Sigrún Davíðsdóttir's Icelog

This morning, Mar Gudmundsson governor of the Central Bank of Iceland met with three Althingi committees to answer questions on the economic outlook. Here are some points from the meeting:*

–        Due to the Icelandic state’s obligations there will be an outflow of currency in the foreseeable future. Consequently, the state will have to look abroad for funding, the sooner the better. Most likely, there will be a bond issue abroad later this year. The relatively low CDS improves the outlook of refinancing

–        The influence of Icesave on a bond issue is undeniable. If the latest Icesave agreement will be rejected in the coming referendum on April 9^th there might be less luck in seeking refinancing

–        A ‘no’ in the Icesave referendum will delay any easing of the currency restrictions

–        The first step in easing the currency restrictions will most likely be to open doors in Iceland to the off shore kronas

–        The currency restrictions can’t be lifted until it’s clear that Iceland can refinance itself abroad. As long as the currency restrictions are in place, the CBI has to buy currency abroad, instead of borrowing, resulting in a lower exchange rate and higher prices on imported goods.

The CBI recently published a report on Icelandic debt, ‘What does Iceland owe?’ So far, there is only an Icelandic version and an English summary but an English version is due. The main results are:

“The article peers through the maelstrom caused by the collapse of the financial system, causing the outcome of assets and liabilities according to official standards to give a misleading view of the debt position that will be the strongest determinant of Iceland’s welfare in coming years. In the report, the authors estimate the likely outcome of asset and liabilities values that will emerge when the dust settles. This can be called Iceland’s “latent” debt position, but the term “underlying” debt position has also been used. Although there is still considerable uncertainty about the findings, it seems certain that, when the estates of the failed financial institutions have been settled and other factors that skew the overall picture have been accounted for, it will be revealed that Iceland’s net international investment position has not been lower in decades. Net public sector debt, on the other hand, will be considerably higher. The report also estimates the country’s hidden current account balance, which (for the same reasons) is much more positive than official figures indicate, in part because accrued interest on the estates of the failed banks will never be paid.”

According to the CBI the outlook is good, Iceland isn’t as heavily indebted as some other countries etc.: 70% of GDP. If the debt related to Actavis are taken out, the debt is 50-55%. In a comment from an economist he added: ‘What’s the difference between the Irish and the Icelanders? Icelanders are good at pretending to be broke.’

However, this isn’t beyond dispute. Some economists I’ve talked doubt the CBI’s conclusion, pointing out that there has often been a tendency to overestimates in Icelandic figures. Qui vivra verra.

*I didn’t follow the broadcast of the meeting but have based this on news in the Icelandic media.

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It’s now clear who, apart from Banque Havilland, tried to hinder the Office of the Special Prosecutor in Iceland to get access to the documents from Kaupthing Luxembourg, now the Rowland family’s Banque Havilland that bought Kaupthing’s Luxembourg subsidiary. Earlier, when I inquired at the courts in Luxembourg I was told that only those connected to the case could get the verdict. Now, Vidskiptabladid Iceland, has obtained a copy of the verdict.

Unsurprisingly, both Kaupthing’s CEO and chairman of the board, Hreidar Mar Sigurdsson and Sigurdur Einarsson, tried to hinder the OSP to get the documents obtained via house searches a year ago. Another paper, DV, wrote today the the OSP had been very successful in finding documents at the home of Magnus Gudmundsson, who was Kaupthing Luxembourg manager and stayed on at Havilland. Some of the documents were in Gudmundsson’s car. (If you ever drive in an ex-Kaupthing manager’s car look around and try to get a peep into the booth.) Gudmundsson however is not on the OSP ‘opposition team.’

Others in this team are Olafur Olafsson,* the second largest shareholder in Kaupthing and four companies owned by him: Sable Air APS Denmark and three BVI companies, Marine Choice Ltd, Fort Shannon Ltd and Fordace Ltd. In addition there are Skuli Thorvaldsson, Egill Agustsson and his business partner Einar Bjarni Sigurdsson, living in Denmark.

This is quite an intriguing circle of business men. All these people, apart from Einar Bjarni, are names that are already connected to alleged market manipulation and other manipulation by Kaupthing. It’s save to conclude that this is a group of men who formed a close network at the core of deals that the OSP is investigating.

