Sigrún Davíðsdóttir's Icelog

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EU is financing Greece – as the Greek government persecutes ex-head of ELSTAT

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The horrifying political prosecutions by the Greek government against the former head of ELSTAT, ongoing for seven years, is no longer just a Greek affair. The European Union is undermining Greek and European statistics by not taking a stronger stance. 

Even the Greek newspaper Kathimerini has called the relentless prosecutions of Andreas Georgiou former head of ELSTAT “witch hunt.” Last year, the paper published a cartoon showing Kostas Karamanlis playing a videogame of chasing Georgiou. Karamanlis, prime minister from 2004 to 2009, is widely seen as the driving force behind the political persecutions against Georgiou and other ELSTAT staff. Karamanlis’ party, New Democracy, is in opposition and Karamanlis long out of office. The cases against Georgiou, now running for seven years, indicate that Karamanlis is still a political force to be reckoned with, a sign of ill omen for Greece.

Andreas Georgiou had been working at the IMF in Washington when he applied for the position of head of ELSTAT. When he took over in August 2010, the systematic falsification of Greek statistics, ongoing since before 2000, had already been exposed. During his five year in office, Georgiou and his staff made the last correction, rebuilt ELSTAT, helped introduce the necessary legal framework and fully implemented the statistical principles in the European Statistics Code of Practice: professional independence, impartiality and objectivity, commitment to quality and other principles. All of this was vital in order to put Greece on a more virtuous economic path, fulfilling its duties as a member of the European Union.

But this was more than the dark forces around Karamanlis and those who had been in power during the years of falsified statistics could endure. Although Georgiou and his staff had only been doing their duty as public servants and statisticians, the first prosecution started already a year after Georgiou took over at ELSTAT.

In 2015, when his five year term ended, Georgiou left ELSTAT and has now moved back to Washington DC. However, the preposterous abuse of power continues, giving good reasons to worry about the state of justice in Greece. There are several court cases ongoing – Georgiou has been charged with damages to Greece of €171bn, violation of duty, felony and slander. Acquittals have systematically been annulled, cases re-opened and new charges brought – an utter travesty of justice.

Economists, statisticians and others in the international community have time and again expressed support for Georgiou’s case, condemning the Greek government’s behaviour and the abuse of the justice system. There is now an international fundraising to meet Georgiou’s legal costs (see here, please consider supporting it).

As Georgiou said on May 29 when addressing the Financial Assistance Working Group of the Economic and Monetary Affairs Committee at the European Parliament the fact that these prosecutions have continued for seven years in Greece seriously undermines Greek and ultimately European statistics. This has long ceased to be only a Greek affair – it is a serious threat to European institutions.

As Georgiou pointed out incentives created in Greece “are poisonous. Would the responsibility for allowing such incentives to arise burden only the Greek State or also EU institutions and other EU stakeholders that are willing to live for years with this situation, which gives rise to these incentives?”

Further, Georgiou stated he was “not happy to report all this. But Greece—which I love dearly—will leave its troubles behind and prosper only if there is a firm commitment to credible official statistics. And this commitment will not be there—irrespective of anything that may be declared or signed—as long as the relentless prosecution of statisticians who followed European statistical law and statistical principles continues.”

Allowing these prosecutions to continue within the borders of the European Union surely undermines not only European statistics everywhere and the governance of the Union, but also the fundamental principles of human rights and the rule of law that the European Union is supposed to uphold and champion in the world.

Icelog has covered the ELSTAT case extensively since I visited Greece in 2015. In “Greek statistics and poisonous politics, July 2015, I explained in some detail the whole saga of the falsified statistics, the corrections and then the processes Georgiou put in place. Here is an overview of later blogs on the ELSTAT case. – Here is the link to the crowdfunding page with a short overview of Georgiou’s case and links to international media coverage of his case. Again, please consider donating.

UPDATE: the case of Andreas Georgiou has now taken a turn for the worse. The Greek Supreme Court has rendered “final and irreversible his conviction for not submitting the 2009 deficit and debt statistics to approval by a vote (this was judged to be a violation of duty, despite the fact that the European Statistics Code of Practice is very clear that statistics are not voted upon). This conviction makes final Andreas’ conviction to 2 years in prison, which is suspended for two years unless he gets another conviction in the meantime. Moreover, there is no further recourse in the Greek justice system for this case. The next step would be to take the case to the European Court of Human Rights.” See here, please consider supporting the crowd-funding for Georgiou’s legal defence. – Following the news, around 80 chief statisticians and heads of statistical associations from all over the world have published a statement, declaring their support for the cause of Georgiou, see their statement and names here.


Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

June 7th, 2018 at 9:02 am

Posted in Uncategorised

Iceland: from fishing to tourism / 10 years on

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For some years, Iceland has been the new darling of international tourism, giving the economy a real boost and healthy balance of payment. There are however some worrying signs – overheating is a clear and present risk, never far off in Iceland. The Central Bank warns against compounding risk in tourism and real estate, even more worrying if unhealthy practices in the old banks have not entirely been eradicated in the new ones. In addition, the growing dependence on tourism is, in itself, not entirely a healthy sign, especially as Iceland still lacks clear policy for tourism, which should ideally not be based on ever more tourists but sustainability.

“It’s either at ankles or ears” – This Icelandic saying, meaning it’s either too little or too much, certainly fits the Icelandic economy. Navigating the years following the 2008 banking collapse and laying a reasonably sound foundation for the future was done with reasonable success. Lately, tourism is reshaping the Icelandic economy.

In addition to classic crisis policies, luck played its part in the relatively speedy recovery – low oil prices, high fish prices in international markets and last but not least, Iceland’s popularity as a tourist destination. Consequently, Iceland has, again, seen booming growth– 7.5% of GDP 2016 and 3.6% 2017 with forecast of 2.9% this year.

This time the growth is not leveraged; Icelanders can literally see the cash cows walking around in colourful outdoor clothing: since a few years, tourism, not fishing, is the largest sector in the economy. Though tourism has done miracles for the balance of payment and strengthened the króna to record levels, tourism may not bode much good for young Icelanders.

Add to that the interdependence of tourism, housing and foreign workers and the conclusion is the one reached in the Central Bank of Iceland’s latest Financial Stabilityreport: “Risks relating to tourism and high house prices could interact.”

Why did Iceland become such a popular destination?

The huge growth in tourism over the last few years has taken Icelanders by surprise; a common question is: “Why is Iceland suddenly so popular?” followed by: “Will this popularity last?”

As to the “why” did not entirely materialise out of thin air. Icelandair and later Icelandic tourist authorities have over the years and decades run rather successful campaigns. Posters with glorious photos from Iceland have for example appeared regularly on the walls in London tube stations.

The rise in tourism was not as sudden as it might seem – there had been a steady increase since 2003 when the number of tourists were 320.000, then roughly the size of the population, growing by 3.5% to 15.1% a year until a downturn by 1.6% and 1.1% in 2009 and 2010 –  though the great increase 2014 to 2016 were indeed staggering.

Screenshot 2018-05-17 00.31.27


Icelandic Tourist Board (International visitors and cruises)

Currency fluctuations have at times made Iceland an expensive destination. That changed for some years after the 2008 banking collapse, making Iceland quite a reasonable destination until around 2014.

Luck helped Iceland when it came to international reports of the banking collapse. At the first Greek bailout in 2010, I did some comparison of international reporting of the crisis in the two countries. As in Greece there had been dramatic scenes of demonstrations and some altercations in the centre of the Reykjavík during the winter of 2008 to 2009.

But quite remarkably, foreign media would often choose to adorn reports from crash-struck Iceland with glorious landscapes rather than demonstrations, fire and fury. Greece also has spectacular and photogenic nature but the Greek financial crisis seemed more often shown in pictures of violent clashes and aggressive graffiti than alluring landscapes.

Far from being the negative impact feared at first, the Eyjafjallajökull eruption in April 2010 proved a gift literally from heaven for Icelandic tourism. An eruption is an awe-inspiring magnificent thing to behold; the Eyjafjallajökull coverage had quite an impact in drawing attention to the island.

The Instagram effect has helped. With the rise of Instagram, the popularity of Iceland was bound to rise – the island is a stunning Instagram backdrop.

Will the popularity last?

“The experience is that if you have a tourism boom of this magnitude, it is there to stay. There might be some ebb and flow, but tourism will, to my mind, continue to be one of the main pillars of the economy. That means we need to manage it well,” said Már Guðmundsson governor of the CBI in an interview with IMF2017.

Common sense dictates that the increase in tourism by 30% to 40% is unlikely to continue but experience from other countries shows that surge in tourism is durable – tourists are not as fickle as fish. According to an IMF study, countries whose travel exports increased by at least 4% of GDP over a decade were likely to see the number of tourists above the pre-surge levels ten years later. Iceland is a case in point – even the drop in arrivals in 2009 and 2010 did not change the underlying trend.

