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Is exit tax on both ISK and FX in the Icelandic Christmas crackers this year?

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If minister of finance Bjarni Benediktsson sticks to his well-publicised intension of moving towards lifting the capital controls before the end of the year a plan must be imminent; some of the foreign advisers have been visiting. One strategy being examined is exit tax on both ISK and FX. Such an exit tax will not solve the offshore króna problem and might prolong the capital controls under a different name. A new judgement by the Icelandic Supreme Court may well have effected the certainty of those pleading for the “ISK-isation” of the failed banks’ estates. Central to the coming plan is whether the government is content with lifting the controls – or if it wants to gain funds for the state coffers as well. As before, the politics count more than the economics.

As soon as they were in office both prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson said they would work towards quickly lifting the capital controls. In office since early summer 2013 the two leaders do not have much concrete to show for their oft-repeated words.

To those close to the process the reason for the sluggish pace is clear: the two ministers have diametrically opposing ideas. Gunnlaugsson has not been saying much recently on the controls but has earlier championed the idea of enriching the state with money from the foreign creditors he invariably calls “vulture funds.” Benediktsson’s speech in October indicated a willingness to avoid legal uncertainties.

An exit tax is a classic solution to capital controls as Malaysia demonstrated in the 1990s. It is also part of the three-step liberalisation strategy set out in 2011 and in its original form intended for offshore ISK. Now however the feeling is that the Icelandic government is planning an exit tax on all funds leaving the island, ISK or FX. And the percentage? Anything less than 30-35% is hardly credible given that the difference between the ISK on- and offshore rate is now 17%; as much as 50% has also been mentioned. Whether this strategy would be based on a transparent plan is not clear.

The rumour in the Icelandic echo chamber is that a plan, some plan, might be presented by the end of November and the exit tax will be a part of that plan. What else it might contain is not yet clear.

Exit tax – in theory not a new idea

As mentioned in the most recent IMF report on Iceland the 2011 capital controls liberalisation strategy included FX auctions, as the CBI has been doing and then further two steps, Eurobond swap and exit tax, not yet implemented.

This exit tax is in line with measures taken in other countries with capital controls: in order to temper outflows, which the controls were put in place to contain, there is a tax. The transparent way is to announce at the outset both the percentage and a schedule for lowering it. If things go well the easing can be accelerated as turned out to be the case in Malaysia: the plan was implemented in less time than foreseen at the beginning. Those holding the problematic currency can then choose if they want a tax haircut or if they wait; other capital movements are not affected.

However, the rumour is that the Icelandic government is planning an entirely different version of the classic exit tax, i.e. a tax on all movement of capital out of the country, whether offshore ISK or FX. This prolongs the controls in all but name. In theory everyone is equally (badly) off, which solves the problem the government is actually very worried about: equality between creditors and others.

In particular the government does not want to be seen as aiding greedy foreign creditors to exit while Icelandic individuals and entities are still locked inside controls. Unfortunately this is partly a misconceived argument – Iceland as a whole stands to gain quite immensely by lifting the controls. This should be the focus of the government, not the possible gain of the creditors. Whether the lifting happens some months later is of a much lesser importance than Iceland getting out of controls. The Icelandic gain of lifting the controls is escaping the controls.

Interestingly, this timing problem could indeed be solved in a fairly simple way: if a composition agreement for Glitnir and Kaupthing is reached it will take at least 4-6 months to work out the details. With an agreement in place this time could be used to open up exit avenues for Icelanders.

Acting so as not to act

An exit tax on all flows seems to be a (not so?) clever way of avoiding a decision on the, for the government, thorny issue of composition or bankruptcy proceedings for the estates of Glitnir and Kaupthing (and for Landsbanki further into the future). The message to the creditors is then that they can decide whatever they want – composition or bankruptcy, no problem, make your own choice. Beyond the estates there is the exit tax.

An exit tax on all outflows does not necessarily solve the offshore ISK problem – the underlying cause for the capital controls – and it does not solve the problem of that particular part of the foreign-owned ISK in Glitnir and Kaupthing: Íslandsbanki and Arion.

The recent judgment by the Supreme Court in the case of Kaupthing v Aresbank SA (in Icelandic; here an unofficial English translation) did not come as a surprise for those who had interpreted Icelandic state and creditors v Landsbanki Supreme Court judgement from September 2013 along the lines now clarified. For those working for the “ISK-isation” of the estates this judgment is no happy tidings. Not only can the estates pay out in FX if they or creditors so wish: the estates can go out into the market and buy FX in order to pay out; quite a feisty judgment as judgements come.

Will the government act at all?

The government is no doubt working on a plan but will it actually have the courage to act? Interestingly, some hardened political observers in Iceland do believe that in spite of all the rhetoric the government will actually not be able to make the necessary decisions. They think the government will simply limp through its four years continuously finding some reasons for in-action on the controls.

Rationally, I have to say I find it difficult to believe this could be the case not least with Benediktsson’s oft repeated intention to act before the end of the year. On the other hand this government has shown some spectacular abilities for inaction or leaving things open (appointing a new CBI governor; a debt relief yes but very different from the original intentions; Landsbanki bonds agreement etc.). With this in mind it is easy to believe that the difficult issues regarding the controls will prove to difficult to solve.

Most strikingly, the government – or, to be more precise, the minister of finance and the prime minister – has not been able to act so far on the Landsbanki bonds agreement and the ISK226bn, €1.45bn, remaining for Landsbanki to pay LBI. If agreed on it will most likely be with some further restrictions for general creditors than in present agreement (though they will not get paid until the estate either goes into bankruptcy proceedings or there is a composition agreement; i.e. the agreement sets on precedence since priority creditors have been paid out in Glitnir and Kaupthing). The next deadline (the fifth) is Monday 17 November.

Regarding Landsbanki the delicate act is how to treat the main priority claimant, the UK deposit guarantee scheme. Economic Secretary to the Treasury Andrea Leadsom allegedly did not mince her words when talking to Benediktsson on his visit to London in autumn. He thought he was coming for a collegial meeting over drinks but instead got an almighty dressing down from the fearsome Leadsom. There are even rumours that the Secretary was waiving a legal writ already penned. All of this is rumours rumours and nothing more.

