Sigrún Davíðsdóttir's Icelog

In the months leading up to the June 2015 plan on moving the three banking estates out of capital controls minister of finance Bjarni Benediktsson was adamant about avoiding legal risk. Indeed, that plan was only announced once the creditors had agreed to a haircut on the estates’ króna assets. The new Act on the offshore króna raises some legal issues as two of the four funds holding the lion share of these assets have pointed out in a letter to Alþingi. Intriguingly and contrary to last year, Benediktsson and the Central Bank of Iceland now seem to be intensely relaxed about legal risk though this time, contrary to last year, it really is the state that is the counterparty.

There has been little debate in Iceland regarding the offshore ISK and measures to lift controls on its owners. Certainly, the numbers are fundamentally different from when these offshore ISK, i.e. owned by foreigners (individuals or entities registered abroad; can in theory be Icelandic and are in some cases) caused the introduction of capital controls in November 2008. At the time these assets amounted to 44% of Icelandic GDP; now they amount to 14% of GDP or ISK319bn.

The largest part of the offshore ISK is owned by a few large institutional investors, two of them being Autonomy Capital and Eaton Vance. The underlying assets are Icelandic sovereign bonds and T-bills, meaning that the counterparty here is the Icelandic state.

As with creditors last year there have been meetings between the large offshore ISK owners and Icelandic representatives of the ministry of finance and the CBI. Contrary to last year, when nothing was done until it had been negotiated with the creditors of the estates, no agreement was reached before the new Act was passed in parliament this weekend.

Officials met with representatives of offshore ISK holders yesterday in New York to inform them of the new measures.

The state sure will pay its debt or… maybe not

Last year, creditors to the estates agreed to roughly a 75% haircut on the estates’ ISK assets. This outcome came as no surprise but had been more or less foreseen for the last several years, based on the Icelandic current account: this is what Iceland could manage without upsetting financial stability.

Hawkes among Icelandic officials have been adamant that offshore ISK owners should endure a similar fate. That however goes against the rule that a state pays its debt in full. At a hearing in the parliament’s economy and trade committee a CBI official underlined this fact: the sovereign will pay its debt.

This is clearly what the funds owning the offshore ISK have literally been banking on: the state is its counterparty and a state pays its debt.

Two options: ISK220 for a euro or deposit at negative rate

The new Act (English translation of the Bill) stipulates that offshore ISK holders can participate in an auction where the reference exchange rate will be ISK220 for the euro, more than a third higher than the present onshore rate of ISK140.

There was a meeting in New York yesterday, where the measures were explained. Clearly, a higher participation in the auction would lead to a better price (creating a version of “prisoner’s dilemma”…) but the funds might also calculate that they were better off heading to court.

If an auction doesn’t tempt them the assets will be turned into a “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.” This debt instrument has no maturity, interest rates are set at 0.5% but will be reviewed annually. Needless to say, 0.5% in Iceland is negative interest rates, well below inflation.

Effectively, the offer is either a haircut of more than a third of the assets or a lock-in at negative interest rates for unspecified time.

If the haircut was meant as a carrot compared to the lock-in stick, offshore ISK owners might well keep in mind the CBI official’s words that the sovereign was of course going to pay its debt in full – and simply head for the courts.

Property rights and human rights

Over the weekend, Eaton Vance and Autonomy sent a clarification of their stance to parliament (here, in Icelandic). The funds protest the Bill defines all offshore ISK as being “potentially more volatile than other króna-denominated assets, as the latter are subject to a home bias.” This does not at all apply to the funds, they claim since they have already shown a preference to being long-term investors in Iceland, i.e. they are willing to buy Icelandic bonds and T-bills.

In addition, they point out that considering growth and good state of the Icelandic economy, the present offer can’t be justified by hardship, as emergency measures following the banking collapse in October 2008.

Furthermore, the funds see their position as being strong since a partial payment would amount to a credit event, thus putting the state into default, with all the unpleasant consequences involved – a potentially expensive experience for Iceland, both the state, public institutions and companies.

There is a “Provisions of the Constitution and the European Human Rights Convention” in the Bill, stating that the “recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination.” – The funds clearly disagree and consider these provisions to be inadequate.