The latest figures show however a dramatic turnaround: the increase the four first months this year was 3.7% compared to last year. The increase was 28.6% 2014 to 2015, 34.7% 2015 to 2016 and a staggering 55.7% 2016 to 2017. The stats do indeed show a decline but all in all still a healthy growth though not the staggering growth of the record years.

In countries where the numbers did indeed decline, the causes are most often political turmoil, crumbling infrastructure – and most interestingly if also worryingly, from the Icelandic perspective – overcrowded tourist sites, environmental degradation and loss in price competitiveness.

The forecast for this year had been 2.2m but there are already some indications that this figure will be lower, even substantially lower. In addition to overcrowding and environmental degradations, difficult to measure, there is the loss in price competitiveness.

With the strong króna Iceland has become the most expensive tourist destination in Europe, even more expensive than Switzerland and Norway. The effect is bordering on the ridiculous: an underwhelming main course at €35 buys in a Reykjavík restaurant doesn’t compare with the quality of a main course at this price in the neighbouring countries.

Manifestos on tourism – but so far, little action

All of this is highly relevant to tourism in Iceland and merits a close scrutiny as it helps to identify the possible weaknesses.

All indicators show that tourists go to Iceland to experience nature. Even if they only go for a long weekend in Reykjavík they will almost certainly go on a tour for a day. The fantastic aspect of Iceland is that nature is not distant to urban areas, i.e. Reykjavík; it’s all around, in sight and easily accessed. The island is small, distances short. But there are some indications that overcrowding and faulty infrastructure is starting to detract from the pleasures of visiting the most famous places.

Arriving at Þingvellir or Geysir, with these spectacular spots hidden on arrival by dozens of buses and the passengers that spill from them, is not optimal. On the other hand, there are plenty of little known places to be enjoyed in solitude though it may take some research to find them.

As both the IMF and the OECD have pointed out in recent reports on Iceland, the varying governments over the last few years have failed to form a coherent policy for tourism in Iceland. The last three governments that came to power – in 2013 Progressives with the Independence party, in 2016 the Independence party with Bright Future and Revival and the present one, 2017 Left Green with Independence party and the Progressives – had all set high goals for tourism in their manifestos.

All of them aimed at forming a coherent policy for tourism, including plans to tax the sector in order to fund the necessary infrastructure for sustainable tourism. Nothing, absolutely nothing, has come of these well-intended manifestos – there is no policy and consequently, no plan on which to form a coherent tax policy.

Rudderless tourist economy

Managing the tourism boom, as governor Guðmundsson mentions, is still lacking in Iceland. The danger is that without a policy that aims at building up a quality tourism, fitting the (unavoidably) high prices, tourists will soon shun Iceland because they hear too much of crowded attractions and crumbling infrastructure with the pictures on social media to prove it.

With nature like the Icelandic one and high prices, the aim should not be to increase the number of tourists but develop tourism where fewer tourists spend more. This is what Costa Rica and Ireland have successfully done. Again, this requires strategic policies, so far wholly lacking in Iceland.

An economy of diminishing opportunities for high skills and education

Once upon a time in Iceland, there was little to be gained from lengthy education in order to be a high earner. Being a fisherman on a trawler meant very high salary and owning a large house as can still be seen in small fishing villages around the country. Working as a tradesman could also mean good salary.

This is no longer the case. There are fewer trawlers than earlier; a job on a good trawler is harder to come by than a highly paid managerial job. And the construction industry is not providing the same well-paying jobs as earlier. The large construction companies are very different from the small-scale constructor who hired his relatives to work for him.

All movements in a small economy like the Icelandic one tend to be rapid. The rise of tourism is no exception. The labour-intensive tourist sector is gobbling up a lot of manpower. The Dutch Disease might be around the corner, especially in an economy where the largest sector is mostly lacking direction and policies.

Recently, I have heard a number of Icelandic parents express their worries of what the labour market will offer their children in the coming years. In this rudderless tourist economy, there is no policy to develop other sectors. There is a budding tech sector in Iceland but some of the most successful Icelandic tech entrepreneurs have moved abroad and encouraged others to do the same, for the lack of tech infrastructure in Iceland. There is also a small pharmaceutical sector that could be developed further.

But a visionary policy of a diversified economy needs a government with a vision – and that has so far been lacking. The strong economic growth seems to lull Icelandic politicians into complacency. But a country that does not offer its young people the opportunities to seek education and then make use of it at home is not a good place to be. That’s greatly worrying many Icelandic parents.