Political tremors

I have earlier pointed out that so far the prime minister has had an upper hand since he apparently stopped Benediktsson from agreeing to the Landsbanki bonds agreement. Now that Gunnlaugsson’s grand promise on debt relief is being carried out, to no great happiness of many Independence Party MPs, Benediktsson needs to strengthen his grip on lifting the controls his way if he wants to maintain his political credibility. The question whispered is “When will Benediktsson man up?”

Coalition certainly is built on compromises but since the controls are part of Benediktsson’s portfolio anything that smacks of the Progressives steering the controls policy will make Benediktsson look weak, very weak indeed. If he is forced on a path fundamentally different from the one he has outlined it will seriously harm his political credibility.

Interestingly, the political focus is firmly kept on the losses the creditors suffer from the waiting game as if none of this mattered for the interests of Icelanders themselves. The legal risks are hardly ever mentioned nor the fact that threatened Landsbankinn is indeed the state’s largest single asset, amounting to 12% of the state’s assets. Benediktsson talks about starting to sell shares in Landsbankinn next year and yet never mentions the connection between the bonds agreement and the possibility of a sale. This rather skewed picture is rarely challenged also because very few people, also politicians, have any firm understanding of the underlying facts.

A political wrestle is also taking place over the 2015 Budget. Benediktsson wants to increase VAT on food from 7% to 12%, a principal change towards simplification from Benediktsson’s point of view and therefore of fundamental importance for his strategy. Progressive Party MPs are against. The intriguing question is if the prime minister will side with his finance minister or his party. Again, any change here reflecting badly on Benediktsson’s political strength will undermine him. (Those who think ex-prime minister Davíð Oddsson still is a political force to reckon with will notice that Oddsson, in Morgunblaðið, has come out against the VAT increase yet again siding with the Progressive party and not with the leader of his own party.) Benediktsson can take some comfort in the fact that the Progressives have plunged in opinion polls whereas his own party is strengthened.

Cyprus implemented capital controls last year. Aimed at hindering outflows from banks the Cyprus controls are intrinsically different from the Icelandic ones. As in Iceland the controls were meant to be in place only for a few months. Cyprus is now far into lifting the controls, has indeed already eased them quite a bit contrary to Iceland where they have gradually been tightened. Cyprus might possibly have lifted them altogether by the end of the year.

Six years into controls Iceland seems far from lifting them – though this year the Christmas crackers might contain unexpected surprises. It remains to be seen who will then have a crackin’ good time.

*I have often gone through the underlying economic problems of the controls; also well explained in the CBI Stability Reports over the years. The last one, published in autumn, clearly underlines the cost and damaging of the controls. – The government’s basic information, in English, on the debt relief is here. (Correction: in the first published text it said the government had been in power since early 2014; that should of course be early 2013 as it now says.)

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Written by Sigrún Davídsdóttir

November 16th, 2014 at 12:50 am

Posted in Iceland

New Supreme Court ruling: estates can pay out in fx

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On November 10 Icelandic Supreme Court ruled in a case Kaupthing vs Ares Bank. This ruling takes further an argument put forth in earlier ruling from September last year. The new ruling not only states that estates can pay out in fx but can actually go into the market and buy fx. Here is a piece I did for Rúv last night (all links in Icelandic). More on this later…

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Written by Sigrún Davídsdóttir

November 12th, 2014 at 10:23 am

Posted in Iceland

Landsbankinn kept in misery – for now

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No decision yet on the Landsbankinn bond agreement – except an extended deadline, now until November 17. There have been rumours that the government was not happy about the deadlines set. Yesterday, minister of finance Bjarni Benediktsson said on Stöð 2 that the deadlines had been put unilaterally by the LBI and that he considered the deadlines just LBI’s own reference. “If deadlines don’t suit us they don’t suit us,” was Benediktsson’s cryptic answer.

What he did not mention is that Landsbankinn, the other part in the deal is indeed state-owned, which means that the government is not that far removed from the process: after all, the bond agreement is between LBI and the state-owned Landsbankinn. Brinkmanship or not, time is ticking for Landsbankinn: it has funds to finance bond payments early next year but the second payment might prove tough if not impossible.

Benediktsson said the government was working on a holistic solution and progress was being made. He denied rumours that the impasse is due to a disagreement between the two coalition parties. Nevertheless, this is what I believe is the case. Among those who follow the matter the feelings range from disbelief to shrugged shoulders.

This whole affair of deadlines and extended deadlines shows a government not quite knowing what to do or prepared for action as pointed out earlier – and it bodes nothing good for the difficult issues ahead. As one observer said: “There was an invitation to a theatre performance but when the curtains were drawn the stage was empty.” The question is if there will be anything to show on November 17.

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Written by Sigrún Davídsdóttir

November 1st, 2014 at 12:29 pm

Posted in Iceland

The day of decision… or maybe not…

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The day of decision regarding the Landsbanki bonds agreement isn’t over – still too early to tell how it ends. Allegedly, Bjarni Benediktsson minister of finance and leader of the Independence party had planned to answer LBI, with some changes to previous agreement. His attempt was, again allegedly, stopped last night by prime minister Sigmundur Davíð Gunnlaugsson.

The LBI postponed its creditor meeting yesterday until today. It is now due to start at 4pm. However, it is still unclear if there will be an answer from Icelandic authorities regarding the agreement. Or not. The minister of finance has to inform the Alþingi economy and business committee of the agreement and so far, no meeting has been called in the committee.

No doubt, there are hectic meetings ongoing. Considering the fact that the agreement was made on May 8 this year the government has had ample time to analyse the matter. However, this government has so far normally decided things the very last moment (the “correction” of loans and handling of the appointment of the governor of the CBI spring to mind).

The agreement was meant to be a first step towards lifting the capital controls. If Benediktsson, who has the formal responsibility for finding a solution, is being stopped in his track now the question is if he is in command and if he stands any chance at all to progress as he wants to. As I have often pointed out earlier the solution regarding the capital controls and the three estates – Landsbanki, Glitnir and Kaupthing – is a political one. It is now an even bigger question than earlier if the two party leaders in government will at all come to necessary conclusions on key issues. Or if things will just drag on as hitherto, with state-owned Landsbankinn limping towards default next year, certainly not the sellable asset of which the government had planned to sell 15% next year and again 15% the following year.

