Sigrún Davíðsdóttir's Icelog

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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