A legal risk but so what…

One view heard from one of those involved on the Icelandic side is that the measures are clearly close to the margin of the possible and postulate a clear legal risk. However, there was no need for Icelandic authorities to pay any special attention to problems the offshore ISK holders might identify, according to this source. Yes, the offshore ISK owners could now decide to challenge the Act but perhaps they had already had enough of wrangling with Icelandic authorities and might just be ready to call it a day. And anyway, an Icelandic court is unlikely to rule against the parliament, states the source.

That is certainly one way of seeing the situation. What I find difficult to explain is why the minister of finance and other officials were so adamant last year about avoiding all possible legal risks, by beforehand securing the creditors’ support to the plan to lift controls for the estates – but are now apparently intensely relaxed about possible legal risks and the pretty obvious invitation to a legal challenge.

All the more surprising since the creditors to the estates had known for a long time that they would only get part of their ISK assets whereas the offshore ISK owners are certainly counting on the state paying back and in full.

Could the Act be only a stick (as was the “stability tax” last year), are talks still going on? That’s one version and an Act of law can certainly be changed. That said, I still find the Act looking surprisingly like a final act if the intention is to explore further avenues with offshore ISK holders.

Reputation risk and “those in the cage”

At a public meeting on the offshore ISK in 2013, some of those present argued that the solution to the Icelandic current account problem was just to cage in the foreign-owned assets so capital controls could be lifted on the domestic part of the economy. Present at the meeting was CBI governor Már Guðmundsson who pointed that when new investors would then arrive in Iceland they would see the cage and ask who was in it. “The investors who invested in Iceland last time around.”

This doesn’t seem to be the most alluring introduction to Iceland but that is none the less what seems about to happen: offshore ISK holders are being offered a cage, unless they prefer fleecing.

Icelandic officials will clearly have Icelandic interests at heart. Last year, it seemed that these interests were best safeguarded by negotiating an outcome with creditors so as to secure a full harmony in the outcome and execution. With the offshore ISK the same officials seem to act in the certain belief that the state can dictate an outcome it wishes, with no need to pay any special attention to those who lent money to the state and who are also willing to continue lending. It will take some time before it’s clear if this is a sound judgement and what the possible reputation risk will be.

Update: here is further information from Ministry of finance on the new Act.

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Last year, Kaupthing’s second largest shareholder Ólafur Ólafsson was sentenced in February 2015 to 4 1/2 years in prison in the so-called al Thani case. After a change in the law on imprisonment shortened the time prisoners have to spend in prison under certain circumstances, Ólafsson was recently released to a half-way house in Reykjavík. He is now electronically tagged but can go to work – he is still one of the wealthiest men in Iceland and owns inter alia a large shipping company, Samskip.

Yesterday, a helicopter accident drew some attention to Ólafsson: it turned out he was on a sightseeing flight together with three foreign business partners and a pilot when the helicopter came down. All on board were injured but none of them suffered life-threatening injuries.

The helicopter, owned by Ólafsson and registered in Switzerland, according the Stundin, though a Danish and a Swiss company. Allegedly, the helicopter has been used a lot lately, allegedly twice turning off the device that allows the helicopter to be tracked.

According to Stundin a group of hikers saw a helicopter eight hours before the crash, flying in a dangerously daring way, close to the scene of the accident. It’s not been confirmed if the helicopter observed was the one owned by Ólafsson.

The accident has also drawn the attention of authorities to the fact that tagged prisoners can in theory travel abroad – it’s not banned – as long as they are back at 9pm. The reason foreign travel isn’t forbidden is only because it’s not until now that there have been prisoners wealthy enough to own their own planes. This will now be taken up.

The Icelandic magasine Séð og heart has now pointed at a weird coincidence. Ólafsson has a very close business partner, Hjörleifur Jakobsson, who like Ólafsson moved to Switzerland, has in general been closely involved in Ólafsson’s business ventures for decades and has often been called Ólafsson’s right hand in Icelandic media.