Even more intriguing that this alleged wrestle between the two party leaders is happening on a day when the daily Fréttablaðið publishes a poll showing that Gunnlaugsson’s party, the Progressive party, now only has 8.7% of votes, compared to 24.4% in the elections in spring last year. With this result the party would lose 13 MPs. Benediktsson’s party, the Independence party, has jumped up from 26.7% to 30%. The social democrats have 23.1% according to the poll, got 12.8% of votes in the election.

– – –

Late afternoon addition:

It now seems clear that no answer on the Landsbanki bonds agreement is forthcoming from the government today – but is apparently to be expected on Monday.

– – –

Monday Oct. 27:

Nothing more has been heard of the Landsbanki bonds agreement today and it has, as far as I’m aware, not been dealt with today. Prime minister Gunnlaugsson is abroad and nothing seems to be moving. Last Friday, the day the earlier deadline expired, LBI extended the deadline by another week. Not all creditors were content with this leniency. However, it remains to be seen if this extension will produce the awaited answer.

If Benediktsson really planned to answer favourably his plan has so far been thwarted.

In addition: on Oct. 14 S&P’s published a new rating for the three banks with the general conclusion as follows:

  • We have revised our economic risk trend for Iceland to positive from stable, and expect a continued improvement in the banking system’s asset quality.
  • We have therefore revised the outlooks for Arion Bank, Islandsbanki, and Landsbankinn to positive from stable, and affirmed the ‘BB+/B’ long- and short-term ratings.

On Landsbankinn it says i.a.:  “We also anticipate that the preliminary agreement will extend the repayment profile of legacy bonds of the defunct Landsbanki Islands hf.”

Here is a thought: when the minister of finance announced this summer that the Ministry had hired foreign advisers this was mentioned:  “the investment bank JP Morgan will assist the government in connection with Iceland’s sovereign credit rating.” It does not seem too far fetched to imagine that S&P had been given to understand that the bonds agreement would be accepted. If the bonds agreement will collapse (which we should see latest on Friday) I wonder what those who possibly carried the message, if that was indeed the case, that the agreement would come into being and the S&P will feel about this whole saga.

Still too early to spell out the consequences of failure – read all about the financial and economics consequences in the latest CBI Financial Stability report and my earlier logs, see the link below*. Without being overly dramatic the political consequences will open up a whole new chapter in the life of this government and indicate what is to come regarding the perspectives in lifting the capital controls. More on that later when the final answer on the bonds agreement is clear.

*More on the Landsbanki bonds agreement here.


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Written by Sigrún Davídsdóttir

October 24th, 2014 at 12:06 pm

Posted in Iceland

Arnarhvoll-ology: when the best of times could quickly turn into the worst of times

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Minister of finance Bjarni Benediktsson discourses boldly on decisive and imminent steps towards lifting the capital controls. Prime minister Sigmundur Davíð Gunnlaugsson now rarely mentions the topic and then only in the most general terms. The next important event is the October 24 deadline* for the Landsbanki bonds agreement. The government faces strikes, the final vote on the 2015 budget is still to come and the “Correction” – writing-down of loans – is moving slower than planned. Worst of all for a government: the two leaders seem light-years apart on key issues. The question is if the two of them really can forge a coherent policy on the capital controls (as well as some other issues).

Russia watchers have Kremlinology. The equivalent in Iceland could be Arnarhvoll-ology (admittedly a word that will not flow easily off a foreign tongue): the art of observing and making qualified guesses of what is really going on in Icelandic politics.

Arnarhvoll is the imposing 1930 building, which now houses the ministry of finance, built at the time when most buildings in Iceland were corrugated-iron sheds or turf-roofed cottages. With an eye on modern Iceland – new(ish) cars, big houses and Harpan – it is easy to forget the giant steps this once so, literally, dirt-poor country took into affluence and modernity. Now Arnarhvoll nests by the Supreme Court house, the Central Bank and the National Theatre, not far from Harpan.

Below is an attempt to practice some Arnarhvoll-ology to gauge where the government stands regarding the capital controls, most of all the pressing issues of the Landsbankinn bonds agreement and of how to resolve the estates of Kaupthing and Glitnir.

Benediktsson’s knowns and unknowns

Minister of finance Bjarni Benediktsson gave a speech last week at a symposium in memory of an Icelandic economist, Jónas Haralz. In his speech, (here, only in Icelandic) Benediktsson reminded the audience of the last time capital controls were put in place in Iceland: stayed for 60 years. With new controls in 2008 Haralz said that compared to earlier Iceland was now much more connected to the outer world in addition to the support of the IMF; Haralz was sure the controls would not be allowed to fester for 60 years this time.

Although Benediktsson’s speech was fairly general it did, to my mind, include soms paragraphs, which under the lenses of Arnarhvoll-ology might give some hints on his thoughts: no, the creditors are no this main worries but, as far as I can see, his coalition partner.

As before Benediktsson said any solutions had to be financially feasible, socially fair and politically doable. It was also important to be aware of the risks implied, he said, aware that circumstances can change quickly in spite of the present positive outlook. Solutions should not be based on too much optimism regarding the coming years. In addition, circumstances abroad could change – a timely reminder for Iceland, he said, to pay off its debt (but no, he did not mention why then ISK80bn of public money should be used for the “Correction” and not to paying off sovereign debt).

Benediktsson said that since last year much work had been carried out to analyse the problems and develop solutions. Then this declaration (which sounds equally un-Icelandic as it sounds un-English in my translation; emphasis mine): “I make the demand that during this year important questions will be answered so that next steps can be taken. They (the questions) will i.a. touch on if it is realistic to solve the issues of the estates without a direct intervention by authorities.

Benediktsson emphasised the importance of a holistic solution, taking care to respect national interest “as well as respecting law, international commitment and ensure equal treatment.” The balance-of-payments needs to reflect reality (never easy in Iceland at the best of times), also to prevent another economic down-turn. Then again, a very interesting sentence: “Actions that take less time, are simple and minimise legal risk will be favoured over more complicated ones; each action needs to be in accordance with the general solution.

Benediktsson said the government was willing to listen to all constructive ideas, no matter where they came from, also regarding exemptions, as long as they improved the economy. But all decisions would be taken with the general interest of the nation at heart, not single interest groups – interestingly, a comment that could as easily be directed at some Icelanders as well as the creditors.