Olafsson was connected to the al-Thani deal: a sheikh from the Qatar ruling family bought 5% in Kaupthing in a highly publicised deal in early September 2008. But instead of the deal showing the sheikh’s believe in Kaupthing it apparently showed that the bank was unable to sell any shares except by offering ‘risk-free’ loans (the risk was all on the bank, making these deals look like a breach of fiduciary duty on behalf of the bank’s management). The sheikh also got a loan of $50m towards future profits. Needless to say there were no future profits only imminent losses. Olafsson got the sheikh another Kaupthing loan to buy shares in Alfesca, where Olafsson is a major shareholder, also a highly publicised deal that then came to nothing. – Olafsson still holds his interests in Alfesca where the chairman is Arni Tomasson chairman of the Glitnir’s ResCom. Olafsson, who earlier lived in London, now lives in Switzerland.

Skuli Thorvaldsson had an interesting relationship with Kaupthing. He has been living in Luxembourg for decades and wasn’t known for being fabulously wealthy. His branch has been property investment. His connection with Kaupthing first became clear when the loan overview from Sept. 08 was leaked on Wikileaks. The SIC made it known that Thorvaldsson was Kaupthing’s biggest debtor in Luxembourg, pretty staggering considering his apparently low key property business. His loans with Kaupthing peaked at €200m just before the collapse of the banks. Thorvaldsson was also involved in Kaupthing plots to lower its CDS: the bank lent Thorvaldsson huge sums through a web of companies enabling Thorvaldsson to buy CDS and affect the bank’s CDS spread. An audacious attempts that Deutsche Bank was involved in – Kaupthing managers claim the idea came from DB but DB claims it, unaware of the aim, only advised these structures. Kevin Stanford and Olafsson were also involved in these CDS acrobatics – and yes, DB’s role is, ahem, interesting.

Agustsson’s business partner is otherwise unknown but Agustsson is connected to companies that were close to Kaupthing and their habit of lending to companies, most noticeably a company called Desulo that has featured in an earlier Icelog on the deals Agustsson and others from the OSP ‘opposition’ were engaged in.

Unsurprisingly, it turns out that those who tried to hinder the OSP to obtain the documents are all, except Banque Havilland, part of Kaupthing’s inner circle, connected to deals and companies that the OSP is investigating.

*4.3.’08: Olafsson has issued a statement saying that he didn’t oppose the handing over of documents to the OSP but that he opposed that documents unrelated to issues being investigated should be handed over.

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As I have mentioned, president Olafur Ragnar Grimsson’s critics claim that by taking stance on the Icesave issue he’s diverting attention from widespread criticism for his previous involvement with discredited business leaders, some of whom are now under investigation for alleged fraud. Below is a photo* from this past. From the beginning, he emphasised that his role in promoting Icelandic businesses abroad. Few would contend with this role, after all head of states and leading politicians mostly do it. But some will feel that Grimsson got a bit to cosy with some of the Icelandic business leaders who have lost their reputation.

The one person truly out of place on this photo is Finland’s president Tarja Halonen to whom these leading lights of Icelandic business life ca 2004-2007 were clearly being presented. Far left is Robert Wessman, who was probably the CEO of Actavis at the time of this meeting. Wessman bought shares in Glitnir for ISK6bn a few days before the bank collapsed. ‘Sometimes you gain, sometimes you loose,’ he said stoically on tv after this disastrous deal became known. Considering what we now know about how the banks lent their favourite clients to buy shares there might still be something unknown about this deal. Wessman, the only businessman on the photo still living in Iceland, is now embroiled in law suits with his former boss and business partner Bjorgolfur Thor Bjorgolfsson. The cases regard Wessman’s departure from Actavis. The two were earlier close enough to co-invest in property deals in Spain that failed, possibly an added source of discontent between the two.