It turns out that as the Icelandic Prison Service is starved for funds it has outsourced the electronic tagging and the surveillance involved to a company called “Öryggismiðstöðin,” which is owned by no  other than Ólafsson’s right hand man, Jakobsson. The magasine is not alleging that Jakobson’s company is granting Ólafsson any favours, merely pointing out that such coincidences can happen in little Iceland.

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After markets closed May 20, minister of finance Bjarni Benediktsson introduced a new Bill (text in English) on offshore ISK, now amounting to ISK319bn, around 14% of Icelandic GDP.

As expected, offshore ISK owners are will be offered  to participate in an auction. Those who don’t accept the offer will see their funds put into so-called “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.”

The restrictions are special indeed: the debt instrument will only carry interest of 0.5%, to be reviewed every year. In addition, this debt instrument does not have a specified maturity. As interest rates in Iceland are well above 0.5% and not likely to be near this rate any time soon, the offer is to participate in an auction or have the funds locked in at negative interest rates forever and a day, i.e. well below market rates in Iceland.

If the word “expropriation” comes to mind the 4.1 Chapter is on “Provisions of the Constitution and the European Human Rights Convention”:

The recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination. Failure to adhere to these principles could create liability for compensatory damages on the basis of Article 72, Paragraph 1 of the Constitution, cf. also the protection of ownership rights according to the European Human Rights Convention, or could constitute illegal discrimination, which would be in violation of the non-discrimination rule contained in Article 65 of the Constitution, cf. also the prohibition of discrimination on the basis of subjective considerations, according to the European Human Rights Convention and the EEA Agreement.

The government carefully avoided legal wrangling with creditors of the estates of the fallen banks. The question is if the new Bill does the same trick and leads to a satisfactory outcome for all. The above are points likely to cause consternation among the four largest holders of offshore ISK, all institutional investors. The question is if it’s more important for them to find a solution and finally clarify the situation or if they see the new measures as an infringement on their legal rights.

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It’s no exaggeration to say that Icelanders are stunned to see another old politician throwing his gauntlet into the presidential ring: Davíð Oddsson is running for president, competing with Ólafur Ragnar Grímsson, his old political adversary from decades ago. There are several other candidates but the most serious threat to the political oldies is Guðni Th Jóhannesson lecturer in history. Icelanders will now be invited to watch a battle as if stuck in the 1990s or watching ahead with Jóhannesson and the younger candidates. 

“Davíð” is a common name in Iceland but an Icelander hearing the name “Davíð” without further qualifications will know who is being referred to. Davíð Oddsson has been a fixture in Icelandic politics since elected mayor in 1982. Born in 1948 he is five years younger than president Ólafur Ragnar Grímsson. As a leader of the conservative Independence party (1991-2005) Oddsson often fought ferociously against Grímsson the leftie in the 1980s and the 1990s until Grímsson moved to Bessastaðir, the presidential residence. – After all, the most famous description of Oddsson, that the at the time prime minister had a “shitty nature” (“skítlegt eðli” in Icelandic sounds much ruder), came from Grímsson.

Formally Grímsson left the political scene in 1996 but others claim the old politician has never left politics, just adapted his tactics to his role. All of this seemed history – until today when Oddsson announced he would run against Grímsson. Icelanders now feel they are being dragged into the political battles of earlier decades. Both Grímsson and Oddsson feel they “won” the Icesave dispute, a clear example of dragging the past into the present. The question is if Icelanders want to look back or onwards.

Oddsson brings the distant past and the banking collapse into the present

As a prime minister from 1991 to 2004 Oddsson became the longest serving PM in Iceland. After a year as a foreign minister he moved to the Central Bank of Iceland, serving as a governor until early 2009 when he was hounded out by public protest and the left government. He was then offered the post of editor of  Morgunblaðið, the newspaper once Icelandic strongest private media.

Among his supporters Oddsson is seen as a strong and fearless politician. Albeit, it’s likely that his supporters are losing numbers, not because they change their mind but because they are mostly old and are slowly leaving this world. These people see him as the best PM ever, later ignominiously treated in 2009 by “the loony left” and activists.

Younger people remember his time as a governor where the CBI lost around ISK270bn on repro deals with the banks in the year before the 2008 banking collapse: the CBI knew what was going on but didn’t want to stop the merry-go-round. Again, others will claim nothing else could be done. However, the loss was large and real.