But there were also words clearly meant for the creditors: “If those seeking exemptions from capital controls do not put forward realistic ideas to meet these points of view as well as others still being worked on, things will be put in order of priority according to the needs of the real economy.” – This means that creditors must take into account issues the government has already presented as well as those not yet presented, the knowns and the unknowns; never an easy proposition.

Anyway, both Kaupthing and Glitnir have tried: Kaupthing has had no answer; Glitnir has had an answer after which it amended its composition draft. There are simply far too many possibilities and variables for this silly game to continue. The government cannot claim the estates are none of its business when it is the final arbiter in the process of the estates’ resolution.

And last but not least some edifying words for those working on lifting the capital controls: “For those responsible for moving these issues forward it is at last important to realise that it will not be possible to calculate all potential outcomes, eliminate all risk and foresee investor behaviour far into the future. What is needed, after the necessary preparation, is simply to make a decision.

Benediktsson’s message according to Arnarhvoll-ology

From all directions it echoes that Benediktsson and Gunnlaugsson are light-years apart on the key issues of the capital controls. Each side appointed people in the all-Icelandic advisory group at work last winter – in the end it allegedly only came up with a mish-mash of various and to some degree conflicting ideas. In the group now at work each side also appointed its representatives, which means, I am told, that there is not much momentum to solve the underlying and fundamental disagreement on composition vs bankruptcy re Kaupthing and Glitnir. Glenn Kim, the foreign advisor in charge of this group is apparently not much seen in Iceland these days (though yes, with modern means of communication presence is not all).

Reading Benediktsson’s speech with this in mind, it is difficult to avoid the feeling the Benediktsson really is talking to his opponents in the government and not so much to creditors. He is telling his opponents that rather than embarking on the risky road of bankruptcy, simple foreseeable routes are preferable. Or, as the IMF put it: composition is an orderly legal route, bankruptcy a disorderly route.

Benediktsson prefers the simple to the complicated and he also prefers solutions that take less time than long time. And Benediktsson is also well aware of reputational risk: my friends (if he still uses that word for his coalition members), lets keep in mind the rule of law, international law and equal treatment for all, both Icelanders and foreigners. An all-encompassing certainty can never be achieved in this world: those who have the painful role of deciding must in the end… eh, make up their minds.

The Progressive Party has over the years been good at securing good deals for chosen party members. The feeling is that some would like to steer Íslandsbanki and Arion, now owned respectively by Glitnir and Kaupthing, into Icelandic hands. If so, this goal could influence their thinking on the issues at stake in lifting the control.

As tried and tested Kremlinologists know the interpretation is only as good as the political understanding it is based on. But no matter what: it is politics and not economy that decides on the vital issues regarding the lifting of the controls.

The best of times

In its recent Financial Stability Report the CBI came out with its so far most clear warning on the “steadily increasing” cost of the capital controls and their detrimental effect on the economy (emphasis as in the FS report):

There are numerous costs associated with the capital controls. The most obvious is the direct expense involved in enforcing and complying with them. But more onerous are the indirect costs, which can be difficult to measure. The controls affect the decisions made by firms and individuals, including investment decisions. Over time, the controls distort economic activities that adapt to them, ultimately reducing GDP growth. The direct costs associated with liberalisation centre primarily on the possible lack of confidence in liberalisation and the associated risk of disorderly capital outflows, which would weaken the króna, stimulate inflation, and result in higher interest rates.

If liberalisation is not carried out successfully, these costs will make themselves felt quickly. On the other hand, liberalisation will lead to increased efficiency over time, as decisions will be made without consideration of the capital controls. Measures aimed at making it easier for some parties in the economy to tolerate the controls reduces the incentive to lift them, with the associated expense for the general public. 

The FS Report is equally clear on the present favourable economic conditions:

At present, economic conditions are favourable for large steps in liberalisation. The economic outlook is better in Iceland than in its main trading partner countries, interest rates abroad are at a historical low, Iceland’s interest rate differential with its main trading partners is positive, GDP growth is stronger in Iceland than in most trading partner countries, domestic inflation is close to target, Iceland has an established trade surplus, the fiscal budget is estimated to be in surplus next year, the spread between the official Central Bank exchange rate and the offshore exchange rate has narrowed significantly in recent months, and the Treasury has demonstrated repeatedly that it has access to foreign credit markets. Therefore, it appears that current economic conditions are conducive to successful liberalisation of the capital controls. It is important to remember, however, that these conditions could change for the worse later on.

The main problems relating to liberalisation have been identified as the stock of offshore krónur owned by non-residents, Iceland’s balance of payments, and the settlement of the failed banks’ estates. The narrowing of the spread between the Central Bank’s official exchange rate and the offshore rate, increased access to foreign credit markets, deleveraging of foreign loans, and the persistent trade surplus diminish the effects of the first of these two risks. The remaining problem, the settlement of the failed banks’ estates, is the largest factor complicating the liberalisation process. 

The same views are widely heard throughout the Icelandic business community, most recently expressed in an article (only in Icelandic) by Þorsteinn Víglundsson managing director of SA, the employers’ organisation.

One way of managing life under controls would be to give more exemptions to domestic entities. Were that route to be used increasingly it undoubtedly means that the government is planning for the controls to be in place for a long time – no good sign.

Landsbanki bonds agreement

According to rumours the Landsbanki bond agreement is yet another battleground between the two coalition leaders. Benediktsson has been in favour of agreeing to it. It seems the prime minister sees the agreement as giving too much to the creditors. (See here for further details regarding the agreement).

Some prudent voices claim the agreement sets precedence for the general creditors. Others claim that the main importance is to abolish the uncertainty Landsbankinn with no agreement poses. The CBI points clearly out the risks for Landsbankinn and Iceland as a whole unless the bonds’ maturities are extended:

Other things being equal, if the Landsbankinn bonds are not extended, domestic demand would have to contract and the currency would have to depreciate in order for the domestic economy to generate enough additional foreign currency to service the debt. Analysis using the Central Bank’s macroeconomic model indicates that, in comparison with a scenario providing for the lengthening of the bonds, the exchange rate would have to decline temporarily by up to 8%, private consumption would contract by up to 2%. Inflation would rise and, according to the model, Central Bank interest rates would have to be kept higher in the near future in order to bring it back to target. In order to prevent this, the State or the Central Bank would have to provide Landsbankinn with long-term foreign-denominated funding, with the associated implications for the Treasury debt position and the Bank’s foreign exchange reserves.

