Sigrún Davíðsdóttir's Icelog

After much effort by former clients of Landsbanki Luxembourg – mostly foreign pensioners in Spain and France who took out equity release loans at the bank – it now seems their efforts have caught the attention of authorities in Luxembourg. In France, a judge has halted the recovery of these loans by the Landsbanki Luxembourg administrator

According to the Luxembourg paper Wort, there are now two investigations ongoing in Luxembourg related to Landsbanki’s operations there. This surfaced in the Luxembourg parliament as the minister of justice Octavie Modert responded to a parliamentary question from Serge Wilmes, CSV. Ms Modert said that both cases related to alleged criminal conduct in the Icelandic banks and great progress was being made in one of them.

According to Wort the progress relates to the Landsbanki equity release scheme, extensively covered on Icelog. It is not clear if both investigations relate to Landsbanki or if the operations of Kaupthing and Glitnir in Luxembourg are also being investigated.

The website of the Landsbanki Victim Group is here. This group has hired lawyers both in Luxembourg and Brussels. Considering the fact that the banks collapsed in October and that there have been efforts in Iceland to investigate operations there, also with assistance from authorities in Luxembourg it can only be said that if there is much progress made now, little was done for a long time. It seemed that Luxembourg was more than reluctant to pay any attention to the financial sector this little Duchy lives so well off.

The latest move is that efforts by the Landsbanki Luxembourg administrator to recover assets from the equity release clients have now been halted. As an investigation is ongoing in France into this scheme sold through Luxembourg, a judge in Paris has thwarted the recovery efforts while the legality of the scheme is still unclear.

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This week, an Althing investigative commission delivered long awaited – or long dreaded – report on the Housing Finance Fund. It was even worse than expected, outlining greater than expected losses. It outlines how political connections – mainly the Progressive Party, now leading the government – systematically put the party’s interest before the HFF’s. The losses 1999-2012 could amount to ISK270bn, 16% of Icelandic GDP, possibly more. Add this to another blunder – the losses of the Central Bank of Iceland from repo deals with the Icelandic banks prior to the collapse – also causing a sovereign loss of 16% of GDP and it seems that Icelanders pay a lot for the political parties putting their own interests before the country’s.

,,… unfortunately, one can’t but sincerely admit that one had lots of doubt but this is what was agreed as the government was formed in 2003. If it hadn’t been done, that government would not have come into being.” This is how Geir Haarde minister of finance 2003-2007 (leader of the Independence Party 2005-2009, prime minister 2006-2009) described to the Special Investigative Commission on the financial collapse in Iceland how the 2003 coalition of the Independence Party and the Progressive Party came into being. In the elections that year, the Progressive Party campaigned on raising the mortgage level to 90% of the purchase price. In order to save the coalition of the two parties, led by the Independence Party, that party agreed to turn the Progressive campaign promise into policy. The vehicle was the Housing Finance Fund, HFF.

This policy turned out to fuel a boom that was already building up. Haarde was aware of the danger but, concludes the SIC report, his estimate was “that the expected loss for society (from this policy) was an acceptable cost to society for keeping the two ruling parties in power.”

We now know that the cost of this policy might be the somewhat unacceptable loss of ISK270bn, €1.68bn, 16% of GDP. Ironically, it now falls on the present coalition of these two parties, this time under Progressive leadership, to take a decisive step to end the Fund’s misery.

A new report (unfortunately only in Icelandic; not even an English summary), published earlier this week by an Althing investigative commission, tells the story of these huge losses and how the fund was used for political purposes. The report lays political networks bare, showing how political connections were favoured over merit and experience and how the fund continuously added to the coffers of companies connected to the Progressive Party. Regulators failed and foreign criticism, i.a. coverage in 21 reports by the OECD and the IMF, was systematically ignored. – The Fund itself disputes the numbers in the report, saying the losses are at most ISK64bn. However, the fund only put forth this number without any documentation in a press release and has not answered other matters raised in the report.

HFF, the Progressive power sphere and regulators who failed

The core of the problems was changes to the financing of the HFF and changed lending rules in 2004. The Independence Party had for some time worked on changing the issuing of HFF bonds so they would appeal to foreign investors. In 2003 the Progressive Party had campaigned on raising the mortgage level to 90% of purchase price. The changed issuance caused an immediate loss in 2004 of ISK21bn. A simple error in calculation added another ISK3.5bn, to the loss, bringing it to almost ISK25bn. Higher lending levels increased the risk and did over time cause higher levels of non-performing loans. The Fund started lending to property developers and companies, both increasing risk and losses.