More Icelanders leaving than returning

The demographics of Iceland is pretty healthy, it’s a nation of young people, compared to some other European nations. Icelanders are now just over 350.000, the number rises steadily. Except for a few years in the 1960s, 1970s and 1990s and then more recently in 2009, 2010 and 2011, more people enter the country than leave.

This looks promising – the nation is growing and more people move to Iceland than leave. However, there is potentially a more worrying underlying trend: in spite of the boom, more Icelanders are leaving Iceland than Icelanders moving home. Foreign nationals are keeping the inflow figures up – more foreigners come to Iceland than leave.

After the 2008 banking collapse whole sectors like construction were nearly wiped out, meaning not only the construction workers and tradesmen but also architects and engineers. Icelanders left in droves, both families and individuals, for work abroad. Norway was a particular popular destination as well as Denmark and Sweden.

The interesting – and for the Icelandic economy, worrisome – thing is that this flow has not stopped though the figures are lower. Icelanders are still leaving for jobs abroad. This, in addition to the decades-long tradition of young Icelanders seeking education abroad, returning as they graduate.

In 1999, 2000 and 2005 more Icelanders moved to Iceland than left but that is the exception. The rule is the other way around: more Icelanders leave than return. The one question Icelandic politicians really do not like to be asked is how they explain that in spite of the boom, there are still more Icelanders moving abroad than returning:

Screenshot 2018-05-17 00.16.08


The intriguing fact is that going back as far as the stats show, more Icelanders have been leaving than foreigners immigrating, with over 2.500 foreigners arriving in 2005, 2006 and 2007 – and again since 2015.

There is no statistics to show clearly who is leaving but the Icelandic Statistics is working on a more informative registry. Anecdotal evidence indicates that the Icelanders who leave are better educated than the foreigners who immigrate; young people who leave to study look for jobs after studying abroad and do not necessarily return.

Also, that it is not just young people leaving but people in mid career. As Icelanders tend to have children early (though not as early as twenty years ago) some might be tempted to leave as the children have left home. One thing that all Icelanders notice when travelling abroad is how expensive food is in Iceland, one good reason to move, in addition to a primitive rental market. More Icelanders living abroad now own property in Iceland as a pied-à-terre. Iceland is well connected to Europe and the US, which does not only facilitate tourism but makes it easier for Icelanders to visit.

My sense is that the old tradition of faithfully returning after studying abroad might be changing. In international studies on migration the general reference is that if people do not return after eight years abroad it is unlikely they return. If the Icelandic pattern is indeed changing it might take some time before the statistics capture it clearly.

The main risk: the combined effect of falling tourist numbers and falling property prices

What could be the interaction between tourism and property prices that the CBI is warning against? To a certain degree it comes down to the classic effect of leverage and falling demand.

At first sight, the connection between tourism and property prices may not be an obvious one. However, one figure connects the two sectors: 16.5% of working people in Iceland are foreigners, up from just under 6% in 2005.

Since 1996, Poles have consistently been the largest number of immigrants each and every year, except in 2004, when they were beaten by Portuguese workers. Consequently, the largest foreign community in Iceland is the Polish one, just under 4% – in total, 8.9% of Icelanders are foreigners, i.e. born abroad. The foreign workers who came in the 1990s mostly came to work in the fishing industry. Later, the construction industry needed foreign workers – building sites in Iceland and London look the same, mostly foreigners from Eastern and Central Europe working there – and now there are the jobs in tourism.

The foreigners are, for obvious reasons, more likely to live in rental accomodation than own their home. If there is a real downturn in tourism, the foreigners will most likely be the first to lose their jobs. If there are few or no jobs to go around, the foreigners leave meaning they will leave their rented accommodation. This would most likely cause a downturn in the rental market, largely catered for by few large property companies. A downturn in tourism will to a certain degree affect construction work, with a compounding effect on the rental market.

This is how Iceland might be hit by the combined effect of falling number of tourists and falling property prices. In addition, external changes affect foreign workers such as changing circumstances in their countries. Poland is doing better, which might tempt some of the Polish workers to return home.

Tourism and the real estate market dominated by few large unlisted companies

An IMF 2014working paper on determinants in international tourism found that tourism “to small islands is less sensitive to changes in the country’s real exchange rate, but more susceptible to the introduction/removal of direct flights.”

Consequently, one risk to the Icelandic tourism economy is a rupture in flights. The eruption in Eyjafjallajökull was one example of how that might happen. That eruption luckily only caused disruption in flights for a few days. Other scenarios might be different.

