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OSP in action related to Glitnir (updated)

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Today, several persons have been brought in for questioning with the Office of the Special Prosecutor. The investigation centres on Glitnir and FL Group, both of which were under control of Jon Asgeir Johannesson. The CEO of FL Group was Hannes Smarason, who left FL Group late 2007, when the company had run out of steam and money.

Apparently, some were employees of Glitnir, some said to be now working for Islandsbanki, the going concern of Glitnir’s domestic operations. DV has named two present employees of Islandsbanki, Johannes Baldursson and Elmar Svavarsson.

According to Ruv, Larus Welding, who was brought in as a CEO of Glitnir, when Johannesson and his associates took Glitnir over, has been sent to a week’s custody. In an email, published in the SIC report, Welding complains that Johannesson treats him like a branch manager, not like the CEO of a bank. Soon after the collapse of the banks, Welding moved to London.

As earlier media coverage, and the SIC report shows there was a wealth of intriguing affairs going on in Glitnir related to FL- and Baugur-related companies. The present investigation centers on ten cases, involving Glitnir’s prop trading and other business related to shares in Glitnir and in the aforementioned companies.

This is the first time that people related to Glitnir have been brought in for questioning. With the Glitnir case, in addition to earlier investigations related to Landsbanki and Kaupthing all the three major banks are now being investigated. In all cases, fraudulent activity involving billions of krona is being investigated, showing the outline of something far bigger and deeper than just failed attempts to save failing banks.

Many Icelanders feel the OSP is taking a long time to investigate alleged fraud related to the three banks that collapsed in October 2008. However, it’s well known that fraud investigations tend to be time-consuming. In terms of the economy, Iceland is doing well but the feeling is that as long as the fraud investigations are ongoing the events of October 2008 and the boom years are still an open book to the Icelandic mind.

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Written by Sigrún Davídsdóttir

November 30th, 2011 at 5:52 pm

Posted in Iceland

Some Icelandic views

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Views, in the literal sense. Here is a website with some webcams in Iceland. You can see people in Reykjavik walking over Austurvollur (the little square in front of Althingi), walking along Tjornin, the pond in the centre, or swimming in the Blue Lagoon (though that would mostly be foreigners; I wonder if they realise they can wave to mom and dad back home).

For those needing their fix of Icelandic nature there are webcams by Eyjafjallajokull (no visibility these minutes), Katla and Hekla (the mountains are hidden in clouds right now). There is a view of Thingvellir (like a Christmas card), Geysir (webcam not working for the moment), Gullfoss (a melé of something that could be clouds or water) and Jokulsarlon (very soothing to watch the flowing water in a landscape of ice and snow).

An absolutely brilliant way to nourish your soul on beauty and calm and let nature remind you that there is something larger and mightier than eurozone worries, currency regulations, creditors and politicians who lack direction.

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Written by Sigrún Davídsdóttir

November 28th, 2011 at 12:37 pm

Posted in Iceland

A ministerial ‘no’ to Huang Nubo

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Minister of Interior Ogmundur Jonasson has refused the Chinese enrepreneur Huang Nubo the right to buy the big plot of land, Grimstadir a Fjollum, that he had his eyes on. As reported on Icelog earlier, the sale was a hot topic in Iceland.

Jonasson, from the Left Green party, seems to have angered his coalition partner, the social democrats. Minister of Economy and Trade Arni Pall Arnason said this weekend that this was a test for the coalition. Other leading social democrats have also expressed anger and irritation. Jonasson has already expressed his doubts. The answer hardly comes as a great surprise.

Nubo’s Icelandic plans have attracted great attention in the international media, ia the FT which yesterday had the latest development in the Nubo case on its front page, as has been the case with the paper’s earlier reporting. This interest indicates the focus not only on Iceland but on Chinese ventures abroad.