The immediate loss of ISK25bn was just the beginning. Over the years, the faulty decisions taken in 2004 have caused snowballing losses, which now stand at ISK103bn of loss already on the books with the addition of foreseeable loss of 167bn, in total ISK270bn. The Fund claims the losses mainly stem from the collapse of the banks but according to the report the main losses stem from changes to the Fund in 2004. In a nutshell, it is a saga of the intertwining of political power and a public institution, the HFF.

The political connection surface in various ways. Fjárvaki, a subsidiary of Kaupfélag Skagfirðinga (once part of the Icelandic co-op movement, strongly connected to the Progressive Party and still part of the “Progressive sphere”), signed a deal to sell software to HFF. In the end the deal was terminated without Fjárvaki fulfilling it. Yet, HFF paid Fjárvaki an amount equal to the sales price. This is only one part of the HFF’s many highly questionable connections to Progressive-connected entities. And only one of innumerable similar stories in the report.

Then there is the glaring incompetence. With the 2004 changes in laws the Fund was obliged to have a proper risk management system. A Swedish consultancy, Capto, delivered the system and ran it to begin with. When the HFF staff took over it seems they neither understood it nor were able to run it, rendering the risk management useless. To make things worse, the Financial Services Authorities, FME, did not react to the Fund’s flawed risk assessment.

On the whole, all regulators and institutions, which were supposed to supervise and regulate the HFF failed. Part of the problem was that the fund was drowning in money as banks were venturing into mortgage lending, wooing clients with lower interest rates than the HFF. With changed rules, borrowers could pay up their HFF without penalties, meaning the HFF was drowning in money it could not invest at rates high enough to meet its own financing costs.

Through 2005, HFF lent ISK95bn to banks and other financial institutions, thereby financing the banks’ own mortgage lending, which was crowding out the Fund’s own mortgages – and in addition fuelling a boom. The report criticises the Central Bank of Iceland for not taking any action, thereby failing its role as a guardian of price stability.

The fervent denial of criticism

Although the extent of corrupt procurement and lack of expertise were first laid bare in the new report, the flawed public housing policy and the risk to the sovereign through the HFF’s state guarantee have been clear from the beginning and indeed heavily criticised by international organisations such as the IMF and the OECD.

The new report trawls through 21 reports from these two organisations from 1999-2012. The Fund’s clear problems and its compromising position has been a permanent fixture in reports from both organisations and still are. Yet, the various governments during all these years have ignored the warnings. And there is still no plan in place to end the Fund’s loss-making misery. The new report concludes that by not heeding the relentless warnings, Icelandic authorities have undermined their trust abroad.

In general and over all these years the intertia to solve the HFF’s problems has always been stronger than all reasoning and advice given by international experts. The question is why this inertia was so strong. The answer is twofold – there was the profound ignorance within the fund and lack of expertise. Secondly, political interests – mostly, though not solely, the interests of the Progressive Party – have been stronger than the general interest of the country. This is what invariably happens when political interest overrides merit and expertise. To the Irish and the Italians these will be familiar stories.

The present echo of ignored warnings

When Icelanders disapprove of foreign criticism of Icelandic issues, their standard answer is that foreigners do not understand the special circumstances in Iceland. The truth is of course that general rules of economics apply in Iceland as elsehwere. But it is difficult to follow any enlightened advise when political interests and connections subsitute normal reasoning.

There are now some disturbing similarities to events in 2003 and what later ensued. As then, the Progressive Party wooed voters in the spring elections with promises of debt relief almost every expert not connected to the Progressive Party warns against. The party’s promise of wide-spread debt-relief to those who are too well-off to have been eligible to earlier debt-relief offers draws criticism from the CBI as well as from the OECD and the IMF. The warning choir is loud and clear and singing from the same hymn sheet: these plans threaten financial stability and could cause inflation, all too familiar to Icelanders.

In a recent interview (in Icelandic) prime minister Sigmundur Davíð Gunnlaugsson said it did not worry him what the different “acronyms” (meaning international organisations such as the IMF and the OECD) thought of the planned debt relief. These organisations rarely welcomed radical actions such as those planned by the government, Gunnlaugsson said. In his speech on the Icelandic national day, June 17, the prime minister said that Icelanders would not let international organisations dictate what can be done for Icelandic households.