Next to Wessman is Hannes Smarason, apparently ill at ease in his unsharp suit. After working for McKinsey in the US, whereby he gained a lot of credibility, Smarason returned to Iceland in the late ’90s to be a CFO at deCode. He has denied that he and deCode’s CEO Kari Stefansson were the middlemen when deCode sold shares in the grey market before floating on the Iceland Stock Exchange. SEC filings show that the sale was conducted through a Luxembourg company, Biotek Invest. When Biotek Invest was dissolved by a Panama company it held almost $40m. Smarason later left deCode to join the rising business star of the early ’00s, Jon Asgeir Johannesson. They bought into Icelandair, sold the air business in 2004 and started on a shortlived investment spree. By the end of 2007 FL Group had failed and Smarason left the company. Since then, no big stories, except from the past, have been heard of Smarason who lives in London. It’s believed that matters related to Smarason are being investigated by the Office of the Special Prosecutor in Iceland. Smarason is also one of the defendants in the Glitnir case in New York that now seems to be about to be reopened after being dismissed last December.

On Halonen’s right is the ever photogenic sharp dresser Bjorgolfur Thor Bjorgolfsson. The formerly so fabulously wealthy major shareholder in the two failed banks Landsbanki and Straumur is still, at least on paper, connected to Actavis, the pharmaceutical company that he built up and then took off the market in summer 2007. However, it seems that Deutsche Bank, Actavis main creditor (Landsbanki took part in financing the Actavis deal but the deal was constructed in such a way that the bank was left with nothing, according to Landsbanki’s ex-CEO Sigurjon Arnason, when Actavis ran into trouble). The fact that Bjorgolfsson’s father, his co-investor in the two banks, was jailed for fraud in the ’80s seems to have made Bjorgolfsson determined that money and respect went hand in hand. He still has money but in Iceland there isn’t much left of the respect. He runs an Icelandic website to explain his side of the matters. I’ve been told that he’s preparing to write a book, both in Icelandic and English, telling his version of the Icelandic fall (in interviews he has blamed everyone except himself but in the report of the Special Investigative Commission some of those involved in the events in October 2008 have said that at that time Bjorgolfsson lied to them about the state of Landsbanki) but his spokespersons say that though he keeps track of things no book plans are confirmed. Bjorgolfsson has been involved in real estate companies in Denmark where an old friend of his, and co-investor both with Bjorgolfsson and Johannesson, Birgir Bieltvedt lives. Bjorgolfsson lives in London and has an office in Mayfair.

Hreidar Mar Sigurdsson was the CEO of Kaupthing. Sigurdsson now lives in Luxembourg and, together with other ex-Kaupthing employees, runs an investment/consulting company there called Consolium. Sigurdsson was held in custody last year in connection to an ongoing OSP investigation into Kaupthing. Consolium has been very close to Banque Havilland, owned by the Rowland family who are the administrators for Pillar Securitisation, the bad debt part of Kaupthing Luxembourg that the Rowlands bought. These close ties – the Rowlands kept Kaupthing Luxembourg’s manager Magnus Gudmundsson until he was remanded to custody like Sigurdsson – have led to speculations about the ties between the Rowlands and Kaupthing’s key managers and major shareholders like Exista og and Olafur Olafsson.

Two and a half years after the collapse of the banks, these five business men – and to some extent Grimsson – are still very much defined by the events of 2008 and their questionable success in the short lived once upon a time of an Icelandic business boom.

*I can’t credit the photographer since there wasn’t any name with the photo but I guess it’s an official photo from the office of the Finnish president.

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Now that the president of Iceland has sent the Icesave bill for a referendum, Icesave is again being debated in Iceland though I sense that it’s not the same burning issue as earlier. Here are some of the aspects that attract the greatest attention.

First of all, was the president within his legal rights to send the bill off to a referendum instead of signing it? Seventy percent of MPs, from all parties, voted for the bill, meaning that here, according to some, president Olafur Ragnar Grimsson is going against the lawful rule of parliament. However, Grimsson points at another vote in Althingi, alongside the bill: the Althingi also voted on a referendum.

Here the vote was narrower. I.a. the Independence Party, in opposition, voted for a referendum. But in an interview following Grimsson’s decision the IP leader Bjarni Benediktsson said that although he had been for a referendum he thought that it had been up to Althingi to decide on a referendum, not the president. He accepted that Althingi vote went against his wish but wasn’t happy with the president’s decision.

When the president presented his decision he spoke of two legislators, Althingi and the people. Legal experts contest this definition: Althingi is the legislator, voted in by the people. The president also pointed out that it’s the same Althingi that voted for the bill now as a year ago, as if that weakened the vote. But this is just his feeling, not supported by the constitution.

