Sigrún Davíðsdóttir's Icelog

With the June plan on lifting capital controls the Icelandic government had finally managed to agree on a way out of controls or rather, the two government leaders had. But the implementation still left a room for disagreement. A recent letter to the governor of the Central Bank from the In Defence group, active during the Icesave debate and close to prime minister Sigmundur Davíð Gunnlaugsson showed unease among a certain faction of Icelandic politics. A delay in publishing the CBI’s Financial Stability report, scheduled for October 6, including a summary of the so called “stability contribution” indicates that something has been brewing. – The question is how deep this disagreement runs and if there still are political obstacles to be overcome.

Although strongly denied all along that there was any difference of opinion, the comments on lifting the capital controls from prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson pointed in different directions. Benediktsson stressed solutions that would take the shortest time and steer clear of legal risks whereas Gunnlaugsson emphasised the funds the state would acquire. The difference was ironed out in June when a plan to lift capital controls was presented.

At the presentation all the emphasis was put into presenting the “stability tax” – and later a law on that tax was passed. However, following talks with creditors of the failed banks an agreement on “stability contribution” was what the creditors wished for, as did those who wanted to avoid legal wrangling and a stalled process to lift the capital controls.

In a recent letter, the In Defence group (set up by individuals opposing the attempt by the left green government to reach an agreement with the British and Dutch government) indicated that the stability tax would be better solution than a stability contribution. The letter was addressed to Már Guðmundsson governor of the CBI, who has already answered the group, clarifying the bank’s position.

October 6, the CBI Financial Stability report was due to be presented (including a summary of the stability measures and the plan for lifting the capital controls; only a summary of known facts, nothing new as far as I understand) but at the last moment the publication was postponed.

The CBI explanation was that there had not been enough time to present the stability contribution as expected, i.a. to the Alþingi economics and trade commission. According to the CBI there had been a last minute addition to the report, which still needed to be presented to the minister of finance. Interestingly, there is no date as to when this could happen.

Creditors of the estates of the three largest failed banks have recently agreed to what they are due to pay in stability contribution: Glitnir ISK200bn, Kaupthing ISK120bn and Landsbanki ISK14bn, in total ISK334bn. The tax would probably be just between ISK600 and 700bn.

In terms of practicality the difference is i.a. that the contribution is already agreed on whereas the tax is not and would most likely be disputed, causing further delays for Icelanders in escaping the capital controls. When the plan was presented in June it sounded as if there were two equally viable routes: a high tax or a lower contribution.

This was rather unfortunate since the debate in Iceland is now evolving in the direction of “why accepting a lower contribution when a higher tax can be harvested?” – A very misleading question, originating in the June presentation, again an attempt to paper over what seems to have been an unsolved disagreement all along.

As the Icelandic economy has been doing well, there were viable solutions to lifting the controls and these were put forth in the capital controls plan. As Benediktsson has stressed, the plan would provide the final solution to the problems keeping the controls in place. The wobbles now will test Benediktsson’s grip of things.

The question is if the In Defence letter is a sign that the group’s earlier close ally, the prime minister, is having doubts about the agreement with creditors. His party has a strikingly low following in polls, ca. 11% compared to 24% in the 2013 elections. It has been clear for a long while that now the economy is doing well the greatest risk regarding Iceland is political risk – and it still is.

Follow me on Twitter for running updates.