It is expensive to live in a country that is badly goverened or where corruption – difficult to avoid that word in relation to the HFF – is allowed to add its poisonous cost to every transaction. The corrupt practices, disregard for competence and expertise and political favours in HFF have so far cost Iceland 16% of its GDP and yes, more might be to come. Losses stemming from the CBI’s repo transactions with the banks before the collapse amount to another 16% of GDP. Consequently, these two mistakes have caused losses equivalent to about a third of Iceland’s GDP, the cost shared by Icelanders for bad political calculations.

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In her blog (in Icelandic), minister of social affairs Eygló Harðardóttir has aired the idea that the estates of failed financial companies could be taxed. Yes, that debt should and could be taxed. Harðardóttir is not the first to mention this possible source of taxation – the idea has been around for a while, mostly mentioned by the minister’s party members, i.e. from the Progressive party. One of those is party leader and prime minister Sigmundur Davíð Gunnlaugsson.

Harðardóttir underlines that she is not the minister of finance so it is not for her to decide on this source of taxation but she finds it utterly natural and even desirable that estates should be taxed.

Others beg to differ. I mentioned this idea to some lawyers in Iceland who said that taxing the estate of a bankrupt company, i.e. taxing debt, runs contrary to what is normally seen as a taxable source. The minister clearly begs to differ.

The feeling in Iceland is that since the estates of Glitnir and Kaupthing are owned by foreign creditors the estates are particularly attractive as a source of income for the government. It is though not entirely correct that this will only hit foreign financial institutions – Icelandic creditors, i.a. pension funds and the state itself, own ca. 7-8% of claims in these two estates.

Taxing the estates is clearly being considered – but there are no doubt lawyers in the ministry of finance and elsewhere who will make clear that this would be a highly questionable practice.

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When Icelandic politicians defend whaling they refer to the right of indigenous people to cultivate their cultural heritage and the right to control the country’s use of its marine resources. Yet, nothing could be further from the truth – whaling never played a major role in Icelandic culture, it makes no financial sense any longer but the only reason there is still a whaling station is the stubbornness of a man whose father was a major whaling magnate in the early part of last century

“If Christ and Mary give me a whale, I will give you the tail,” is one of the sentences from one of two Icelandic 17^th century Basque-Icelandic glossaries. The glossaries indicate cultural ties with Basque whalers who hunted for these magnificent mammals in the oceans around Iceland. First mentioned in Icelandic annals in 1613, the Basques would at times pay a visit, which might explain why there are still people in the Vestfjords with exceptionally black hair and dark eyes.

Icelanders hunted for whale as for other creatures of the seas and made use of “drift-whales,” dead whales that drifted on shore. The meaning of the word “drift-whale” in Icelandic, “hvalreki,” has the same meaning as “wind-fall” – an unexpected good incurred at no cost.

At the time, Basque whalers sailed as far as Newfoundland as did the Dutch and the British, also the Norwegians and whalers from the British colonies in America. The whales were mostly hunted for the oil, i.a. used as fuel for street-lights, ever more frequent in major European cities from the middle of the 18^th century. All this was to change in the late 19^th century as fossil fuels gained popularity but whaling was still an important industry.

Already around 1900 over-hunting started to drive whalers from old hunting grounds to new. In early 20^th century Russians and others used ever bigger ships and more powerful weapons to hunt for whales. After World War II whaling resumed with enormous force, culminating in 1961-62 when almost 70.000 big whales were caught.

The International Whaling Commission and whaling in Iceland

In response to over-exploitation of the big whales, the International Whaling Commission was set up in 1946, both to set quotas and for the purpose of research. For decades the interests of the big whaling nations ruled the IWC and the quotas were too low to make a difference. Over time the protection lobby got stronger and in 1982 the IWC introduced a total ban on commercial whaling, i.e. commercial whaling moratorium, enforced in 1986. Though set to be reviewed at a later time, the moratorium is still in place to this day, except for catch allowed for aboriginal subsistence whaling. The IWC now also establishes protocols for whale-watching and its whole agenda is protection.

Over time, various countries have set their own ban not only on whaling but on any imports of whale products

Around 1900 there were several whaling stations in Iceland, owned by Norwegians who employed Icelanders. In 1948, Hvalur hf, the first and only Icelandic company dedicated to hunt for big whales started operations in Hvalfjörður (Whale-fjord), ca 50 km West of Reykjavík. Minkie whale, a small whale, has been hunted on smaller boats in various places around the country, now almost exclusively in Faxaflói, the gulf around Reykjavík.