The general feeling among Icelandic legal experts is that by his decision the president has redefined his power. The president has, according the constitution, the right to send bills to a referendum. No president had done it until Grimsson, in 2004, sent a hotly debated bill on media ownership (that many saw as The Independence Party going against Baugur’s grip of the Icelandic media) to a referendum. The media bill was then consequently withdrawn. Then it was the Icesave bill last year – and now again. The move now is widely questioned since this time the Icesave bill had a wide support in Althingi.

It’s clear that the EFTA Surveillance Authority keeps an eye on the situation. The EFTA court will not rule on the Icesave agreement itself, that’s beyond its remit. Its focus of interest is the decision by the Icelandic government from Oct. 2008 to differentiate between depositors in Iceland and abroad (this decision is often referred to as being part of the Emergency Act, passed on Oct. 6 2008 but this differentiation is actually not part of the Act).

Icesave keeps on attracting attention abroad. Yesterday, WSJ wrote on the ‘Icelandic Freeze-Out’, pointing out that this time polls indicate, as pointed out earlier on Icelog, that Icelanders might vote for the agreement. WSJ then goes on:

“A yes vote in a referendum likely to be held in early April would leave Iceland in hock to London and The Hague for as long as 35 years—and this because the British and Dutch governments decided, of their own volition, to bail out their own citizens. (My underlining.)”

It’s highly questionable how long the payments will stretch out, 35 years is the maximum but it seems that the Landsbanki assets will go a long way to cover the Icesave debt though there is some exchange risk involved. It’s however completely wrong that the British and Dutch governments decided, on their own, to pay their respective Icesave depositors.

The Icelandic government kept saying that the deposits were completely save and guaranteed by the state, as did the governor of the Central Bank David Oddsson, earlier PM and now editor of Morgunbladid, an Icelandic newspaper, in early February 2008. After the collapse of the banks, Icelandic ministers met with their opposite numbers in Brussels early November 2008 and reiterated their intentions to pay. At the time, the IP and the social democrats were in government. The IT changed tone only when they landed in opposition in March 2009. The present government is led by the social democrats, with the Left Green at their side.

Many Icelanders feel that the president’s decision is highly motivated by his past: he was an energetic cheerleader for the Icelandic banking ‘Wunder,’ travelled to open bank branches and mixed with the bankers and businessmen now tainted by alleged fraud. By putting himself so firmly against the big nations who are squeezing the little one he might well be positioning himself to run for his fifth term next year, an unprecedented length of time. There is no legal limit to an Icelandic president’s time in office.

The president has pointed at the benefits that his decision had last time: a much more favourable agreement. However, it’s come at a cost to businesses but it’s a cost that’s not easy to calculate. Right now, the CDS has again shot up. There might be some Icelanders who shrug their shoulders, refusing to pay. Others might be worried about the consequences of an international isolation and the cost of being seen as a people who flip flop and doesn’t honour its words.

As to the political consequences, it’s difficult to say. If the referendum rejects the bill the government really has run out of options since the UK and the Dutch government will not try negotiating a fourth time. Could the government resign? Though nothing is impossible, it’s not terribly likely since the opposition wouldn’t be keen to wade into the Icesave mess.

For the time being, the most exciting part of the political scene is the Independence Party. Some feel that Benediktsson showed great courage to support the agreement (though admittedly the party had a hand in it, having supported Lee Buchheit to lead the negotiations). Die-hard followers of David Oddsson (now fewer than earlier from his own party but with some unexpected support from the far-left Icesave-opposition) will support his attempts to drive Benediktsson, who has stood up to Oddsson, out of office though there is no apparent leader-in-waiting. Oddsson, earlier no fan of Grimsson, is now writing laudatory editorials about him, underlined by the messianic photo of Grimsson on Morgunbladid’s front page on Monday.