If the bonds are lengthened and external conditions remain unchanged, it is likely that the trade surplus will suffice to cover resident entities’ unfunded debt service burden in foreign credit markets in coming years…

Landsbanki estate, the LBI, has not been able to pay out to priority creditors for over a year now, see its financial statement here. With time and no explanations from the authorities it will make the UK government increasingly frustrated as well as other priority claimants. Again, does not bode well for Landsbankinn. Also, it prepares a case for creditors that the Icelandic authorities are withholding their funds.

The worst of times – in sight

In addition to the good times in Iceland there are positive circumstances abroad. As Benediktsson pointed out in his speech nothing lasts forever. In Iceland, an ominous winter is ahead.

Coalition MPs disagree wildly over tax – Benediktsson proposes to put VAT on food up from 7% to 12% and offsetting this by lowering VAT on i.a. kitchen appliances. This is a thorny issue for the Progressive Party. Sigmundsson himself wrote some years back on the unfairness of putting up VAT on food, an opinion widely shared by his fellow MPs. The question is if Gunnlaugsson will side with his fellow party members or with Benediktsson and the Independence Party when the budget coms up for a final vote in Althing: a truly impossible choice unless Benediktsson helps him out, which in turn hurts Benediktsson and cements his reputation as a ditherer.

Because of this the budget might not go down smoothly in Althingi. In addition, the “Correction” is still not in people’s pockets and so far unclear when it will happen.

Physicians got the right to strike some thirty years ago but have never gone on strike so far. That might be about to change: the Icelandic Medical Association now threatens a strike on October 27. Other strikes could follow in the coming winter.

The times for lifting the capital controls may be as good as they get. Objectively, Benediktsson has excellent reasons to be optimistic about decisive steps in sight. There are solutions in sight, tickling the finger-tips. But as long the underlying discord and clear-cut disagreement is unresolved the good economic circumstances do not help. The truly frustrating thing is that because of the work carried out by the Icelandic authorities those who, like Benediktsson, favour a quick and simple solution really do see various ways to reach the goals set forth by Benediktsson. Above, nothing is said about the unknowns related to possible creditor action against Icelandic authorities – hopefully an unknown Benediktsson is working on understanding and then explain possible risk to those who take a different view on how to proceed, also the fact that no action on behalf of the Icelandic authorities is not entirely risk-free either.

If the underlying disagreement remains unsolved  and if strikes and budget battles are on the horizon the best of times could easily become the worst of times… and drain the government of the political energy needed for taking the decisive steps the minister of finance is demanding. Sad for Iceland but hopefully it will not take 60 years as last time.

*Updated version. – The original version gave the LBI deadline as Oct. 26; sorry, it is indeed October 24 as stated in an earlier Icelog.

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Written by Sigrún Davídsdóttir

October 20th, 2014 at 12:23 am

Posted in Iceland

Six years after the collapse: the government is starving the Special Prosecutor of funds

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After the banking collapse in October 2008, three things were set in motion by the government at the time (Independence Party, together with the Social Democrats): an investigation into the causes of the collapse, rewriting the constitution and an Office of a Special Prosecutor. The investigation was concluded with a report of 2400 pages published April 10 2010; so far, no country has done a comparable report on the financial crisis in 2008. Rewriting the constitution was not finished in the way intended due to a political backlash. The government now plans to review OSP’s role although the OSP was made a permanent serious fraud office in 2011 – and starve it of funds while the review is ongoing.

It did not start too well: after Althing passed an Act in December 2008 to set up an office of a special prosecutor to investigate possible fraud related to the banking collapse no one applied. Finally, Ólafur Þór Hauksson stepped forward, a sheriff (called “sýslumaður” in Icelandic) from Akranes, the village on the other side of the gulf from Reykjavík.

Though having no previous expertise in Iceland to build on, the OSP has built up the expertise and know-how in investigating fraud such as market manipulation, insider trading, embezzlement and breach of fiduciary duty. So far, six OSP cases have found their way all the way to the Icelandic Supreme Court: five ended with sentencing, one with acquittal.

The Icelandic decision to investigate possible fraud within the banks has been much noticed around the world where financial institutions often seem like holy cows, too powerful to investigate and bankers too important to jail. Examiner Anton Valukas who led the investigation into Lehman Brothers’ demise pointed out certain accounting practice, so called Repo 105, which according to the report seemed to have the sole purpose of balance sheet manipulation (see here on Valukas and the SIC report). Valukas has later clearly expressed bafflement that no charges have been filed regarding Lehman. – In Iceland, irregularities regarding the operations of the banks are being investigated and bankers prosecuted as well as other high-flying businessmen.

With the present coalition government of the Progressive Party and the Independence Party (which led the government that set up the OSP; ex-PM Geir Haarde said on Rúv tonight it had been a good step), the tone is now changed: the OSP is being starved of funds in the 2015 budget.

The government claims it is going to review the OSP operation. Interestingly, it is going to starve it first and then review it. The government seems to ignore that fact that since the law on the OSP was changed in 2011 so as to turn it into a permanent serious fraud office, there is no burning need to come up with changes of purpose and mission.

In numbers (from a recent Rúv interview with Hauksson): the OSP budget for this year is ISK900m, €5,9m; for next year its share in the budget is ISK295m, or a cut of 67%. Sixteen employees were recently fired because of the envisaged funding cuts. With the present prospect for 2015 staff will go from seventy to twenty. The number of cases now under investigation is 96; 39 of them are related to the collapse. The planned cuts also mean that opening investigations into new cases will be problematic; the outlook for seeing charges through court is uncertain.

Just to give an idea on the OSP present activity: these days, the OSP’s most extensive case so far is in the Reykjavík District where Landsbanki’s CEO Sigurjón Árnason and three Landsbanki employees are charged with market manipulation. This weekend, Rúv brought news of charges against four Spron board members and Spron CEO Guðmundur Hauksson (not related to Special Prosecutor Hauksson) relating to an ISK2bn, now €10m, loan to Exista; Guðmundur Hauksson had shares in Exista and long-time relationship with that company, the largest shareholder of Kaupthing. In January, the so-called al Thani case is coming up in the Supreme Court; appeal of the Reykjavík District Court where Kaupthing CEO Hreiðar Sigurðsson was sentenced to 5 1/2 years, executive chairman Sigurður Einarsson 5 years, Kaupthing’s second largest shareholder Ólafur Ólafsson 3 1/2 years and Magnús Guðmundsson manager of Kaupthing Lúxemborg 3 years.