At the time, Iceland did not object to the moratorium but in 1992 Iceland left the IWC, having carried on whaling for scientific purposes. In 2002, Iceland sought to re-enter though it did try to preserve some scope for whaling by making a reservation:

Notwithstanding this, the Government of Iceland will not authorise whaling for commercial purposes by Icelandic vessels before 2006 and, thereafter, will not authorise such whaling while progress is being made in negotiations within the IWC … Under no circumstances will whaling for commercial purposes be authorised without a sound scientific basis and an effective management and enforcement scheme.’

Though not all member governments of the IWC accepted this reservation, a majority accepted Iceland’s membership to the IWC.

In 2006, Iceland concluded that commercial whaling could be resumed since the moratorium and the state of whaling had not been re-evaluated as Iceland insisted had been the intention with the moratorium. The quota at the time was only nine fin whales and 30 minkie whales. Since then, Hvalur hf, the Icelandic company, has caught whales on and off.

In 2009 the Icelandic Ministry of fisheries stipulated that fin whales could be haunted in the coming years, through the year 2013. The last two years, Hvalur hf did not send its boat out to hunt for whales but this year, with a quota of 154 fin whales, the whaling boats are out at sea.

Those strongly in favour of whaling are equally strongly opposed to Icelandic membership to the European Union since it is clear that the EU is not in favour of whaling in Iceland.

Icelandic whaling and the convoluted interests: part of the past, not the present

During the centuries, whale meat was been eaten in Iceland. The meat is very perishable, turns rancid very quickly. The layer of fat next to the red meat would be could into strips and preserved in whey. After freezing was introduced as means of preserving food, the whale meat was frozen as soon as possible. Meat from big whales was by no means a stable during the latter part of the 20^th century but was at times on sale. When fresh it does not have a strong taste, the texture is similar to beef and it was sometimes used in stews as a substitute for beef. Lately, some restaurants in Iceland serve grilled minkie whale meat or cured like gravlax.

The sense in Iceland has long been that it was of vital importance for Iceland to hold on to its right to whaling – any retraction would seriously undermine Iceland’s sovereign rights to make use of its marine resources, in addition to whaling being part of the Icelandic cultural heritage. “First the foreigners forbid us to hunt for whales, one day they might tell us to stop catching cod,” was a frequent argument.

Lately however, more and more Icelanders are asking if Iceland really has any interest at all in continued whaling.

The interests of the whalers weighed against the general interests of Iceland as a country that makes sustainable use of its natural resources was questioned this week from an unexpected direction: a shareholder in Hvalur hf.

In a newspaper article (in Icelandic), Birna Björk Árnadóttir, a grandchild of one of the founders of Hvalur hf and as such, as deeply imbued in the whole ethos of whaling as can be, wrote that for years she was in favour of whaling, for the same arguments so often repeated by Icelandic politicians (translation and emphasis mine):

The species caught by us are not in danger of extinction, it is the right of a sovereign nation to make sustainable use of its resources, whales impoverish us by eating so much and last, but not least, whaling is a profitable profession, contributing export revenues to the national economy. I have now changed my mind and I guess I’m not the only one. Although certain whale species are not about to become extinct, whaling is part of our past, not our future. The argument that we should catch whales because we have the right to and we can is both out-of-date and provincial in the global society we inhabit. Consequently, it is sad to hear a new minister of fisheries refer to centuries’ old tradition in making use of resources and lack of understanding when whaling is criticised in foreign media.

Árnadóttir then poses the question if catching 154 fin whales is necessary and reasonable. She both refutes the argument of aboriginal subsistence whaling and any regional importance though the hunting creates a few jobs in Hvalfjörður. Fin whales are not on sale in Iceland, the meat is exported and since there is no Icelandic industry based on whale products this is just export of raw material.

The only market is Japan and the meat does not really sell there at all – part of the catch from 2009 to 2010 is still unsold, kept frozen there. This is the situation, in spite of numerous marketing trips to Japan the last few years and regular statements that the market is improving.

Árnadóttir is pointing out, what many have surmised: it is an illusion that there is a market for whale meat.

According to Árnadóttir, the Hvalur hf management is unwilling to reveal the cost of whaling. She wonders how much money should be thrown at feeding whale meat to the Japanese who are not buying it. The only buyer seems to have been a Japanese pet food producer who just recently announced it had stopped buying fin whales. There really seem to be no other buyers for fin whales, making the whaling a rather strange undertaking.