But man-made havoc may be a cause for greater concern. The two Icelandic airlines, Icelandair and Wow Air carry between 70 and 80% of tourists coming to Iceland; this figure was 73.5%in April. The rest was shared by 13 international airlines with EasyJet having the largest market share among the foreign ones.

Icelandair is a listed company; Wow Air is privately owned. Icelandair has often had a bumpy ride in terms of profits and profitability. With new management and some new board members there is good reason to believe it will be better run now than in the past.

Wow Air is a different story. Early last year it published some financial indicators, which were not great. This year, so far – a total silence. Quite remarkably, its CEO and main owner Skúli Mogensen mentioned in a recent interview that the company was thinly capitalised – a statement that had some wow factor to it. It’s unlikely it was just a slip of the tongue, more likely a message but to whom is less clear.

In general, budget airlines have been experiencing problems; the demise of Monarch and the troubles of Norwegian are two cases in point. It’s difficult to see why Wow Air would be doing that much better. An under-capitalised company in a market of fewer customers and diminishing returns sounds ominous though they claim their sales went up this winter when Icelandair sold fewer seats.

The three largest property companies – Gamma, Heimavellir and Almenna leigufélagið – are all privately held. Again, the question is how well capitalised they are, how leveraged and how prepared for a down-turn in property prices, demand and rental prices. Gamma has recently shed its CEO and founder, shrunk its foreign operations (which seemed more based on dreams of 2007 than reality) but claims it is otherwise doing well.

Are there still “favoured” clients in the Icelandic banks?

The CBI risk warning related to the interlinked tourism and property market. A compounding factor is the relative opacity of the privately-held companies, quite large in the context of the Icelandic economy. The question is if any of the unhealthy practices of Icelandic banking pre-collapse can still be found such as the banks having, what I have called, “favoured” clients they serviced in a wholly abnormal way.

The Icelandic financial regulator, FME, has recently given noticeto Stefnir, an Arion Bank investment fund, for its risk management: Stefnir had, amongst other things, seven times exceeded its legal investment limits during the year from July 2016 to end of June 2017.

The FME notice does not mention what the investments relate to but most likely they are investment in United Silicon, a now failed venture that Arion was highly exposed to. The story of United Silicon is a sorry saga (which I investigated in detail for Rúv) of fraud and greed where Arion played a rather doubtful role as a lender and investor. In addition, pension funds managed by Arion were investors in United Silicon and kept investing well after it was clear that something was seriously wrong in United Silicon.

The Arion involvement with United Silicon smacked of how Kaupthing (and the two other large banks, Glitnir and Landsbanki) went out on a limb for their largest shareholders and their fellow travellers: the rule was that the “favoured” clients never lost, only the banks (i.a. by buying assets above market price). That the pension funds lost on United Silicion, is a sad reminder of how the old banks used (or abused) pension funds before the collapse, leading to gigantic losses after the collapse.

Given these indications of the return of bad banking, the large privately held and possibly thinly capitalised tourism companies and property companies take on a whole new dimension of risk.

If the risk materialises?

The short- and medium-term risk to the Icelandic economy is as the CBI has identified, overheating and the interconnection between tourism and the real estate market. Were this risk to materialise the effect would be nothing like the 2008 collapse, more the classic contraction of the economy Iceland has known for decades where depreciating króna and inflation eat away purchasing power, with rising unemployment (but not necessarily in a dramatic way; the foreigners partly take the hit and leave) and a lower standard of living.

To my mind, the no less worrying risk related to tourism is however the Dutch disease and lack of job opportunities for people with higher education or good skills – circumstances, that would cause young Icelanders to move abroad or stay abroad after studying and might also tempt mid-career people to leave.

Given that Icelanders who leave are more likely to be better educated than the foreigners who move to Iceland there might already be an on-going brain-drain in Iceland. All of this would in the long run make Iceland less attractive for Icelanders.

This risk is growing bigger every year as Icelandic governments seem sadly complacent in forming a long-term policy for tourism – a policy that would develop a high-yield tourism economy and tax it, both to invest in infrastructure and the diversification of the economy.

Next October there will be ten years since the banking collapse. Over the comings months I’ll be publishing blogs that in some way reflect on where Iceland is at now. This is the first “10 years on” blog.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

May 17th, 2018 at 12:34 am

Posted in Uncategorised

Sale of Arion – are the Icelandic authorities failing the IMF test?