On the the day the banking collapse became a reality, 6 October 2008, Oddsson decided to lend €500m to Kaupthing – this lending is one of the very few unexplained and inexplicable actions related to the banking collapse (see my blog on this loan).

Oddsson: writing for the fishing industry and his own irritation

Morgunblaðið is owned by two large and powerful fishing companies and has been seen as an untiring campaigner for the fishing industry’s interests, against the European Union, against taxing the fishing industry etc.

As a PM Oddsson did lead Iceland into the European internal market by the agreement on the European Economic Area in 1993 but has grown ever more EU-sceptic. As editor, he has in addition cultivated his own unrelenting irritation against Rúv, the public broadcaster. Oddsson’s pen is sharp and merciless, in the latter years often more fierce than funny.

By deciding to run Oddsson brings all of his past into the present, both the deeds he’s still admired for by some conservative voters and the more questionable time, i.e. as a governor. Facebook has been ablaze in Iceland today, inter alia bringing up that the Time Magazine named Oddsson as one of 25 leaders from the world of banking and politics responsible for the banking crisis in 2008: he was earlier an avid campaigner for regulation-light and oversaw the privatisation of the banks, in  addition to the repo lending.

Icelandic presidents and changing public taste

The first Icelandic president, Sveinn Björnsson, was a politician voted by parliament as the Icelandic republic was founded in 1944. When Björnsson died in 1952 the second president Ásgeir Ásgeirsson, a social democrat was duly elected, remaining in office until he retired in 1968.

Before Ólafur Ragnar Grímsson’s victory in 1996, Icelanders had twice rejected politicians in favour of non-politicians. In 1968 the director of the Icelandic National Museum Kristján Eldjárn was voted president, beating Gunnar Thoroddsen, a conservative politician and Ásgeirsson’s son-in-law; in 1980 Vigdís Finnbogadóttir lecturer in French became the first Icelandic female president, also writing international history as the first woman democratically elected as president. The two had reached national fame through television, Eldjárn with a TV program on Icelandic archeology, Finnbogadóttir by teaching French on TV.

In 1996, times had changed and a politician won over several non-politicians. Grímsson, a divisive politician who started his political career in the Progressive party before moving farther left, to the People’s Alliance, won, much aided by his very charming Icelandic wife Guðrún Katrín Þorbergsdóttir. She died in 1998, after which he met the British-Israeli Dorrit Moussaieff, born into a wealthy family owning a jewellery business where she has later worked. They got married in 2003.

Surreal choices

It was already surreal to see a sitting president running for the sixth time. To see one of his political rivals from Grímsson’s political past conjures up a situation, which is beyond weird. Oddsson’s candidacy is not wholly surprising: it was frequently mentioned as a possibility in 2012 and this time there have been persistent rumours.

A four(!)-page article in Morgunblaðið, by an old friend of Oddsson on Oddsson, richly adorned with photos of the glorious leader with other glorious leaders, appeared last week, out of the blue; it now makes greater sense though the tone is no less comic. Think of the Guardian running four pages on Alan Rusbridger or the Financial Times on Lionel Barber…

The day Grímsson repeated his 2012 act by changing his mind and announcing he would run, contrary to his declaration in his New Year address, Morgunblaðið published a particularly vitriolic editorial about the man who couldn’t leave power. It was widely thought that part of the anger stemmed from the fact that Oddsson had been planning to run but hadn’t planned on challenging Grímsson.

Grímsson’s decision was however not as well received as in 2012. Lately, his wife’s links to offshore companies have done little to enthuse voters. Oddsson might think this paves his road to Bessastaðir. In addition, some are guessing he counts on Grímsson withdrawing – all of this are pure guesses.

As Oddsson rightly said this morning, politicians can no longer count on the party allegiance of voters; Icelandic voters have been extremely fickle lately. It was however remarkable how tepid the answer was from Bjarni Benediktsson leader of the Independence party when asked if he would support Oddsson: “I think the answer to this question is partly, no actually let us say wholly self-evident. But I believe Davíð will appeal to people far beyond the party.”

