Sigrún Davíðsdóttir's Icelog

Extending the maturity of the two Landsbanki bonds, held by LBI, is widely seen as one of the prerequisites for lifting the capital controls in Iceland. An agreement on extension was reached in summer. In order to ensure LBI would pass payments on to creditors the agreement is dependent on exemption from the capital controls. The deadline, originally August 8, expired October 1. The agreement, which seemed a step towards lifting the controls, is now one foot forward but hovering.

“The attitude in Iceland is that an agreement is never final but can always be renegotiated,” was one comment I heard now that the Central Bank of Iceland is keeping Landsbankinn and the LBI, the estate of the old failed Landsbanki, in a limbo.

The extended deadline has passed – but the LBI has published a statement announcing the re-extending of the deadline: “According to revised terms if the transaction is not completed by October 24, the amendment agreement between LB and LBI will terminate.”

The question is what can be read out of this latest development regarding the advancement of a plan to lift the capital controls, the view within the government and the role the CBI is playing.

The CBI can play politics … or not

The procedure regarding exemptions from capital controls is that if the CBI approves an exemption the minister of finance has to confirm it, which means the process is political. This gives the CBI two options in its standpoint on exemption: it can make its own evaluation – does the exemption threaten financial stability in Iceland or not – or – it can play politics and make assessment according to how the political winds are blowing: if it thinks the minister will agree to it or not. (Once the decision has been taken it is however not necessarily clear what option it took.)

October 1 the CBI published two letters (only in Icelandic) to Landsbankinn regarding the agreement: a letter from July 14 and a letter sent October 1 to Landsbankinn.

The July letter mentions that the CBI already has in total three exemption requests from the LBI to pay out funds, kept in Iceland and abroad, to priority creditors (who have been fully paid in both Glitnir and Kaupthing). In addition, LBI has requested, in connection to the Landsbankinn bonds agreement, that any payments due to creditors from the bonds be kept outside the capital controls, meaning the LBI could pay creditors directly thus avoiding the exemption process (a clever arrangement, which I had not heard of earlier).

The CBI acknowledges in the July letter that the new agreement makes it easier for Landsbankinn to seek funding on international markets, which alleviates the Icelandic balance of payment (BoP) problem linked to the bonds repayment.

In spite of the (obviously) positive and desired effect of the agreement the CBI states that “within the timeframe given” it cannot agree to the request of keeping bond payments to LBI outside of the controls for two reasons:

“For the first the bank’s decision needs to be based on a thorough analysis of the effect of the agreement on BoP and on those privy to the agreement. The agreement needs to be compared to the present status. It is also the bank’s duty to examine if any changes in its fulfilment or other options could be both realistic and better for any single party or all those privy to the case. Here it is not being stated that this might be the case. This analysis just takes longer than the time given, in particular considering the time of the year.

Secondly, it needs to be taken into consideration that the government’s policy on lifting the capital controls is being re-evaluated, especially what role of the resolution of the estates of the failed banks will play in that process. This work is though going forward. Last April an advisory group on lifting of the controls gave an opinion and recently foreign advisers were hired who will be advising the government on forming this policy. It is however unavoidable to examine how the above request harmonises with that policy. This cannot be stated at this point.

Considering the present plans a final answer can be expected no later than the end of the year. It should be emphasised that earlier requests for partial payouts to creditors are still being considered. It should be reiterated that all exemptions mentioned in this letter need by law to be confirmed by the minister of finance in addition to the approval of the CBI.”

The new letter refers to the July letter, saying that an answer could not be provided before August 8 but would be forthcoming no later than by the end of the year. The CBI sticks to opinions expressed in the July letter.

“Since the letter was sent the work on the issues mentioned in the (July) letter has progressed well. Yet, it has not been possible to deal with the matter before October 1 as had been requested in a letter of August 8 from the LBI. The CBI reckons however that it is highly likely that a answer to the LBI request can be provided in the next few weeks.”

An agreement with two godmothers?

It is easy to gauge the atmosphere at the LBI and Landsbankinn. Knowing Iceland and its government they are hardly gobsmacked but they can hardly be pleased. They are now left to grapple with the dilemma if there is an agreement in the making or nothing at all.

As to why the two parties thought they had an agreement there are again, theoretically at least, only two possibilities: the Landsbankinn management thought it had the acceptance of the CBI and the Ministry of finance to make this agreement with the LBI (and then it can hardly avoid feeling betrayed) – or it did not have such an acceptance and then the question is why the management thought it would get the agreement accepted.

As far as I know civil servants from both the CBI and the Ministry of finance followed the negotiations. After all the state owns 97.9% of Landsbanki and negotiating without any attention to the wishes of the owner would hardly have been prudent.

Considering the fact that the CBI has repeatedly expressed the view that extending the maturity of the Landsbankinn bonds was a necessary (first) step towards lifting the capital controls and the authorities had an eye on the negotiations this whole aftermath looks somewhat peculiar.

Priority creditors have already been paid out in Glitnir and Kaupthing; thus, allowing bond payments to be paid out to creditors in the LBI hardly sets precedence. By extending maturity from 2018 to 2026 payments to general creditors will not be forthcoming for the next many years.

The LBI double trouble and the Landsbankinn demise in sight

The creditors in LBI now have a double trouble to deal with: the fact that the CBI, for no clear reason at all has stopped payments to creditors although the waiting payments, fx cash, threaten neither Icelandic BoP nor financial stability nor do they constitute a precedence for Glitnir and Kaupthing. In addition, the LBI is set to get nothing on the bonds next year as Landsbankinn cannot pay.

Landsbankinn’s problem is that instead of being able to use the agreement to refinance in international markets it is now staring into the abyss of a possible default. Will it be forced to do a fire sale of foreign assets?

According to the government’s Budget for next year, the plan was to sell 15% of the state’s share in Landsbankinn and another 15% in 2016, for a total of ISK70bn. In addition a sale would bring a saving on interest payments of ISK12bn the next three years. With no agreement the Ministry of finance can start re-calculating the Budget.

Lifting controls is a political problem

Even in Iceland some people claim that Iceland is like a company in bankruptcy proceedings: the controls are like a Chapter 11 protection. The uncertainty is costly and can be measured in Iceland’s low credit rating meaning that the cost of financing is high, not only for the state but also for companies.

At a BICC meeting in London recently Bjarni Benediktsson minister of finance repeated three times in his speech that decisive steps towards lifting the controls would be taken this year. Prime minister Sigmundur Davíð Gunnlaugsson mentioned no date in his speech in New York that same week but gone was his belligerence and the world “vulture fund” was not heard from his mouth.

What the government will tell the IMF at the Fund’s annual meeting now in early October remains to be seen. But it will take some talent to make it look as if things are moving steadily forward because at every hurdle – be it appointing a new CBI governor or taking a stand on an issue like the Landsbankinn bonds agreement – the government seems to dither.

As I have pointed out earlier, lifting the capital controls can no longer be seen as a problem of purely economical nature: with growth and growing fx reserves there is the capacity to lift the controls if cleverly negotiated. It is however a political problem: the question is if the government is strong enough to pull this giant salmon ashore; so far, it does not seem to be pulling in the same direction.

*I have earlier explained the intricacies and details around the Landsbanki bonds and the agreement. – The quotes from the CBI letter above are my translation (and may differ from a legally formal translation). – The text above was updated Oct. 2 to include the statement published by the LBI on extending the deadline.

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