Are we perhaps sacrificing greater interest for less interest? Let’s not forget our main trading partners oppose commercial whaling and trade in whale products. As the situation is now there is only one person who decides if these fin whales will be caught or not. I really wish he would let go of this whaling stubbornness and use his energy and assets for something else. The barracks in Hvalfjörður and the old whaling ships do indeed offer plenty of opportunities.

Continued whaling: more Freud than financial arguments

The person Árnadóttir does not name is Kristján Loftsson, son of Loftur Bjarnason who founded Hvalur hf, together with Árnadóttir’s grandfather. There are now 98 shareholders in Hvalur hf, a holding company for various fishing industry assets. Loftsson has always been very close to the Independence Party, which has been a staunch supporter of the company and the Icelandic right to whaling. There is probably no single Icelandic company, which for so many decade has enjoyed as much governmental support as Hvalur hf.

Some say that Loftsson’s push to keep Hvalur hf whaling seems to have more to do with Freud than financial motives; he cannot let go of the activities his father built up.

It is safe to conclude that the profit of whaling is negligible if any. However, another and very different whale-related industry is booming: whale watching. Those who oppose whaling see a conflict of interest here. Those in favour of whaling claim both industries can thrive side by side.

Árnadóttir makes a forceful argument: whaling hardly contributes anything at all to the economy – and it disturbs the relationship Iceland has with its most important trading partners. But as long as politicians continue to make statements as the new minister of fisheries Sigurður Ingi Jóhannsson, the driven owner of Hvalur hf is not the only one showing considerable stubbornness.

As so often, the politicians seem to be the last to sense that ever more Icelanders do indeed think like Árnadóttir: whaling makes no sense whatsoever and it does indeed belong to Iceland’s past and not its future.

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The new coalition of the Progressive Party and the Independence Party indicates it will drop the EU membership negotiations. Former declarations by the Progressive party that money to reduce household debt will be fetched from creditors to Glitnir and Kaupthing have been softened. But voters are already losing faith in the seductive promises.

The main goal of the incoming Government is inducing much needed optimism in Iceland, Bjarni Benediktsson leader of the Independence Party said today. Benediktsson will be Minister of Finance and Economy in a Government led by Sigmundur Davíð Gunnlaugsson leader of the Progressive Party.

The first part of the coalition agreement (so far, only available in Icelandic) is on “Homes” – i.e. debt situation of private households to whom the Progressive Party promised extensive debt relief. This promise was to be financed by negotiating with creditors of Glitnir and Kaupthing in such a way that the Government would get the funds needed. The exact method was however never quite clarified.

Here is what is stated in the coalition agree on this topic (my translation; my comments in brackets):

As indexed debt increased and asset prices fell, i.a. because of the effect of the collapse of financial firms and because of their appetite for risk leading up to the collapse, it is right to use the scope – which will most likely be created parallel to the winding down of the estates (of the collapsed banks) – to assist borrowers and those who put their savings towards their homes, just like the Emergency Law (passed on October 6 2008) secured that the assets of the estates were put to use to defend financial assets and to resurrect domestic banking. The Government keeps open the possibility to set up a special correction fund to reach it goals.

This sounds clunky and unelegant but so is the Icelandic text. This statement is somewhat rambling compared to the campaign promises. This “correction fund” indicates that if the process of recovering funds towards the promises takes (too) long this fund can bridge the time gap. How the fund is going to be financed is not clear nor is it clear how much money will be used for the much announced debt relief. And when borrowers can expect a cheque or correction is not made clear either. – Gunnlaugsson said today that coalition agreements were rarely very specific but added he was very content with how clear the agreement was on this issue. To me, this clarity is totally unclear.

Both coalition parties are opposed to membership to the European Union. This is what the agreement says on the EU:

There will be a break in Iceland’s membership negotiations with the European Union and an assessment made of their status and the development within the Union. This assessment will be put to Parliament for discussion and the nation informed of it. The membership negotiations with the European Union will not be continued except after a referendum.

There are pro-EU members of the Independence Party, the party’s MPs are mostly against membership but some of them – i.a. both Benediktsson and Illugi Gunnarsson who will be a Minister for Culture and Education – have earlier aired pro-EU stance. The pressure from strong interest groups such as the fishing industry and from the party’s old guard has swayed the party into a more hard-line direction in later years. However, many of their traditional voters are still pro-EU.

