Sigrún Davíðsdóttir's Icelog

The Ministry of finance has now introduced the third and last significant step towards lifting capital controls. After lifting controls on the estates of the failed banks last year and the disputed action earlier this year to solve, or box in, offshore króna holders, it’s now as promised since the elections in 2013 time to lift controls on Icelanders, both individuals and companies, just in time for the coming election on October 29. All but the very wealthiest Icelanders will now be outside controls. And Icelanders? They don’t pay much attention to this latest step.

Ordinary Icelanders have not much felt the capital controls in their daily lives since the capital controls only cover investment but now those wealthy enough to want to buy property abroad or invest in foreign companies etc. can do so. The main points are the following, according to the Ministry of finance press release:

• That outward foreign direct investment be unrestricted but subject to confirmation by the Central Bank of Iceland.
• That investment in financial instruments issued in foreign currency, other monetary claims in foreign currency, and prepayment and full payment (retirement) of foreign-denominated loans be permissible up to a given amount, upon satisfaction of specified conditions.
• That individuals be authorised to purchase one piece of real estate abroad per calendar year, irrespective of the purchase price and the reason for the purchase.
• That requirements that residents repatriate foreign currency be eased and that they be lifted entirely in connection with loans taken abroad by individuals for real estate or motor vehicle purchases abroad, or for investment abroad.
• That various special restrictions be eased or lifted entirely, including individuals’ authorisation to purchase foreign currency for travel.
• That the Central Bank of Iceland’s authorisations to gather information be expanded so that the Bank can promote price stability and financial stability more effectively.

As of 1 January 2017, the following are to take effect:

• The ceiling on investment in financial instruments issued in foreign currency, other monetary claims in foreign currency, and prepayment and full payment (retirement) of foreign-denominated loans will be raised.
• Transfers of deposit balances will be permissible for amounts below  a certain ceiling. The requirement for domestic custody of foreign securities investments will be revoked. This will enable residents and non-residents to transfer deposits and securities to and from Iceland and to trade in securities abroad within the limits specified in the bill.
• Individuals’ authorisation to purchase foreign currency in cash will be expanded significantly.

Capital controls lifted in a record boom

All of this is made easier since Iceland is enjoying a record boom with tourism flourishing and more foreign reserves compared to more or less any time in the country’s recent history. As I’ve mentioned earlier, Icelandic authorities don’t regard it as a problem that the largest offshore króna holders are preparing to test in court(s) the earlier decisions regarding the offshore króna, i.e. either a haircut in an auction or a lock-in with 0.5% interest rates, effectively negative in Icelandic context and no expiry date. Nor does the comparison with Argentina seem to cause worries in Iceland.

Easing out of the capital controls is obviously a hugely important step for Iceland. Yet, it has mostly gone unnoticed in the media. The reason is that people normally haven’t noticed the controls except in minor things like having to bring a flight ticket in order to buy travel currency. For those running companies it’s been a different story, the controls have both been annoying and harmful. Measuring losses due to capital controls isn’t easy but in 2014 The Icelandic Chamber of Commerce estimated it to be ISK80bn annually. As the CBI and others have frequently pointed out the longer controls remain in place the greater the harm.

The CBI has put in place safety measures re foreign inflows. Some claim this means that controls are still in place but that’s certainly not how I see it. By 2012 the CBI had already announced in a report, Prudential Rules Following Capital Controls, that as well as lifting capital controls the bank would also develop financial stability rules in order to temper foreign inflows if needed, much like other countries with have done such as Asian countries under similar circumstances.

Collapse measures out, political distrust in

Alors, after almost eight years with capital controls Iceland has now almost entirely graduated from that part of the banking collapse, certainly a significant step towards normality. The question is still if the second measure, i.e. re offshore króna holders, will come back  to haunt the country.

Though the emergency measures from 2008 have disappeared over the years politically the collapse still looms large in Icelandic politics. It’s not that the collapse itself is frequently discussed, not at all, but it shapes the hues and colours of the political debate. Quite specifically, the collapse has inter alia stoked distrust in politicians both in general and in certain politicians, due to their stories, still looms large. Icelanders are willing to throw their trust on new parties, next to be tested in the coming election.

One obviously prudent measure not introduced in Iceland is the separation of retail and investment banking. Three governments have ignored doing this, meaning that there is probably a silent political will to sell Landsbanki and Íslandsbanki without this safety measure. Hugely indicative of the influence of powerful private interests, quite worrying for the public interest.

Now, mostly free of restraining controls the Icelandic króna, the currency of the world’s smallest independent economy with own currency, will again be free (with the safety jacket of financial stability rules) to float in the large ocean of international finance. Trying times await booming Iceland, testing if the right lessons were learnt in 2008.

*Here is an earlier blog on the offshore króna problem and potential litigation; here is the latest one on offshore króna holders and their US political contacts.

Fitch has downgraded “Iceland’s Long-Term Local Currency (LTLC) IDR to ‘BBB+’ from ‘A-‘. The Outlook is Stable.” – The downgrade results not from Icelandic conditions but are due to changes Fitch has introduced to reflect regulatory changes, see here.