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Recent movements around ownership of Arion bank indicate that opacity and under-cover deals are again rife in Iceland, this time with foreigners involved. It could be seen coming: last year, the International Monetary Fund pointed out that an IPO of Arion bank would pose a test for the banking regulator; IMF also stated its worries about a weak regulator, exposed to political pressure, indeed worrying signs.

Mid February, Arion bank published its 2017 annual accounts. At the same time, changes to its ownership were announced: Kaupthing, Arion’s largest shareholder is buying the Icelandic state’s 13% shareholding in Arion. This seems to be a move towards fulfilling an agreement from last year, kept secret at the time: four of Kaupthing’s almost 600 owners, who last year bought shares directly in Arion, aim at getting hold of an Arion subsidiary, Valitor, a payment solution company, before Arion’s IPO, planned in the coming months. – The four particularly active funds are Taconic Capital Advisors, Attestor Capital, Och-Ziff Capital and Goldman Sachs.*

The International Monetary Fund sees the sale of Arion as a major test for the Icelandic financial regulator, FME, post-2008 collapse. As the IMF pointed out last year in its Article IV Consultations: “The Arion transaction poses a test for Fjármálaeftirlitid (FME, the banking, securities, and insurance regulator), which must ensure its fit and proper assessments are stringent and evenhanded.” According to the IMF FME is currently “not sufficiently insulated from the political process…”

The Arion test is now on-going and so far, it is not obvious that the Icelandic authorities will pass with flying colours.

Foreign funds buy into Arion – for a reason

Arion bank was founded on the ruins of old Kaupthing. Until last year, its owners were the Icelandic state, holding 13% and the rest by Kaupthing, the old bank’s estate owned by Kaupthing’s creditors. Kaupthing’s ownership in Arion is through a subsidiary, Kaupskil, set up to create an arm’s length between Kaupthing and Arion. Events over the last year or so do however cast doubt over this exercise: Kaupthing has all the power over Arion it wishes, i.e. in selecting and de-selecting board members.

In 2015, some Icelandic pension funds approached Kaupthing and indicated willingness to buy shares in Arion. After talks for over a year, Kaupthing brought the talks to an abrupt end last year. At the same time Kauphing unexpectedly announced four new Arion shareholders: Taconic Capital Advisors, Attestor Capital, Och-Ziff Capital and Goldman Sachs,* respectively holding 9.99%, 10.44%, 6.58% and 2.57%. After these transactions Kaupskil owned 57.41% and the Icelandic state 13%.

This came as a surprise to the pension funds that had not known of other Kaupthing negotiations. “This was just business,” a representative of one of the funds said to me, indicating that there had been no hard feelings. Yet, both he and others I have talked to felt that Kaupthing had fooled the pension funds. The result was a breach of trust, seen from the pension funds’ perspective.

Arion and Icelandic ministers made much of the fact that new shareholders were now on board, indicating a trust in the bank. Another way to look at it was that these four funds were all previously shareholders in Kaupthing. Therefor, Kaupthing was effectively selling to a part of itself.

These transactions between related parties did not bring any new shareholders aboard. The four funds are now both directly and indirectly, through Kaupthing, shareholders in Arion.

The secret agreement hidden in the 2017 transaction: Valitor

Part of this transaction between Kaupthing and four of its shareholders was however kept secret: the four funds made an agreement with Kaupthing that should Kaupthing come into possession of shares in Valitor the four funds would have an option on the Valitor shares.

Since this agreement, all moves by Kaupthing and the four new Arion shareholders have been aimed at bringing this to fruition, i.e. that Kaupthing would come to possess Valitor shares, which the funds would then buy. Buying Valitor in a transparent normal sale, competing for this asset with other buyers, was apparently never part of the plan.

Why this interest in Valitor? Over half of Valitor’s earnings comes from its foreign operations, it has some clever technical solutions and operates in a market the foreign funds understand well. Therefor, the funds are well positioned to make the most of this asset in a future sale. According to Icelog sources Valitor’s value is easily twice p/b.

Kaupthing wooing the pension funds

In January this year, Kaupthing approached some Icelandic pension funds with an offer to buy up to 5% in Arion. The deadline was 12 February, two days before Arion’s annual accounts were due to be published.

One Icelog source said that late in the day, the foreign funds had realised that in Iceland you can’t do any major deal without having some of the pension funds on board: their money is useful but most of all, transactions are lacklustre if the pension funds don’t give their blessing by participating. And in this case, selling before a planned IPO later this year would give an indication of price and interest.