The list of ministers was published tonight. From the Progressive Party:

Sigmundur Davíð Gunnlaugsson Prime Minister, Gunnar Bragi Sveinsson Minister of Foreign Affairs, Sigurður Ingi Jóhannsson Minister for Fisheries, Agriculture and Environment, Eygló Harðardóttir Minister for Social Affairs.

From the Independence Party:

Bjarni Benediktsson Minister of Finance and Economy, Hanna Birna Kristjánsdóttir Home Secretary, Illugi Gunnarsson Minister of Education and Culture, Ragnheiður Elín Árnadóttir Minister of Industry and Trade, Kristján Þór Júlíusson Minister of Health.

According to a poll published today, the Progressive Party is already losing votes, indicating that voters are turning skeptical. The party got 24.4% of votes but has now 19,9% meaning it has lost about 20% of its votes in three weeks. The Independence Party is strengthened, from 26.7% in the elections to 28.4% now. The Social Democrats are on the same losing course as the Progressive Party, drop from 12.8% to just below 12% but the Left Green rise from 10.8% to 12%.

Apart from introducing a coalition agreement today, Gunnlaugsson had an indirect brush with the justice. As he headed back to Reykjavík, from Laugavatn ­– the village where the signing ceremony and press conference was held – his political adviser who was driving got stopped by the police for speed-driving. The youngest Prime Minister in Iceland since 1944 is clearly eager to get on with his job. The polls today indicate that he has no time to lose.

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At 11.15 Icelandic time, the two parties, the Progressive Party and the Independence Party will hold a press conference to announce new ministers and their coalition agreement. What is known so far is that the Independence Party will get five ministries: finance, home office, trade and industry, education and health. The Progressive Party will lead the Government, i.e. Sigmundur Davíð Gunnlaugsson will be Prime Minister. In addition, his party will get social affairs, agriculture and fisheries, environment and foreign affairs.

The ministries are fewer than the ministerial posts because there will be more than one minister in some of the ministries. The Left Government had merged ministries. In the Welfare Ministry there is health and social affairs. In the Ministry of Industries and Innovation there is trade and industry.

And what about the membership negotiations with the European Union? According to Morgunblaðið, whose editorial stance is against Icelandic membership of the EU, the negotiations will be called off immediately. This is an indirect quote (in Icelandic) from leader of the Independence Party, Bjarni Benediktsson.

New Government, new style: the two leaders will sign the coalition agreement at some sort of a ceremony, apparently in the presence of the media, ca 100 km from Reykjavík, at Laugarvatn, a small village on the lake, Laugarvatn, which has grown around a few schools there.

In addition:

There are two things that I will be paying most attention to: EU membership and negotiations with creditors of the estates of Glitnir and Kaupthing that respectively own the two new banks, Íslandsbanki and Arion. As I have blogged on earlier, the development of these negotiations determine if and how the capital controls will be abolished.

In his recent piece on Vox EU, the Icelandic economist Jón Daníelsson writes about the Icelandic recovery, “myth or a miracle?” – Just briefly, I rather believe it is neither of these two. Further, he states: “The main reason why the Icelanders voted out their government was its deference towards foreign creditors. Iceland came under significant pressure from the IMF to accommodate foreign creditors, and the government gave in.” – I also disagree on this. The unanimous understanding in Iceland is that the Progressive Party did well because it made the simple promise of returning money to voters. As irresistible to Icelandic voters as a similar promise by Silvio Berlusconi to Italian voters recently.

Daníelsson seems to ignore that Iceland cannot both fleece foreign creditors and expect foreigners to be willing to invest in Iceland. In a global world isolationism and nationalism have its limits if a country wants to be connected to foreign trade and investments. And, by the way, attracting foreign investments has always been a problem in Iceland, incidentally as it has been in Italy.

Daníelsson seems to indicate that the drop in inflation is just a temporary one and the króna, having been stronger recently, will fall again. It remains to be seen but so far, the indication is that inflation is falling, partly due to a stronger króna, that might be fairly steady in the coming months. The Central Bank has indicated it will aim for the present króna level. More on the here, in analysis from Íslandsbanki.

According to polls, major part of Icelanders is against membership – but the majority wants to end the negotiations, get an agreement and vote on it.

PS I will be following the press conference, tweeting from it – and will blog on it later today.