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The re-awoken charges against ex-ELSTAT head Andreas Georgiou and two of his colleagues are attracting attention in the international media. Last, the Financial Times takes the case up on its front page today. According to recent report on EurActiv it also seems that powers in Brussel are rightly getting increasingly worried about the procedures in Greece against Georgiou.

After a trip to Athens last year I wrote about the case in detail on Icelog. When the case resurfaced now in summer I pointed out that Greek authorities were punishing the messenger instead of those who really falsified Greek statistics for roughly a decade.

The reason I find the ELSTAT case so interesting and important is that in my view it’s a test case for the willingness of the Greek political class to face the misdeeds of the past, the corruption and all the things that hinder prosperity in Greece. In addition, a country without reliable statistics can’t really claim to be a modern and accountable country.

As it is now, Greece is heading towards a political trial where those who fixed the fraud are being hounded and punished, not the perpetrators. As long as the charges against Georgiou and his colleagues are upheld it is clear that the forces who want to keep Greece as it was – weakened by corruption and unhealthy politics – are still ruling. That isn’t only worrying for Greece but for Europe as a whole.

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Holders of Icelandic offshore króna holders seem to have gained some intriguing friends. A so-called think tank, Institute for Liberty with the slogan “Defending America’s Right To Be Free” has suddenly found the urge to set up a project called “Iceland Watch” with its own website, specifically to follow, it seems, how Icelandic authorities deal with offshore króna holders (inter alia linking to some of my blogs).

The focus of interest, according to the Institute, is the following:

“The Institute for Liberty has followed Iceland’s path to recovery since the 2008 collapse and has developed an increased concern over recent protectionist economic policies like the discriminatory practices against offshore króna investors.

“In creating Iceland Watch, we aim to keep the public apprised of any anti-democratic and anti-free trade policies put into place by the Althingi, Iceland’s parliament, which could threaten the property rights of offshore investors in Iceland’s króna.

“Holders of Iceland’s offshore krona include several American investors, which serve a variety of retail investors like retirees with 401k plans and institutional investors such as corporate and public retirement plans, foundations, and endowments.

“Despite investors’ willingness to support Iceland during its time of transition and several distinct offers to negotiate good faith solutions, the Icelandic government refuses to offer anything other than a clear take-it-or-leave-it scenario. The discrimination against foreign investors is disturbing and could affect millions of American holders of 401k and retirement accounts.

“When Iceland’s parliament, the Althingi, convenes its Summer Special Session on August 15, its actions will indicate whether the island nation will reintegrate itself into international free markets or further its isolation by instating new costly, misguided policies that chill investment and economic growth.”

The Institute’s website indicates it’s also interested in Puerto Rico’s debt, another place where American investment funds struggle to get repaid. More intriguingly, the Institute has also fought Obamacare and other typically far-right interests.

Indeed, the Institute is part of ad hoc networks of “think tanks,” non-profit organisations and ,,grassroots” organisations funded by far-right American billionaires such as David and Charles Koch and the hedge fund owner Paul Singer, who for years fought the Argentinian government, now a settled issue.

The Institute is mentioned in Jane Mayer’s insightful and well-documented analysis of the money powers on the right-wing of the Republican party, far more right-wing than the mainstream Grand Old Party is. Powers, that for a few decades have pumped money into setting up phoney “grassroots” organisations in support of the tobacco industry, against environmental issues and lately, Obamacare. Mayer’s book, Dark Money; The Hidden History of the Billionaires Behind the Rise of the Radical Right, came out in spring, an essential read to understand the undercurrents in US politics the last decades and the issues behind political funding, now open to anonymous donations, and the Citizens United ruling in 2010.

According to Mayer, Institute for Liberty got lucky with funding, yet another node in the efforts to fight Obamacare; in 2009 it received $1.5m:

Four hundred thousand dollars of these funds were channeled back to DCI Group (Washington PR company, instrumental according to Mayer in fighting Obamacare) for “consulting.” The previous year, the Institute for Liberty’s entire budget had been $52,000. Suddenly it was so awash with cash that the group’s president, Andrew Langer, told the The Washington Post,‘ “This year has been really serendipitous for us.” He said a donor, whom he declined to name, had earmarked the funds for a five-state advertising blitz targeting Obama’s health-care plan. (Mayer, p.192).

As I’ve pointed out earlier, there have been some articles popping up here and there – op-ed in WSJ, guest blog on FT Alphaville and the most recent on The Street, “Iceland Should Learn From Argentina’s Bad Example” by Aldo Abraham, an Argentinian academic.

No need to point out that of course all of the media rumbling is orchestrated, driven as it is by non-journalistic input; as seen from Mayer’s book the DCI Group has links to the Institute. Everyone fights their turf as best they can, the links to the knights of dark money is rather unsettling but “à chacun son goût.” It is intriguing to see the cause of Icelandic offshore króna holders as part of this picture: not necessarily surprising but yes, intriguing.