The intense, and incredible, attention on Icesave has detracted attention from other issues that should have been discussed more, such as the state aid to the banks and later to other financial institutions. If lucky, the Icelandic state might have to fork out ISK50bn, to foreign Icesave deposit holders (but more if less lucky and the exchange rate falls). So far, the government has put ca ISK26bn, €162m, into VBS, a bank that survived Landsbanki by 8 months because Landsbanki had financed it far too lavishly (another story). Eight months later, VBS was bust. ISK12bn went into the insurance company Sjova (any national harm that an insurance company would go bust?) and now enough billions into collapsed building societies, bringing these numbers close to a possible Icesave payment. I leave it to the readers to contemplate whether paying foreign deposit holders is more of an issue than saving Icelandic financial fiefdoms.

Icesave isn’t formally linked to Iceland’s EU application but EU can’t disregard the issue. Most people I’ve spoken to do think that EU will want to see an end to the dispute before the application is processed further. At a press conference yesterday morning, Denmark’s foreign minister Lene Espersen aired her concern if the referendum would put an end to an agreement. Iceland would have to settle the dispute with the Dutch and the UK.

The IMF seems to be indicating that the currency restrictions can’t stay in place forever and should be lifted as soon as possible. With Icesave in limbo it won’t happen. It can be argued that the Icelandic currency (or the non-currency as a friend of mine says) is now artificially high, making the Icelandic business environment a Wonderland, cut off from reality. The currency restrictions were seen as a temporary necessity for Iceland to adjust after the crash. At some point, Iceland will need to adjust to the real world.

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According to Ruv, Icelandic Broadcasting Corporation, the dismissed Glitnir case in New York against earlier major shareholders in Glitnir Jon Asgeir Johannesson, his wife Ingibjorg Palmadottir, businessmen Jon Sigurdsson from FL Group (now Stodir), Palmi Haraldsson (who still owns Icelandic Express), Thorsteinn Jonsson (who owned Coca Cola in Iceland, lost it but might be buying it again with the Spanish Coca Cola) and Hannes Smarason (earlier the high flying CEO of FL Group), Glitnir’s ex CEO Larus Welding and Glitnir’s auditors PriceWaterhouse Coopers, now seems to have been reinstated at the New York Supreme Court.

The drastic move by the bank’s Winding-up Board to sue the group, ‘a cabal of business men led by convicted white-collar criminal Jon Asgeir Johannesson’ according to the thriller-like charges, seemed to have faltered when judge Charles Ramos dismissed the case December 14 on the ground that it was indefensible for him as a judge, paid by US tax payers, to use his precious time on a case that could just as well be heard in Iceland. All the relevant facts pro and con were presented in court on that day. The judge said his heart went out to the investors who lost money but he couldn’t but dimiss the case.

Judge Ramos did however pose two conditions to the defendants for dismissal: the defendants would not contest jurisdiction in Iceland and would have to meet up voluntarily in an Icelandic court; second, they would agree not to raise any jurisdictional or other defences to enforcement of a final judgement in New York on assets that they might retain in New York.

Glitnir didn’t rest but appealed the decision and it now seems to have been reinstated since the defendants didn’t comply to the demands of the judge. From the court filings lately it seems that all of them had to agree to this but that didn’t happen. There have been letters going to the court, the last one, from Hannes Smarason, filed only today. If the latest news is true, the letters from the defendants don’t seem to have satisfied the judge and the flurry of letter have come to nothing.

When Glitnir brought the charges in New York the defendants were both upset and dismayed over this very audacious move, claiming that any case against them could perfectly well be brought up in an Icelandic court, that the WuB was running a personal vendetta and only out on an expensive information gathering exercise. Johannesson, whose assets were frozen internationally last summer by a UK court at the behest of Glitnir, threatened to sue Steinunn Gudbjartsdottir chairman of the WuB and to have her assets frozen. So far, these have been only empty, and somewhat pathetic, words and impotent threats. And now the Glitnir charges seem to threaten the defendants again.

After all the lament on behalf of the defendants, understandably so since it’s no joke to be sued in the US, it’s difficult to understand why the defendants didn’t jump to fulfil the demands of judge Ramos and escape the charges. Whether there is some misunderstanding in this, the defendants were stubborn or got bad legal advise the surprising twist in this Glitnir New York tale seems to be that the Glitnir WuB again is on track with charges in New York. So far, the court documents* have given a fascinating insight into the business surrounding Glitnir and its major shareholders. If the case continues there might be more to come.

*Due to security reasons it’s not possible to go directly to the documents. You will be asked to write down numbers or letters before getting access.