In my Ruv reporting I have pointed out that Nubo, though portrayed as one of China’s dollar billionaires, has no business ventures outside of China that indicate his ability to develop the huge tourism plans he seemed to have in mind for Grimstadir. His main foreign ventures are in the US where he ia owns a plot of land, plans to build a shopping mall, but hasn’t had the money, because of the crisis, to commence. He is also developing tourist fascilities at a ranch in Nashville. Due to opacity in the Chinese business environment, Nubo’s ventures are yet another example of how difficult it is to ascertain the real standing of Chinese companies.

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Written by Sigrún Davídsdóttir

November 27th, 2011 at 1:03 pm

Posted in Iceland

An ESA investigation into loans to VBS, Saga Capital and Askar Capital

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The last log, ia on the state loans to VBS and Saga Capital was timely. The EFTA Surveillance Authority has just announced that it will open an inquiry into these loans, as well as into loans to Askar Capital.

Here is what ESA announces:

The EFTA Surveillance Authority decided today to open a formal state aid investigation into loans granted to the investment banks Saga, VBS and Askar Capital.

The loans, of a total amount of 52 billion ISK (330 million EUR), were granted on favourable terms by the Icelandic Treasury in March 2009. The Authority received a complaint concerning the loans from an interested party in July 2010.

The purpose of the loans was to reschedule short-term collateral and securities loans from the Central Bank of Iceland to long-term loans. This was thought necessary because the Central Bank loans were in default.

The Central Bank collateral loans were secured amongst others with bonds issued by the three commercial banks, Glitnir, Kaupthing and Landsbanki Islands. Following the collapse of those banks in October 2008, the value of the underlying security diminished severely. The investment banks were unable to provide other security or settle the debt.

The Icelandic authorities claim that through the loan conversion, they have endeavoured to protect the interest of the state and acted in line with the conduct of a private creditor. The Authority, however, has doubts whether the terms agreed by the Treasury are consistent with commercial conditions. If  not, the loan conversion could be regarded as unlawful state aid within the meaning of the EEA rules.

VBS Investment Bank and Askar Capital Investment Bank are already in liquidation and the operating license of Saga Investment Bank has recently been revoked. The Authority nevertheless considers it appropriate to finalise its assessment of whether or not the terms of the loans are compatible with the state aid provisions of the EEA Agreement.

Should the Authority conclude that the loan conversions are to be regarded as unlawful state aid, it would be obliged to require the national authorities to recover the aid from the recipients. If the recipient of such aid is in liquidation, claims shall, if possible, be filed against the estate for recovery of incompatible aid.

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Written by Sigrún Davídsdóttir

November 23rd, 2011 at 12:41 pm

Posted in Iceland

Iceland: successful recovery and the non-bail-out banking myth

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Now that so many European countries are struggling, how is Iceland doing? Iceland is doing rather well, thank you. A growth of around 2% is forecasted for this year and the unemployment, though at a horrible high, from the Icelandic point of view, 8% isn’t too bad compared to the neighbouring countries. When reading about Iceland’s good standing, compared to many other countries, the usual refrain is that Iceland didn’t bail out its banks. As shown below, that’s only partially true. Iceland’s economy is indeed weighed down by the cost of its banking crisis.

Iceland’s recovery was the topic of an IMF conference in Reykjavik October 27, most appropriately at Harpa, the new concert house (and since I happened to be in Iceland I was there). Harpa was half-built when the crisis struck but instead of letting it stand as a sad reminder of the insane optimism, it’s now finished, much to the delight of the culturally gluttonous Icelanders.

Martin Wolf from the FT was there and has just published an excellent overview of some of the topics. In addition, he uses the opportunity to show-case Iceland as a good example of a country profiting from not being in the euro. One of the reasons why so many economists seem to be interested in Iceland is that they find there facts and figures to underpin their ideas. Hence, Iceland is quickly becoming all things to many economists.

At Harpa, leading luminaries from the dismal science, such as Willem Buiter and Paul Krugman, pondered on the state of Iceland. But from my point of view, it was most interesting to hear Gylfi Arnbjornsson president of the Confederation of Trade Unions and professor of economy Gylfi Zoega speak, as well as Stefán Olafsson, professor of sociology, both from the University of Iceland. In addition, professor Fridrik Mar Baldursson, Reykjavik University, gave an excellent overview of the Icelandic economy. All this is accessible here.

