets, remains to be seen how it goes. An expected stability tax of 40% can hardly be on priority claims, because that would then hit the UK claims, not the intention. It is difficult to see that the tax could be put in place sooner than 2017, which means no lifting of controls for Icelandic entities until after that, which means still years of capital controls. However, this is speculation until the plan is published.

Among themselves, the hardliners have been talking about getting creditors with their back to the wall facing a gun, i.e. with no options but to follow the government’s diktat. However, Iceland has a rule of law and creditors have legal options in Iceland and abroad. It remains to be seen, as the Icelandic saying goes, who laughs last.

The worrying thing for Iceland is if protracted legal dispute keeps going for years, hindering the lifting of the capital controls. The government seems to be taking the risk of just kicking the process off, in this way, then seeing where it leads to.

Lee Buchheit, advising the government on these issues as on Icesave earlier, brings with him experience, which hopefully will not be relevant. Cleary Gottlieb, the firm he represents, is adviser to the Argentinian government (not Buchheit though but his colleagues). At a conference in Buenos Aires recently, Buchheit foresaw that Argentina’s dispute with creditors might run for at least a decade. Probably not what Cleary envisaged for its stubborn Argentinian client – and hopefully not what is in spe for Iceland.

It certainly has to be kept in mind that Argentine’s problem is sovereign debt and a mismanaged restructuring whereas Iceland has a balance-of-payment problem vs estates of failed private banks. It would take quite a few wrong steps to put the Icelandic government in the situation where it would be directly in dispute with creditors, as is the Argentinian government. So far, no one has really believed the government could end there.

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Icelanders have been drip-fed with promises of an almost-there plan to lift capital controls, so far nothing but the question is if this plan is now about to be introduced. A plan will most likely need to be supported by a new Bill, on much-mentioned tax, either exit tax or recently mentioned stability tax, which means it should first be presented to the government, which would mean either any Tue. or Fri., the two days the government holds its regular meetings.

However, this government does not always follow the normal route, remains to be seen if a plan will emerge at all, how it will be presented and, most of all, what it will contain.

There is indeed still a plan in place, from 2011, as I have pointed out before but what is needed is i.a. how to deal with ISK assets in the estates of the failed banks. A tax on the estates will not solve the underlying issue of the foreign-owned ISK, which are holding the controls in place. But it will fulfill promises made by prime minister Sigmundur Davíð Gunnlaugsson, at least if it will not end in legal wrangling in various jurisdictions and hinder the easing of the controls.

As I have often outlined earlier, it seems that Gunnlaugsson and minister of finance Bjarni Benediktsson have not been looking into the same direction for a solution: Gunnlaugsson has underlined the moral necessity of the banks paying for the harm caused and that there would, unavoidably, be a windfall for the state; Benediktsson has stressed the need for an orderly process that should take as little time as possible and not incur a legal risk.

Given that the prime minister’s party now hovers at 8% in the opinion polls, after harvesting 25% in the elections two years ago the question is whether he will be prone to panic politics, i.e. instigating a conflict with creditors he would try to orchestrate as a victory. After all, he has very little to lose – the party can hardly sink further. It is always a dangerous situation when politicians have little to lose and much to gain. Close to him is ex-PM and ex-governor of the CBI Davíð Oddsson, who is adamant that his legacy especially of his time at the CBI is without a blemish. Oddsson has often shown that he prefers a hard line against creditors, no matter what.

As I have said time and again (after all, most things have been said regarding the capital controls, now it is just waiting to see what there is to come…) Benediktsson’s leadership will be seriously tested by the big Plan to-come. Although leading the same party Oddsson led, the Independence Party, Benediktsson seems further from Oddsson on these issues than the PM. If Gunnlaugsson’s – and Oddsson’s – view prevails it means that Benediktsson is literally powerless in this government. After all, capital controls are his remit, not the PM’s and he would lose all credibility as a leader in his sphere.

The topic of capital controls is muddled in the debate. Very few seem to remember that the problem, which holds them in place is foreign-owned ISK, the old over-hang (now much reduced and already being worked on by the CBI; further steps awaited) and the ISK in the estates of the old banks. Any action that does not solve this problem is no solution at all. Taxing the estates clearly does not solve the problem – after all, this is not a problem of debt but of currency shortage, not enough to convert the foreign-owned ISK. Iceland does not lack funds but funds – the estates are failed private companies, unconnected to the state – and the easiest way would be a haircut of some sort.

The effect for Iceland of a plan will not only be on the economy but very much a political effect. If Benediktsson loses this battle his party – or at least the more sensible part of it – must ask itself if the Independence party is only in government to promote policies of the coalition party. Certainly a role, which would have been unthinkable in earlier times, for example at the time Oddsson was the party leader and PM.

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