Oddsson has time and again scolded, reprimanded and denigrated Benediktsson in Morgunblaðið. From this point of view Benediktsson’s tone is understandable. Oddsson hasn’t made life easy for the party leadership; there will be many there who will feel no reason to show any allegiance at all. There will be those who see Oddsson as an earlier leader who time and again has made life very difficult for the party leadership by his comments; he has repeatedly be seen as a very vocal backseat driver, unhappy about his seat, certain of knowing what’s best for the party as the leader in more glorious times of much greater support.

Who could beat Grímsson and Oddsson?

Not an easy task because of the electoral system: the candidate getting the greatest number of votes will be president; there is no second round in case no one gets a clear majority. There are now around ten candidates running, some have already withdrawn, unclear what happens with these two political titans… or dinosaurs, depending on the point of view.

Andri Snær Magnason is a well-known writer and environmental campaigner in Iceland, born in 1973. There was some buzz around his candidacy but he only seems to appeal to a small group of “latte-licking” 101 inhabitants, i.e. hipster in the centre of Reykjavík.

Born in 1968, Guðni Th. Jóhannesson has been a vocal public intellectual in the Icelandic political debate, not taking political sides but a voice of reason and historical oversight. With a Canadian wife and four young children and a daughter from a previous relationship he represents something entirely different from the two old politicians.

Both Grímsson and Oddsson argue for their candidacy by claiming that Iceland is going through perilous times and need an experienced captain. Johannesson doesn’t recognise the peril, any more than most Icelanders seem to do, and he propagates optimism and a firm belief in the future of Iceland.

Grímsson and Oddsson might to a certain extent appeal to the same voters leaving most likely Jóhannesson as a choice for those who want to tear themselves from former political debates and of problems. But because of the peculiarity of the electoral system, it’s not entirely easy to predict the outcome.

*Updated: after flip-flopping on earlier decision president Ólafur Ragnar Grímsson has now withdrawn his candidacy. Davíð Oddsson, rumoured to have known or had an inkling that Grímsson would leave the race, is now the only candidate of the old political guard in Iceland. The question is if Icelanders still want the old… or prefer new faces. It seems that Guðni Johannesson has a strong following. Remains to be seen, the elections are 25 June.

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After my talk on “Iceland: the offshorisation of an economy” at the Tax Justice Network Workshop on “Corruption and the Role of Tax Havens” I was invited to blog on the Icelandic offshore lessons. Thanks a million to TJN for the invite, the blog is here.

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When things get big in Iceland they get big, proportionally at least. There are 540 inhabitants in Vík, Mýrdalur – and 1300 spaces for short-time lets. Could that be a world record? Or only comparable to Venice, Cinque Terre etc…

Record or not, the Vík Council has now announced it will now stop granting licence for short-time lets. There is enough on offer in the village. Those who already hold licenses can extend them until 2022 so this isn’t a clamp-down but a mere halt on further expansion.

Apart from spaces offered by the locals there are examples that houses have been bought or built solely for the purpose of short-time lets for tourists. The Council points out that these houses, often empty, add nothing to the village life except a bit of cash, not necessarily profiting the local community if the owners live elsewhere.

Earlier, the Icelandic Supreme Court ruled in a case where flat-owners in one of the luxurious high-rises along Skúlagata, close to the music house Harpan, sought a confirmation that flat-owners need to agree to short-time lets; one owner can’t ignore the neighbours. The Court ruled in favour of the flat-owners. This does change the environment for short-time letters.

In the meantime, there is no lack of Airbnb and other letting suitable for tourists. However, this summer and the whole year will see an unprecedented number of tourists in Iceland. Bar eruptions etc. this year it’s likely there will be more than the 1.5m who came last year. If you are heading to Iceland, make sure you have your accommodation secured – there might be plenty of flights available, never so much on offer, but accommodation might at times be scarce.

*May 14, the local council in Kirkjubæjarklaustur decided to restrict bed & breakfast/home accommodation: no more than ten places will get permission and only if certain criteria met. The council motivates its decision by pointing out that lack of housing, i.a. because of lack of land to build on, prevents development at Kirkjubæjarklaustur.

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