Arnbjornsson was adamant that with the krona Iceland couldn’t prosper. Export had deteriorated, in spite of sharp depreciation. Such a small open economy wasn’t sustainable with its own currency.

Stefan Olafsson underlined that in spite of cuts, the worst off in society had not lost out the most as seems to be happening elsewhere. The gap between the worst off and those at the top has not widened. This is perhaps the success saga, less that Iceland didn’t save its banks. More on that below.

Gylfi Zoega underlined that it was a fairy tale that Icelanders are different. He characterised Icelandic banking rather well: “others talk about related party lending; we call it banking.”

Jon Danielsson, LSE, argued vehemently against the currency control and has just published an article on the matter, together with Ragnar Arnason, University of Iceland.

But let’s look at this popular belief, running through the IMF conference and most things written on Iceland, that Iceland didn’t bail out its banks. Correct, Iceland didn’t bail out its three large banks that all collapsed in October 2008. The Government tried to safe Glitnir end of September but failed miserably. This attempt made it abundantly clear, that it was, of course, beyond the Central Bank of Iceland to be a lender of last resort for these three, compared to the Icelandic economy, gargantuan institutions. The Government was unable to do anything but watch in horror.

Because these banks failed and weren’t saved, Iceland has become the heroic example of a country that, contrary to ia Ireland, didn’t bail out its banks. So much drivel has been written about this as Grapevine, an Icelandic magazine published in English, pointed out earlier.  In this heroic story that’s going around in the world, Iceland didn’t let the debt of private banks migrate from the private to the public sector. I wish this was true but it isn’t. Not quite. Quite some myth-making here.

In the Emergency Act, passed on Oct 6, 2008, there was a provision for helping the Icelandic building societies (similar to the German ‘Sparkassen’). This was later done. Also, the Government helped two banks, VBS and Saga Capital.

With documents from Landsbanki, I have already shown that many years before the crash, Landsbanki kept VBS afloat. Just before Landsbanki collapsed there was the last helping. This kept VBS alive until the following spring when the Government propped it up with ISK26bn (€16.2m), which prolonged its life until early 2010. Together with support to Saga Capital, the Icelandic Government helped these two banks with almost 3% of GDP 2009.

The building-societies system has collapsed, partly because it was taken over – as everything else with a cash flow – by the main banking protagonists, the banks and its main shareholders and clients. The core functions in this system, such as lending, was very unprofitable during the years before the collapse but this fact was masked by prop trading and financial engineering.

In the Icelandic IMF programme, ISK25bn (€15.5m) was set aside to fix the building societies. Out of ten remaining societies, five have been saved by the state. If the cost of saving these banks and a few others are all added it, the amount is over ISK70bn (€43.6m). By adding the cost of saving Sjova, an insurance company, and ILS, the state mortgage company, this bail-out sum rises to ISK118bn (€73.6m) – and that amounts to 7,7% of GDP, not a trivial sum.

But this isn’t the whole story of ‘not bailing out the banks.’ The two main problems from this system of small financial institutions are indeed not small. Byr, horribly abused by Glitnir Bank and its main shareholder Baugur and FL Group, was bought by Islandsbanki (the resurrected Glitnir, now owned by its creditors). Sparisjodur Keflavikur, a building society from Keflavik (yes, where the international airport is) has a huge gaping hole, a string of truly shabby loan stories and was taken over by Landsbanki, owned by the state (the Icesave bank that no creditors want to touch).

These two sales/mergers happened last year but the sales aren’t yet finalised, probably because the state then has to cough up a lot to make these institutions palatable to the new owners. Consequently, these two banks are now a walking danger, zombie banks. The rumour is that just for the Keflavik society, ISK30bn (€18.7) will be needed.