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A group of investors in Luxembourg funds have been trying to lodge complaints with the Luxembourg financial services authority, CSSF, after enduring losses in 2008. According to the FT (paywall), the group got a negative answer and little understanding from the CSSF in 2011 and has since been trying to get their complaints taken seriously, lately by sending a flurry of letters to prominent politicians in Luxembourg, i.a. PM Jean-Claude Juncker and Minister of Finance Luc Frieden.

One of the group’s interesting discoveries is that although financial regulation in Luxembourg is, on paper, comparable to other EU countries, the enforcement lags far behind. The result seems to be that if things go sour, as in these investments, the CSSF allegedly is not there to protect the interests of investors. The feeling is that Luxembourg is a country where the interests of the financial sector are seen to be best served by doing very little about eventual rogue elements.

This attitude of the CSSF will not come as a great surprise to regular Icelog readers.* Icelog has earlier dealt extensively with the plight of a group of clients of Landsbanki Luxembourg to get authorities in Luxembourg take their complaints seriously. Complaints that both regard the dealings of the bank before its demise in October 2008 and also how the bank’s administrator has handled both complaints and these clients. This group has run into closed doors time and again. Only through the extremely diligent work of the Landsbanki Victim Action Group – at great cost, both pecuniary and emotional – is the group hopefully moving its case onward.

One of the most remarkable events in that whole saga was when the Luxembourg Prosecutor issued a press release to declare his support for the Landsbanki Luxembourg administrator, thereby alleging that the clients were seeking to avoid paying their debt. The fact that the State Prosecutor saw fit and proper to give his support to an administrator of a private company puts Luxembourg in a league of its own among EU countries.

The banking collapse in Cyprus has led the attention to other financial centers in small economies, such as Luxembourg. It seems that much of the shady money, previously nesting in banks in Luxembourg, has not gone back to countries of their owners, such as Russia, but is seeking shelter in other offshore places, Luxembourg being one of them. It seems that ties between Russian and Luxembourg might be strengthening.

The fact that the Luxembourg media and international media is now reporting more on irregularities in Luxembourg increases the hope that the Luxembourg finance sector will at long last operate under the rules and regulations as should be the standard in the EU. Though Luxembourg certainly is not the only country with questions to answer regarding its finance sector, it still seems too difficult for clients of the very potent financial sector to seek justice in cases of alleged irregularities and outright fraudulent behaviour.

*Here is one log on Landsbanki Luxembourg; here are logs related to “equity release” loans, which are at the core of the Landsbanki Luxembourg saga. A log on the CSSF and the Icelandic banks.

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It is interesting to see how intensely relaxed Icelandic media seems to be about the new Government in the making. First, Sigmundur Davíð Gunnlaugsson leader of the Progressive Party summoned Bjarni Benediktsson leader of the Independence Party to coalition talks in unannounced places. They went to the haute-luxe summer house of Benediktsson’s father by Lake Þingvellir, which to Icelanders signals old wealth. Then to the summer house of Gunnlaugsson’s father-in-law, more the nouveau-riche type – his father-in-law got rich from importing Toyota cars and then selling the agency at a good time. Having exhausted good countryside places they started meeting in Reykjavík but they have not much been followed around – the Icelandic media is not chasing them for the latest and tiniest moves, as happens in some other countries.

The latest report, from this weekend’s Morgunblaðið, interestingly close to both parties, says that a new Government is almost there, just few remaining issues to be resolved. According to the paper, Gunnlaugsson will be Prime Minister and Benediktsson will be Minister of Finance. Other Progressive ministries will be foreign affairs, transport and the environment whereas IP will have education, justice and most importantly health, an area the IP has signaled great interest in and, more importantly, politicies.

Though the Government is not in place yet it seems that there is one decision, which will be acted on soon: repealing of a much disputed levy on the fishing industry, the so-called “veiðileyfisgjald.” Ever since transferable quotas were introduced in Iceland in the late 1980s, levy and tax on this natural resource that fish is has been a bone of cronic contention in Icelandic politics. The measures (half-measures according to many on the left; too much for many on the right) introduced by the Left Government, i.a. this levy, did not remove the contention. If the Government starts by repealing this fishing levy, its direction and interests will be very clear to most Icelanders: yet again, there is a Government clearly following the interests of the powerful Icelandic fishing industry.