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As a break from Icesave and the crisis talk, take a look – or rather enjoy a whiff – of Andrea Maack perfumes. Andrea is an Icelandic artist who a few years ago took a fancy to scent and decided to use proper perfume in her installations. She joined up with a French perfumeur and has now made three real perfumes – Sharp, Smart and Craft – that are sold by leading perfume stores all over the world, i.a. Lucky Scent in Los Angeles and Les Senteurs in London.

Andrea now works on the perfumes with her husband and with Inga, who apart from being an old friend of Andrea, is an interior designer who takes care of the design of the bottles, the package and the visual side of the scents.

Judging from the reviews and buzz around Andrea Maack perfumes, it will be interesting to follow Andrea’s scents.

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According to opinion polls in Iceland 60,7% support the decision of the Icelandic president to send the Icesave agreement to a referendum – and 57,7% said they would vote for the agreement. If that were the case, the agreement would comfortably go through.

Last time there was a referendum, the government didn’t move a finger to get people to vote and the PM didn’t even vote. They seemed to think from the beginning that they would be able to get a better agreement. This time, there really isn’t anything else on the table. This time, it will be interesting to see if the government throws its weight behind the agreement. The Dutch government has announced that it’s waiting for the results of the referendum but that the agreement is the final offer.

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According to Icelandic law, a referendum has to be called within two months of the president sending a bill for a referendum. Prime minister Johanna Sigurdardottir said today that the aim is to hold a referendum on Icesave in a month’s time. There is some discussion going on to hold another vote for the constitutional assembly at the same time but so far that’s only an idea.

At the referendum last year both the Dutch and the British government said that a referendum was a domestic issue for Iceland. Most likely, that’s still their position. This time however, it’s not in sight to renegotiate. Sigurdardottir said today that the Dutch have made it quite clear that there will be no new negotiation. The latest agreement is also a final offer. She hopes that the two nations will not retract the last agreement.

The president’s decision gives rise to quite an exceptional situation. It’s clear that, contrary to the constitution which stipulates a representational democracy through parliament, the president now holds the power and can simply on his own stifle decisions by a democratically elected parliament. This unprecedented situation will no doubt cause a hefty debate, yet again, on the powers of the president vs the parliament. Today, there were already many who voiced concern that the president went against a parliamentary vote where 70% of the MPs, from all parties, had supported the Icesave bill – a decision that the president has now overturned.

If the Icesave agreement will be overthrown in a referendum it’s completely unclear what will happen. The question is whether the government would survive though the opposition would most likely not be too keen to come to power to solve the Icesave dilemma. With Icesave unsolved and not yet settled, it seems rather obvious that the Icelandic membership of EU will stall. Neither the Dutch nor the Brits will accept that a country they feel doesn’t honour its words should become a EU member. ESA might also have a say on a new situation, after its two recent moves regarding Iceland. The dispute might possibly end up in the EFTA court, a move that Lee Buchheit, who led the last Icesave negotiation, has warned might turn against Iceland.

There certainly are those in Iceland who will feel fine about having Icesave an unsolved issue since it distracts the attention from other things. The conservative old power elite connected to Morgunbladid and its editor, former PM and governor of the Central Bank David Oddsson, who earlier saw the president as an arch enemy has now discovered a new ally in him. This power elite will keep on bashing the leader of the Conservative party Bjarni Benediktsson as they have been doing so mercilessly in the last few weeks. Their aim seems to be to drive Benediktsson out of office. It remains to be seen if Benediktsson will actively campaign for a yes in the coming referendum but he will most surely be fighting for his political life.

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Here is the declaration, in English, that the presdent issued today, on Icesave.

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After the Althingi passed the bill on Icesave, giving the necessary guarantee to back the third agreement, the president of Iceland had to sign the bill in order to pass it into law. He has now decided to send the new agreement to a referendum.

At a press conference today, president Olafur Ragnar Grimsson made his decision known. On Friday, he was given a petition, signed by over 40.000 people, asking him to send the Icesave agreement to a referendum, yet again. Last year, the petition was signed by 56.000 people. However, with the Althingi firmly behind the Icesave bill this time, Grimsson is sending the agreement to a referendum, claiming that because the same members of Althingi this should be dealt with by the nation.

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