On October 6 2008 Icelanders sat stunned as prime minister Haarde addressed the nation at 4pm to tell them the government was doing what was needed to prevent the collapsing banks from causing a national catastrophe. The OSP has been diligent in bringing banking high-flyers and their helpers to court. Although the task is not finished it seems the government is no longer adamant about investigating collapse-related fraud cases, let alone keeping an eye on potentially new financial fraud cases. – It is now oh so 2008…

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Written by Sigrún Davídsdóttir

October 6th, 2014 at 10:39 pm

Posted in Iceland

The Landsbanki bonds agreement: one step… not quite forward but hovering

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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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Written by Sigrún Davídsdóttir

October 1st, 2014 at 10:45 pm

Posted in Iceland

Now that the Dutch have sold their Icesave priority claim in LBI…

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Admittedly, the Dutch have been fortunate with the €/ISK trend, which no doubt tempted them to waive good-bye to their LBI priority claim. For the UK deposit guarantee scheme the £/ISK trend has been the opposite, making a UK sale less likely (but not impossible especially if British authorities see no imminent sign of LBI payout and only a rising political risk). Though the Dutch exit is logical it also hints at what some other creditors might be thinking: that the Icelandic government seems to be tackling the capital controls sub specie aeternitatis.

For quite a while it’s been rumoured that De Nederlandsche Bank, the Dutch Central Bank, DNB, intended to sell its priority claims in LBI, the estate of the old/failed Landsbanki. Dutch authorities were from the beginning adamant to recover the whole amount and there has been political pressure to bring the Dutch Icesave saga to an end. As the €/ISK trend has been favourable to the Dutch it is no wonder that Dutch authorities decided not to tempt their luck any longer and instead rid their books all Icelandic risk.

With the Dutch sale and the fact that summer is over it is appropriate to ponder on the prospects of Iceland lifting the capital controls. More than one coalition insider has told me recently that “decisive steps towards lifting the capitals controls will be taken this winter.” I certainly do not doubt the will – in addition to strong pressure from the business community.

However, the government’s grip on major issues so far and the tension within the government on the core problems related to the capital controls (see earlier on Icelog, i.a. here) raise the question if the government has enough political strength and stamina to proceed. If nothing tangible will be done this winter, it seems safe to conclude that decisive steps towards lifting the controls will not be taken by the present government.

The Dutch numbers

As pointed out in the DNB press release earlier this week the Dutch State paid out 1.428bn and Dutch banks 208m to Icesave depositors. DNB held these claim on Landsbanki and has over the years recovered 932m; it had expected to collect further 623m and that is the batch the DNB has now sold.

It seems that DNB sold at just over 0.93. The reason it can claim it has made a full recovery stems from the €/ISK trend since April 22 2009. That day, the €/ISK rate stood at I69ISK against the euro; August 27 it was 154ISK. Given that the Dutch sold at 0.93 their price based on the €/ISK is 1.02.

Based on this simple calculation it made a lot of sense for the Dutch to sell. Instead of waiting until 2018 – or longer if the maturity on the Landsbanki bonds is extended (further here re the LÍ bonds) – the funds are in hand or, more likely, in the DNB.

With this calculation in mind the British case is just the opposite. On April 22 2009 the pound stood at ISK190.6 but was on August 27 ISK193.2 against the pound. If the British were offered 0.93 for their claim their real price would be 0.917, i.e. a loss and not a gain. (The Dutch and the British authorities are still trying to recover their cost from Iceland as seen from a claim filed in Iceland earlier this year against TIF, the Icelandic deposit guarantee fund).

Who bought the Dutch claim?

I don’t know, is the short answer. Deutsche Bank was an intermediary in the sale. There was more than one buyer. No doubt, the buyers already hold claim in the LBI. If the króna is strengthened recovery by priority claim holders increases and general creditors get less; vice versa if the króna moves the other way. With this in mind it makes sense for any general creditor in LBI to buy the priority claim as a hedge.

In addition, it makes even more sense for general creditors in LBI to buy the Dutch claim in order to strengthen their influence in LBI. Put bluntly, the LBI has something akin to a stronghold on the government given that the state-owned Landsbankinn is short of fx funds to pay on the Landsbankinn bonds next year. – For some reason, this stronghold is hardly ever mentioned in the Icelandic debate.

Interestingly, many of LBI major creditors are creditors to Glitnir and Kaupthing. With greater weight in the LBI they could try to influence course of events in Glitnir and Kaupthing through the LBI.

The Icelandic authorities the Dutch sale is not necessarily happy tidings as it fractures the creditor group. For other LBI creditors losing the Dutch might be bad tidings because both the Dutch and the British authorities can be assumed to have greater pondus than other creditors. Whether the outcome of the Landsbankinn bond agreement might have been different without them is another matter but the Dutch sale will hardly simplify matters in the LBI.

The Dutch view on the Iceland risk

The favourable €/ISK trend made sale an attractive option, in addition to political pressure for the Dutch government to exit the Icesave affair with positive numbers and not a loss. I cannot claim having an insider view on what risks the DNB feels it now has sold off but it is easy to make some inferred guesses.

Both the Dutch and the British authorities have understandably been focused on the political risk. Since last year the LBI has not been allowed to pay out to creditors (i.e. priority creditors who are paid first; having already paid priority claims Glitnir and Kaupthing are waiting impatiently for the government to make up its mind on the legal paths towards resolution in order to start paying general claims). The CBI is vested with the power to issue exemptions for a payout but needs the blessing of the minister of finance which has not been forthcoming since last year.

It is hardly a coincidence that the LBI hasn’t been allowed to pay creditors. The Dutch might well have come to the conclusion that no LBI funds would be flowing their way any time soon; better to act than to wait. In addition, there is the agreement on the Landsbankinn bonds, which the government needs to agree to. It was supposed to answer in early August but its deadline has now been extended to end of September.