Another important signal that will be awaited is the abolition of the capital controls. Part of that big bundle is finalising the fate of the estates of Glitnir and Kaupthing, thereby clarifying ownership of the new banks, Íslandsbanki and Arion, respectively owned by the estates. Both the Central Bank of Iceland and the creditors themselves have done all the necessary work over winter. Data has been analysed back and forth and what can and cannot be done is now pretty clear. A new Government cannot truthfully say it has to start gathering information on these issues – it is all there and now needs to be acted on.

If the Government does not make a move before the high-summer and holiday season, it could be seen as if the Government is fearful of tackling this very tricky and most complicated issue or lacks the ideas as to how to proceed – or feels the options are not gainful enough for the interest groups it wants to service. And if that were the case, this Government would be a disaster for Iceland, much in need to escape the fetter of capital control in order to be, again, part of a European area of free flow of capital.

For good reasons, Iceland is seen as a country that, after all, got remarkable easy out of its collapse and crisis. But that saga is not over until the country successfully gets rid of the capital controls.

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Deka Bank has lost its case against the Icelandic state. The bank had claimed the state was responsible for its loss of  €336m, stemming from repo agreements with Glitnir, involving bonds from Kaupthing and Landsbanki. These agreements were made in early 2008, which means the bank at the time was willing to do these highly risky deals.

Deka sued the state for causing the bank’s loss both because of lack of supervision and because of the Emergency Law, passed October 6, 2008. The Reykjavík District Court passed the same judgement last year but Deka appealed. The Icelandic Supreme Court has now confirmed the earlier judgement. Seven judges passed a unanimous judgement. Normally, the judges are three but the fact that seven judges were on the case shows its importance. The judgement sets precedence for other possible claims. In addition, Deka Bank has to pay costs for the state, in total ISK3m, almost €19.000.

The ruling, so far only in Icelandic, gives an interesting insight into the relationship between Deka and Glitnir and the way these deals were done.

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Today, a small investor in Landsbanki Vilhjálmur Bjarnason, now a newly elected member of Parliament for the Independence Party, won an appeal (in Icelandic) at the Icelandic Supreme Court, which will allow Bjarnason to call 15 witnesses and access a certain crucial email in order to clarify the role of Björgólfur Thor Björgólfsson in the collapse of Landsbanki. Bjarnason, together with other small investors, is preparing a possible compensation claim against Björgólfsson. The judgement today brings Bjarnason one step closer to such a case.

Björgólfsson, known as Thor Bjorgolfsson abroad, was the bank’s largest shareholder, together with his father, Björgólfur Guðmundsson. Pere et fils owned ca. 42% of the bank and are alleged to have controlled around 70% of the bank, through the bank’s own shares. Bjarnason alleges that Björgólfsson’s influence played part in the bank’s demise. In order to clarify these issues Bjarnason wanted to be allowed to call Björgólfsson and 15 others as witnesses.

Reykjavík County Court had earlier turned down his request. The Supreme Court has now turned that judgement around in Bjarnason’s favour, with the exception that he will not be allowed to have Björgólfsson questioned since Bjarnason might later bring a case against Björgólfsson.

The witnesses are i.a. the two former CEOs of Landsbanki, various other Landsbanki employees and employees of Novator, the investment company owned by Björgólfsson. Bjarnason will also get access to an email, said to be from Björgólfsson and his employee to FME, the Icelandic Financial Services Authority, sent early 2007, relating to ownership of Samson, the pere et fils company that held their Landsbanki shares. Björgólfsson’s father was the chairman of the Landsbanki board and there were at times two people closely connected to Björgólfsson on the board.

In the aftermath of the collapse of Landsbanki Guðmundsson went bankrupt but Björgólfsson survived. He was the largest owner of Actavis, a generic pharmaceutical company and did for a while hold the single largest loan in Deutsche Bank. Björgólfsson still has some investments in Iceland and Bulgaria and lives in London’s Notting Hill.

What Bjarnason is trying to show is that Björgólfsson and others hid the extent of Björgólfsson’s control of Landsbanki  – that Björgólfsson did in fact control the bank to a greater extent than his shareholding showed and also that he got more loans from the bank than indicated in Landsbanki annual accounts. If all this had been clear, Bjarnason says, he would not have invested in Landsbanki.

Statements of these witnesses are bound to throw a clearer light on Björgólfsson’s role in Landsbanki. Whether it will tell the saga Bjarnason alleges remains to be seen. So far, Björgólfsson has always refused these allegations and claims he never exerted any influence on the bank’s management.

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