The worst thing is that there doesn’t seem to be any policy in all this bail-out activity. Saving VBS was clear and pure madness and amounted to throwing ISK26bn into the North Atlantic. There might very well be some good reasons to save some of the building societies but there just doesn’t seem to be any clear policy. The Government hasn’t made it clear if all the remaining 10 societies, out of which the state now is a stakeholder in 5, should be run as now, should be merged into one or into a few larger ones.

All in all, Iceland has some ISK200bn (€1.2bn)* at risk in the banking system, ca 14% of GDP. So here is the correct version of bank bail-outs in Iceland: the Icelandic Government at the time couldn’t save the three largest banks – but a lot of the undergrowth in the financial system has been saved. And it’s not clear why or what the policy is.

*The Icelandic number is correct but the conversion into euros was wrong; it should be €1.2bn, as is now stated, not €124.5m as was previously stated.

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Written by Sigrún Davídsdóttir

November 22nd, 2011 at 6:04 pm

Posted in Iceland

‘Samhengi hlutanna’ – the literary side and sense of the Icelandic bank crash

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Samhengi hlutanna’ (the English title is, so far, Not a Single Word) is my latest novel, published last week. It’s best described as a docu-drama and a financial thriller. It takes place from mid December 2009 till May 2010 in London and Iceland.

Hulda is an Icelandic journalist living in London. She has reported on the Icelandic boom-and-bust and the collapse of the Icelandic banks. When she dies in a bicycle accident her partner, the lawyer-turned-artist Arnar, struggles to hold his life together. A few months later Raggi, an Icelandic journalist and old friend of Hulda, turns up on Arnar’s doorstep. Raggi has decided that with Arnar’s help he is going to finish the book Hulda was working on before she died.

Arnar tries to dissuade him but Raggi, a stubborn Icelander and sober alcoholic, drags him into his scheme. Rambling, they start looking up people that Hulda had talked to, in order to pick up where she left off. One of Hulda’s contacts puts them in touch with Mara, a Hong Kong-based Finnish private investigator. Mara guides them through a maze of intrigues and whole galaxies of off shore companies but she also seems to have her own agenda.

They meet one person after the other who all shed some light on what happened but the bits and pieces don’t add up and no coherent picture emerges. Until, as Mara had predicted, the confusion begins to take shape though Arnar and Raggi find it much more difficult than Mara, specialised in financial fraud, to figure out what really took place.

The Icelandic title can be translated as ‘the context of things’ and that’s what Arnar discovers: a whole new context to what happened in Iceland and eventually to his own family. There is an Icelander who got rich in Russia, bought a bank in Iceland and is now investing in Africa. Another made his money in Latvia.

In the Icelandic context there are company groups stretching from Iceland to Germany, Luxembourg, London, Cyprus and other secrecy jurisdictions where money flows into unnamed bank accounts. Nothing makes much business sense but it all makes sense if the context is money laundering and bribes. And where did the money sloshing around in the collapsed Icelandic banks come from? Not just from Iceland, that’s for sure.

Samhengi hlutanna’ has a Facebook page (with comments and links to interviews, reviews etc) – and can be bought in most Icelandic book shops, so far only in Icelandic, and here on-line.

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Written by Sigrún Davídsdóttir

November 9th, 2011 at 9:46 pm

Posted in Iceland

“Greek-save” – an Icelandic deja vu

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From the Icelandic point of view, the decision of president George Papandreou to call a referendum on the EU bailout-deal is a deja vu. The situation is similar: a political leader who has nothing to lose.

Papandreou’s situation is dire. He is leading austerity measures that, understandably, are profoundly unpopular among his countrymen. He seems to have concluded that his best option in a bad situation is a referendum. On what exactly isn’t clear, not easy to formulate the appropriate question. Nor is it clear when the referendum will be held but it will hardly be until January. The EU Greek deal, seen as essential to stabilise and calm the euro-situation is now up in the air.

The situation of a leader in dire strait is well known in Iceland. The president of Iceland doesn’t have the power that his Greek counterpart has but Olafur Ragnar Grimsson was widely unpopular after the collapse of the Icelandic banks since he had been a keen advocate of the Icelandic banks. His decision to call a referendum on Icesave, not once but twice, was widely interpreted as his attempt to regain popularity.