It soon became apparent that the pension funds were not too keen to accept the offer and in the end none of them agreed to buy. The reasons given varied: the time was too short, they would have liked to see the annual accounts first, they felt the present major shareholders had an unclear vision of the bank’s future. – But underneath, there was still the lingering rancour from the abruptly ended negotiations last year.

Not Onegin – but a story of twice fooled

With the rejection from the pension funds Kaupthing looked like Pushkin’s Onegin who didn’t accept Tatjana’s love when she offered it to him but then got rejected when he finally did fall in love with her – if you don’t want when you can, you can’t when you want to…

Then, lo and behold, the story turned out to an entirely different one: Kaupthing did (of course!) have a plan B, in case the pension funds rejected the offer. The story from last year was repeated: within 24 hours of the lapsed deadline, Kaupthing announced a sale of just over 5%: four Icelandic investment funds, managed by four Icelandic banks, materialised as buyers of 2.54%, with Attestor Capital and Goldman Sachs, buying in total 2.8%.

The four funds, i.e. the new Icelandic shareholders, are managed by Kvika, which is also Kaupthing’s advisor, Stefnir managed by Arion, where Kaupthing is the largest owner, Landsbréf by Landsbankinn and Íslandssjóðir by Íslandsbanki. The share division between the individual buyers has not been announced.

As one Icelog source said this was worse than anticipated in the sense that it only brings a very small amount of new owners in Arion and again, the Kaupthing-related Valitor-interested funds are participating.

The road to Valitor – and yet another opaque transaction

From this point, the plot thickens.

The 5% sale was crucial since the Arion board had agreed at its meeting 12 February that a sale of 5% of Arion shares was needed to unleash a dividend of ISK25bn. It also agreed to allow Arion to buy up to 10% of its own shares, a transaction that would then be deducted from the dividend.

The representative of the Icelandic state on the Arion board voted both against linking dividend payment to other transactions and against Arion buying own shares, both of which ran counter to the government’s ownership policy.

The Arion board, controlled by Kaupthing, however had its way here, i.e. the dividends are connected to other transactions and Arion could buy own shares. The share-buying sounds particularly ominous in Icelandic ears since this characterised the boom-time banking in Iceland.

Following the board meeting two things happened: Arion bought 9.95% of its own shares from Kaupthing (via Kaupskil) – and Kaupthing (via Kaupskil) made use of its option since 2009, buying the state’s 13% stake in Arion. This means that the Icelandic state will have no say, neither on the board or elsewhere, over Arion. Alors, all hindrance out of the road to Valitor.

The state leaves the Arion stage

In principle, this should be a good move; the state was only ever an involuntary shareholder. It owns quite enough of the financial sector, owning the two other big banks, Íslandsbanki and Landsbankinn. – However, given that this is being orchestrated by Kaupthing adds an unsettling feel to the sale.

Dividend in kind is another thing that has a particular ominous echo in Iceland, both from the boom years and also from some transactions in the last few years. The experience in Iceland is that this has mostly been done in order to tunnel assets to major shareholders, in effect cheating other shareholders and creditors. Tunnelling played a large part in the transition in Russia and Eastern Europe, a rather inglorious comparison. And how many systemically important banks in Europe pay out dividend in assets?

In an interview I did for Rúv in January with deputy director of FME, Jón Þór Sturluson, he emphasised there is nothing illegal in this. He did however point out that it is a doubtful action since estimating the value of a payment-in-kind may cause problems. And in particular, it causes reputational damage.

Strong words when they come from the regulator but, according to some of my sources, not strong enough. This is a serious issue since Arion is a systemic important bank. Thousands of Icelanders, Arion clients, are stakeholders.

Back to Valitor

Given that Valitor is one of Arion’s most valuable assets, distributing it with a secret agreement attached instead of selling it, gives the transaction a sense of tunnelling out valuable assets to preferred shareholders before the IPO. It has not yet happen but it is expected to be imminent.

Sources connected to Arion tell Icelog that Valitor might be worth more in the hands of experts such as the foreign funds. That is correct but handing Valitor over to Arion shareholders instead of selling to highest bidder seems far from being evenhanded. Sadly, it is a repetition of events seen in the last few years. The sale of Bakkavor, by Arion, and of Borgun, by Landsbanki both had a foul smell of friendly favours.

According to minister of finance Bjarni Benediktsson, leader of the Independence party, agreements between the state and Kaupthing hinder that assets would be tunnelled out of the bank. So far, it has clearly not been the case that the agreement secures some governmental oversight via the Kaupskil set-up. The most active Kaupthing creditors now rule the bank.