Again, this deadlock regarding the Landsbankinn bond agreement could be seen as a negative factor since it seems fairly obvious that the CBI, which followed the negotiations, must favour the agreement. One might also surmise that Landsbankinn’s (the new bank) owner, the state, would have been in favour of it though the minister of finance claimed at the time he was not familiar with the agreement.

In addition, the Dutch must have evaluated the general political situation: is it likely that this government is going to solve the issues related to the capital controls in the foreseeable future? Although the Dutch might have valued the positive numbers above the political outlook the Dutch sale is never the less food for thought.

A CBI governor half-hired, a minister half-fired

On the same day the ministry of finance announced that Már Guðmundsson had been re-appointed as a governor of the CBI, it was announced that part of the portfolio of home office minister Hanna Birna Kristjánsdóttir would be moved to another minister/ministry. Guðmundsson was told that the position of governor might change which might change his situation, meaning that he was in a sense only half-hired on the day he was re-appointed. And Kristjánsdóttir, having the major part of her portfolio removed was indeed half-fired.

As I have pointed out earlier, Guðmundsson’s half-hearted re-appointment might leave the CBI in a limbo. However, the bank has worked with full energy on issues related to the capital controls and will no doubt continue. Guðmundsson and most of the CBI staff will no doubt pay great attention to IMF’s advise on reputational risk and an orderly exit for the estates. And Guðmundsson is no doubt adamant to proceed in order to make capital controls progress a part of his legacy at the bank – a legacy, which so far is looking promising.

The spin school of staunch denial

Kristjánsdóttir’s case involved a leaked document on an asylum seeker, discrediting him, as it seems to justify that he was being sent out of the country. Later she denied any part in it or any knowledge of the case, also that she knew anything about the Reykjavík Police investigation, which ensued. It now turns out that not only did she know about the investigation but she tried to influence the chief of the Reykjavík Police during his investigation.

This has surfaced in an enquiry by the Althing Ombudsman. Despite this evidence Kristjánsdóttir staunchly denies any interference in the matter. She now has until September 10 to answer the Ombudsman.

On Facebook the minister has criticised both the Ombudsman and the police. Bjarni Benediktsson leader of the Independence party and minister of finance has supported Kristjánsdóttir thereby indirectly taken a stance against the authorities investigating the matter. All of this is rather remarkable seen from the outside but could, in an Icelandic context, be seen as yet another example of the rather lackadaisical approach to structure and form of Icelandic authorities.

Political infirmity

In other countries, a minister in the quagmire Kristjánsdóttir finds herself in, would most likely have resigned. Most ministers resign when they are told they have lost the trust of the prime minister: the only choice is then between walking the plank or being pushed.

This sorry affair has now been in the media for close to a year. When finally, late in the day, it was decided that she should be relieved of that part of her portfolio related to the police it took the best part of two weeks until new arrangement was decided (the prime minister takes on what she isn’t allow to have, leaving her with not very much).

Another example of a long-winding and inconclusive process: last year, the government announced a review of law on foreclosure, making it more difficult to foreclose on individuals in order to hinder that people were driven out of their homes. This is connected to the government’s debt relief programme, which is coming into force in November. With an on-going review foreclosures were suspended until September 1 this year. It now turns out the review is not ready, incidentally part of Kristjánsdóttir portfolio, which means that foreclosures will now be suspended until March 1 2015.

The whole CBI matter, both a new organisation for the bank and the appointment of a new governor, sadly shows the same lack of firm grip. Things seem to happen only as ministers stumble along to meet deadlines. Governmental procedures under the present government tend to look ungraceful and not terrible elegant.

Though unrelated, none of these cases bode well for the tough decisions regarding the capital controls. Nothing can be done without deciding on the Landsbankinn bonds agreement and the legal path for the resolution of Glitnir and Kaupthing. So far, there is little to inspire confidence.

“No foreign banks do yet dare to lend to Iceland”

All in all, Iceland is doing well, indeed phenomenally well compared to many European countries. With Iceland now being a major tourist attraction foreign currency is flowing into the country. Talking to an Icelandic business leader recently, he pointed this out, adding that yes, things were going well in Iceland and also for his business. All was well… except this problem with the capital controls.

The fx inflows have enabled the CBI to buy fx as never before: last year, it bought ISK1bn, this year the bank has so far bought ISK70bn. CBI is clearly bolstering its coffers for a future of lifting capital controls. With relative (though precarious) stability in the euro zone and booming tourism these are incredibly favourable times to take the necessary steps towards easing the capital controls.

Coalition ministers hardly ever mention the detrimental effects of the capital controls for Iceland. The coalition message is that the controls are much worse for the creditors than for Icelanders. The government seems to think it has all the time in the world to solve this problem; and as if there was for example nothing more natural in the world than money piling up in the estates and the creditors just waiting patiently for a solution… if and when.

Many Icelandic business leaders beg to differ that there is no hurry. United Silicon is a company building production facilities in Iceland. At an event to mark the occasion United’s CEO Magnús Garðarsson said that the equity came from abroad but the funding was entirely Icelandic. “No foreign banks do yet dare to lend to Iceland.” – His words attracted remarkably little attention in Iceland.

Steps towards lifting the capital controls will define the term of this government. After strong words on action at the beginning of its term this government will be seen as having failed miserably and catastrophically if nothing is done. The question is what will be more painful: forming the necessary policies – or – being judged as a failure.

Judging from the government’s grip on things so far nothing less than a miracle is needed for action regarding the capital controls. In politics, miracles are rare –solutions are normally born of political pressure and political necessity rather than divine intervention. Given the modern rarity of the divine the question is if there are the right political conditions for finding solutions. The problems related to the economy can all be solved – it’s the political problems, the tension in the government, which seem to hinder the steps needed.

*Earlier Icelogs, in addition to those cited above: the numbers and the tension; what needs to be done; the IMF view; further on politics and the capital controls.

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Written by Sigrún Davídsdóttir

September 3rd, 2014 at 12:27 am

Posted in Iceland

New governor of the CBI – but not an end to uncertainties

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After the government’s less than a stellar appointment process a new governor of the Central Bank of Iceland present governor Már Guðmundsson has been reappointed. This might seem to end uncertainties that the government has created by its fumbling actions. But no, not quite. It may sound like a contradiction but it could be said that effectively the new governor is being fired by being reappointed.