The Princeton economist Angus Deaton,  summarises masterly in his powerfully argued “The Great Escape” that the worrying trend in US politics is the tendency of interest groups to buy influence in Washington.

As spelled out in earlier blogs Argentina is potentially a worrying example for Iceland: it fought creditors and then settled after a decade of costly legal wrangling, beneficial for the lawyers involved and corrupt powers but deeply deeply harmful for Argentina. In Iceland, voices similar to those Argentinian politicians who fought the Argentinian debtors can be heard. Elections are coming up in October, politicians will hardly strife to be on the side of foreign creditors although successful plan last year re the estates of the failed banks, based on agreement with creditors, is a positive argument for co-operation with creditors.

Views vary: some claim Iceland’s cause is wholly different from Argentina. However, although Iceland has graduated from the earlier IMF program the Fund is still closely connected to Iceland; it’s difficult to imagine that the Fund’s views will be ignored. Happily, Iceland is blossoming and, according to the latest IMF report, has more than gained what it lost on the crisis, i.e. it’s difficult to argue for any emergency actions. In the end, Iceland will have to decide on the best course to follow so as to adhere to the rule of law and further prosperity.

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In Greece, authorities go after those who tried to sort out the mess of the Greek economy, not those who created it. That’s one conclusion to be drawn for charges, yet again, brought against Andreas Georgiou former head of ELSTAT, the Greek statistics bureau. It should be scary for Greeks and European institutions to see the relentless persecutions of a civil servant who did his job.

Since he was appointed head of ELSTAT in summer of 2010, well after it was clear that the Greek statistics were unreliable, Andreas Georgiou has had to fight forces in Greece who simply refuse to let go of him and his colleagues, a story carefully recounted on Icelog a year ago, with the precise data of statistics and the development of the ELSTAT saga. Time and again, the case against Georgiou has been dropped but always brought up again.

New criminal charges now against Georgiou do not only threaten him with a prison sentence but also threaten to awaken earlier dropped charges against him and two of his colleagues.

And those who for years falsified statistics? No, not one hair on their head has been ruffled, no investigations set up as to how it was possible that wrong and falsified statistics were reported to Greeks themselves and to international bodies such as Eurostat, the European statistical bureau, more or less from 2000 until 2009.

In Game Over, the Inside Story of the Greek Crisis, George Papaconstantinou minister of finance during the fateful time from the October 2009 election until June 2011 recounts thoroughly how the falsified statistics came up as soon as the PASOK government came to power.

Already during his first days in Office, Papaconstantinou heard from various institutions that inter alia the much watched budget deficit was well beyond what the Greek authorities had reported to Eurostat two days before the October 2009 election. “In short, they had lied,” Papaconstantinou concludes in his book. What ensued was a discovery of fraudulent statistics going back years.

No one could precisely show Papaconstantinou how the reported figure was found. One of his first acts in office was to call the head of the national statistics, professor Emmanouil Kontopyrakis to his office. The professor had no idea how the deficit figure was computed but to him it did seem like a “reasonable projection” – the minister asked him to resign.

As Papaconstantinou carefully recounts much of the mistrust of his European colleagues directed at Greece was based on the fact that there wasn’t even precise statistics and figures to work with to begin with.

When Andreas Georgiou took over as head of ELSTAT in August the much-debated deficit figures, both forecasted and the real figures, had been corrected, of course greatly increasing the deficit, under the auspice of Eurostat.

As carefully detailed in my ELSTAT saga last year, the numbers kept going upwards. The 2009 deficit first forecasted 3.7% in early October was by April 2010 estimated by Eurostat to be an actual deficit of 13.6% but Eurostat was still not sure it couldn’t rise; by late 2010 Georgiou and his team found it to be 15.4%.

In his book, Papaconstantinou writes that Georgiou proved to be the right man for the job, “helping to make Greek statistics credible. I was less lucky with of the other people appointed to the ELSTAT board.” In a police investigation one board member was later discovered to have hacked Georgiou’s email account. Another member accused Georgiou of inflating the deficit figure, causing the bailout, a “totally absurd” accusation according to Papaconstantinou.

The memorandum on the Greek rescue packet was finalised May 2 2010. Yet, Georgiou, who only took over in August 2010, is continuously persecuted for having influenced the bailout.

Considering how poisonous the unreliable data proved to be in the discussions up to the May 2010 memorandum it would have been greater reason to thank Georgiou and his team for delivering sound statistical data.

But that is not what happened and things didn’t stop there. The opposition lapped up the accusations. “Soon the justice system was involved. Prosecutors brought criminal charges against Georgiou for actions having caused billions of damage to Greece. We were suddenly in a parallel universe; rather than bringing to task those who had lied about the true size of the deficit, we were accused for having told the truth!”

No matter though Georgiou’s case has been thrown out several times the dark forces in Greek politics always find a way of bringing it back. And that has now happened again, the case is being brought back in a new guise (see here and here). It seems that Europe risks having a political prisoner within its boundaries, imprisoned for doing his job.

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