Needless to say, the Euro bailout is in jeopardy. Or, as comments on Citywire today go: ‘What’s wrong with democracy?’ asks one. The prompt answer is: ‘You are just about to find out.’

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Written by Sigrún Davídsdóttir

November 1st, 2011 at 2:40 pm

Posted in Iceland

The Icelandic High Court: deposits are priority claims

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The Icelandic High Court has just ruled on whether deposits are priority claims. The ruling implies that the Icelandic Emergency Act, passed on Oct. 6 2008, do not go against the constitution. A ruling that some have called ‘the ruling of the century.’

The ruling comes after several cases where creditors sought to challenge the emergency measures, passed on Oct. 6 2008, which severely diminished the recovery that creditors to to Icelandic banks can expect. These cases had already been through the Reykjavik County Court. The Icelandic High Court has now ruled, as did the County Court, confirming the legality of the emergency laws.

This is the last legal hindrance to pay-outs to creditors from the Landsbanki estate. It is expected that pay-outs can soon start, which means that the Icesave money to the British and the Dutch authorities can now be paid out.

This, however, will not solve the Icesave dispute, since the two countries claim interests since they took loans to cover the payments to their respective Icesave depositors. The UK authorities paid depositors in full, the Dutch up to €100.000. The Icesave dispute is about only the European minimum, €20.000, meaning that the two countries only stand to recover the first €20.000 on each Icesave account.

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Written by Sigrún Davídsdóttir

October 28th, 2011 at 2:23 pm

Posted in Iceland

More on Dexia and casino banking

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Here is an interesting article on Dexia from the NY Times. It doesn’t mention the dubious loans but questions why all trading partners of failing banks, like Dexia, should get everything paid out in full. Why are the derivatives paid out to trading partners?

Walker F. Todd, a research fellow at the American Institute for Economic Research and a former official at the Federal Reserve Bank of Cleveland, makes an interesting point when he says that governments are setting a troubling precedent by bailing out a company and pay its trading partners in full, as occurred with A.I.G. and as might occur with Dexia.

“In the short run, it would help if the authorities would say they refuse to provide publicly funded money for the payoffs of derivatives,” he said. “This is like using public funds to support your local casino. It is difficult to see how this is good for society in the long run.”

This is an important point to keep in mind these hours are the European Union is struggling to finalise plans for recapitalising European banks. Or, as Matt Taibbi puts it: ‘Wall Street isn’t winning. It’s cheating.’

When banks were being saved left right and centre in the autumn of 2008, it was heard all over the political spectrum that this was all emergency measures – and of course, banking shouldn’t be about privatising the profit and nationalising the losses. This isn’t heard any more, expect from Occupy Wall Street and other similar movements. Yet, this seems to be about to happen again.

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Written by Sigrún Davídsdóttir

October 25th, 2011 at 9:48 pm

Posted in Iceland

Dexia, the Icelandic banks, corruption and the Eurozone crisis

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The French-Belgian-Luxembourg bank Dexia lent its two largest shareholders to buy Dexia shares. This practice, as familiar to Icelanders as the Northern lights, was at the core of Icelandic banking. It enabled managers to control shares and to inflate the share price, as well as securing favourable connections and the left the banks fatally weakened when share prices fell. Why have banks been bailed out with no questions asked?

From 2006-2008 Dexia lent two of its largest shareholders €1.5bn to buy its own shares, with the shares as its collateral. In September 2008 the French, Belgian and Luxembourg Government bailed out Dexia with €6.4bn. At the time, lending against own shares was legal in Belgium. The two shareholders that borrowed from Dexia in these deals jointly owned 35% of Dexia’s shares and nominated two members to the board. How likely is it that this board would be truly independent in scrutinising the running of the company?

At the time, Dexia was running dangerously low on capital and used this creative method to inflate its own capital. This practice, widespread in the failed Icelandic banks, throws further light on how this can be used and the effect it has on the individual banks and the banking climate. This practice allows the managers to fool the market, fool other shareholders and, last but not least, fool the regulators.