After much back and forth minister of finance and leader of the Independence party Bjarni Benediktsson has announced that Már Guðmundsson will be reappointed governor of the CBI for another five years. This seemed at first to indicate that Benediktsson has shown independence from the old guard in the party, which has vehemently fought to throw Guðmundsson out, not to mention the fact that prime minister Sigmundur Davíð Gunnlaugsson leader of the Progressive party has time and again criticised the bank, and thus its governor.

However, it says in the letter of appointment that since there is a committee working on revising laws on the framework of his office might change (see further here).

This has prompted Guðmundsson to publish a letter (in Icelandic) on the bank’s website where he acknowledges the possibly imminent changes. He states that he might be tempted to return to work abroad (as he did earlier, he was with BIS) and might not wish to stay in a changed CBI.

This effectively means that yes, Guðmundsson is reappointed – but things will not necessarily remain as they are for what should be his whole five year period. Or it could be said that he has been fired but at a later and unknown date.

However, the optimistic view is that Guðmundsson now has some time and could very well use this time effectively. After all, he has nothing to lose. And so far the government has not been able to make up its mind as to how to reorganise the CBI and will not necessarily jump to a rapid reorganisation.

It is clear that Guðmundsson is adamant about taking decisive steps towards lifting the capital controls and would no doubt like that to be part of his legacy at the bank. That includes having to decide on the fate of the estates of the fallen banks. The feeling is that Benediktsson is more than willing to follow the guidance of the CBI – and the IMF, which has warned against the so-called bankruptcy route (see here). Prime minister Gunnlaugsson, who feels that Iceland won an important victory over foreign finance forces in the Icesave case and is still fighting that battle, seems to take the opposite view (and the fact that Guðmundsson wanted to negotiate on Icesave most likely made him less endearing to the prime minister).

Már Guðmundsson has so far proved himself to be a capable governor, respected abroad and in Iceland. As always, not all will agree with the CBI policy, rates etc but that is as it is. Most importantly, Guðmundsson has shown independence towards Icelandic power centers and political parties. The bank is i.a. investigating alleged fraud involving foreign currency transaction by the largest fishing industry in Iceland, Samherji.

The pessimistic view is that the CBI is now, as much as before, in a limbo. And that again bodes nothing good for Iceland. While waiting, Guðmundsson might just as well make a heck of a good use of his time.

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Written by Sigrún Davídsdóttir

August 15th, 2014 at 2:24 pm

Posted in Iceland

End of central bank independence in Iceland – the pessimistic view

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The leaders of the Icelandic coalition government are struggling to appoint a governor of the Central Bank of Iceland. It now seems that the most likely outcome is that more than one will be appointed, whether it will right away or later. This spells the end of an independent central bank in Iceland. The stumbling process prompts the question how likely it is that a government that cannot agree on appointing a governor of the Central Bank will be able to chew through all the very difficult decisions needed in order to lift the capital controls.

In its last report on Iceland the International Monetary Fund sent some thinly veiled sharp messages to the Icelandic government: one was on the importance of respecting the independence of the Central Bank of Iceland; the other was the importance of an orderly path in resolving the estates of the collapsed banks, i.e. composition and not bankruptcy (more on this in an earlier blog).

It now seems that the government is just about to ignore the first advice, on the all important independence of the CBI. After mulling over the three most suitable candidates a “bizarre” selection committee put forward it now seems that the government cannot choose one candidate. Instead, it seems to be planning to change the management structure of the bank – and put more than one governor at the helm (more on the selection and its implications here).

Bjarni Benediktsson minister of finance said in a Rúv interview last night that considering the increased work load at the bank it made sense to appoint more than one governor (as if this need has suddenly become desperately clear).

The truth is that the government has been mulling over these changes more or less during the year since it came to power but apparently never could make up its mind as to what to do. This surfaced i.a. when the governorship of the present governor was not prolonged literally hours before it would have been renewed automatically.

At the beginning of May Benediktsson appointed a committee to review laws regarding the CBI. The committee was to come up with proposals before the end of this year. Those on the committee are Friðrik Már Baldursson, one of the applicants for the post of governor, Ólöf Nordal who was on the selection committee and is an ex-MP and ex-vice chairman of the Independence party. The third committee member is professor Þráinn Eggertsson at the University of Iceland.

Now there is suddenly no time to wait for the proposals of this committee as to the future of the CBI. Instead, it has all to be decided on the hoof and in a hurry before a new governor or governors will be appointed. New governor(s) has/have to be appointed before the end of August when the time in office of the present governor, Már Guðmundsson, expires.

From the three candidates seen as equally merited by the “bizarre” selection committee – Már Guðmundsson and two professors, Ragnar Árnason and Friðrik Már Baldursson – Guðmundsson is undisputedly the best qualified. For political reasons, the government is unable to rest with Guðmundsson continuing. This seems to be accelerating the process of management changes at the CBI where one or two of the professors would be hired as well.

Benediktsson seems to be indicating that more than one could be appointed. How that is possible – i.e. to make changes and then just appoint from the present pool of applicants – seems questionable but well, remains to be seen.

Seen from the outside, imaging this whole process happening in another Western civilised country, tells a sad saga about the state of affairs in Iceland. Regrettably, the CBI has been kept in a limbo since end of February when it became clear (unexpectedly since it was done last minute) that Guðmundsson’s time in office would not be automatically extended. Bearing in mind that Guðmundsson is eminently respected and has shown himself to be a capable governor and the CBI has been doing important work towards lifting the capital controls all of this is even more regrettable.

In addition, this whole unfortunate saga of the CBI is a sad example of how this government struggles to make up its mind on important issues. The unsettling thought is that since it seems so difficult to choose a governor of the CBI how is this government ever going to agree on i.a. the tough issues that need to be dealt with in lifting the capital controls. Maybe I’m being overly pessimistic here but if things continue in this way the four years of this government in power will come to pass without any of the decisive steps needed. – A case in point is that the time to decide on the Landsbanki bonds agreement has now been extended from August 8 to end of September… because the government had not made up its mind, yet.

With nothing being done regarding the capital controls would mean four more years for Iceland in the wilderness of controls – a truly dispiriting thought. (And I sure hope I’m wrong.)


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Written by Sigrún Davídsdóttir

August 13th, 2014 at 9:40 am

Posted in Iceland