Consequently, lending to buy own shares runs absolutely contrary to transparency and equal information to all players in the market. With this practice, the managers who carried and the shareholders who took part knew that the bank wasn’t as sound as it seemed to be whereas the regulators and other shareholders had an altogether different picture. Or, as one enlightened expert said, when Icelog explained this way Icelandic practice to him: ‘Ah, so they converted their loan book into capital.’ – Creative indeed.

In Iceland this practice of lending to buy its own shares, with the shares as a collateral, was widely practiced in all the three banks, Glitnir, Landsbanki and Kaupthing. Kaupthing used this method quite systematically. This lending practice is thoroughly documented in the SIC report.

Kaupthing’s systematic use is particularly indicative. It secured the managers a wide control over the bank since effectively the managers themselves chose the shareholders with whom they parked the shares. With this, they could fend off possible major changes in the shareholder group, ia a hostile overtake and cement the influence of the managers in all matters.

In the three Icelandic banks, the loans to buy shares in the banks were offered to favoured clients, not to just all and sundry. The loans were heavily weighted against the interest of general shareholders and in favour of these chosen clients. What they were offered was ‘risk free’ investment, ie no risk to the borrowers, all risk on the banks. In addition, this enabled the managers to offer these ‘risk free’ investments to people they wanted to be on good terms with. Some people would perhaps use the word ‘bribe’ in this context.

How badly these loans affected the banks became inordinately clear when the shares began to fall. The banks couldn’t make margin calls as they can with other collaterals. The banks couldn’t rake in their own shares, since they could neither hold them nor sell them. Selling them in big quantities would of course have caused further falls and ultimately there were no buyers. The SIC report points out that how these loans weakened the banks, creating what the report calls ‘weak capital.’

All these effects would apply to Dexia. It would be really interesting to know on what terms these two institutional clients were offered the loans. The bank claims the loans were just normal loans. Well, I wonder. The collaterals weren’t normal nor was it in any way normal for the bank to be lending to stimulate the sale of its own shares, thereby weakening its own capital. Why were these two shareholders offered this deal? And was the risk equally divided between borrower and lender? Obviously not since Dexia couldn’t do margin calls etc as was demonstrated in the Icelandic cases. Consequently, these loans can never be normal loans.

Dexia shareholders should be up in arms about this, as should the owners of the two companies that participated in this cosy deal with Dexia, not to mention the three governments that have now twice bailed out Dexia.

It’s interesting to note who Dexia’s two favoured shareholders were. Arco, borrowing €275m, invests for the Belgian trade unions. Holding Communal, borrowed €1.2bn, claims that the whole sum wasn’t used on shares, but it’s still fair to surmise that a large part of it was. Holding Communal belongs to Belgian municipalities.

And what’s now happening to Holding Communal? It’s being bailed out itself by Belgian regional governments by a state guarantee of €450m and a federal government contribution of up to €132.5m. In addition, Dexia will write off €101.5m of Communal Holding debt.

With the banking crisis now dragging on for three years and nothing really resolved it’s about time to consider that the bailed-out banks weren’t closely scrutinised by the governments who so freely have poured billions of tax-money into these banks. It’s quite understandable that this couldn’t be done when it was all happening in October 2008 – but the fact that it hasn’t happened since then is a gross negligence on behalf of those who are in charge, both regulators and financial services authorities.

At the core of the Eurozone crisis is reckless lending. And the reckless lending is part of reckless, possibly corrupt, banking that hasn’t been stopped although so many banks have been and are being saved by governments. These governments are trusted by their voters to make the best use of public money. In the case of Dexia and many other banks governments haven’t at all scrutinised what public money is bailing out. That is a serious failure of public duty.

*Earlier Icelogs on corruption and its effects on the Eurozone crisis can be found here and here.

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Written by Sigrún Davídsdóttir

October 23rd, 2011 at 5:34 pm

Posted in Iceland