There has been some discussion in Iceland if the price for the Arion shares taken over by Kaupthing is the right price. To my mind, that is not the main issue – the main issue is how the Kaupthing creditors have manipulated events in Arion so far. If they achieve their goal of getting Valitor without bidding for it is the proof that the agreement was not worth much.

The intriguing thing is also that Benedikt Gíslason, who was the government’s main advisor in reaching the agreement with creditors in 2015, is now working for Kaupthing.

In plain sight

All of this is happening in broad daylight – and Icelanders have seen tunnelling before. Now it’s being done together with foreign investors. Iceland is tiny and often beyond the horizon of international media but the IMF comments last year underline the gravity of these matters.

An IMF is due to visit Iceland now in March. Just in time to evaluate how Icelandic authorities are doing on the Arion test.

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Written by Sigrún Davídsdóttir

March 1st, 2018 at 6:49 pm

Posted in Uncategorised

The Legatum Institute: the charity and its offshored sponsor

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Special-interest billionaire-funded organisations have for years been a common feature in US politics but less prominent in the UK. The UK Legatum Institute, now influential in pro-Brexit government quarters, seems to fit the US formula. It played a curious role in an Icelandic dispute in 2016 with some US funds holding offshore króna. That story throws an unflattering light on Legatum’s research and exposes intriguing US connections. In a wider context it is a cause for concern that sponsors of British charities can hide behind the offshore veil.

In October 2016 the Icelandic government suddenly found itself the target of an international ad campaign. With a photo of Central Bank governor Már Guðmundsson the Icelandic Central Bank was accused of corruption. The government was said to follow “protectionist economic policies” discriminating against offshore króna investors, in reality four American funds. Not a word on the fact that the policy of the Icelandic government was formed in close cooperation with the International Monetary Fund.

The ads ran in international media like the Financial Times, WSJ and Danish media, in addition to Icelandic media. The ads were signed by “Iceland Watch,” run by Institute for Liberty, which claimed to be a think tank.

One of the ads cited “a research team in Britain” that claimed the action against the offshore króna investors cost each Icelander between $15,000 and $27,000 a year, causing the loss of 30,000 jobs, quite fantastical figures in the context of the Icelandic economy. These findings were taken from a report, Frozen Capital: a Case Study of Icelandic Distortions by Shanker A. Singham and A. Molly Kiniry at the Legatum Institute.

Now that Legatum’s staff is publishing Brexit reports and popping up as Brexit-advisers in Whitehall Legatum’s Icelandic report and the ties it shows throws an interesting light on the Institute’s operations.

Iceland Watch and “Dark Money”

Until the ads appeared, Institute of Liberty and its Iceland Watch had been wholly unknown in Iceland. Institute of Liberty was however a familiar name in US politics. In her book, Dark Money; The Hidden History of the Billionaires Behind the Rise of the Radical Right, the American journalist Jane Mayer recounts how billionaires like David, Charles and Bill Koch, Peter Singer and lately Richard Mercer, much strengthened by the 2010 Citizens United ruling, have poured money into politics for decades, inter alia advocating in favour of tobacco and petro-interests and against Barack Obama’s healthcare.

Part of the funds to fight Obamacare flowed into a tiny organisation called Institute for Liberty. In 2008 its budget had been $52,000. The following year, it got $1.5m from the DCI Group, a Washington PR company, used for “a five-state advertising blitz targeting Obama’s health-care plan;” $400,000 were channelled back to DCI Group for “consulting.” (Mayer, p.192)

DCI turned out to be instrumental in spreading funds to groups fighting Obamacare, some of which, according to Mayer, “appeared to be shell organizations fronting for DCI Group.” One of them was Institute for Liberty. As a recent Bloomberg story (with a link to Icelog) shows the DCI Group’s operations are essentially lobbying in disguise, greased by ample funds from opaque sources.

The “dark art” of the DCI Group and Legatum Institute

At the end of October 2016 the following ad ran in Icelandic and international media, under a photo of Central Bank governor Már Guðmundsson:

“Who is paying for public corruption and discriminating rules in Iceland? You do!

The decision taken by the Central Bank of Iceland to discriminate between investors so that only those of domestic origin can invest there has been criticised internationally.

According to a new study done by a research team in Britain the discriminatory policy of the Icelandic capital control hinders the creation of 30.000 new jobs and costs the nation between and US dollars in GDP annually.

This costs each Icelandic citizen between 15.000 and 27.000 US dollars annually.”

In the context of the Icelandic economy these figures are rather implausible. How could offshore króna controls hinder the creation of 30.000 jobs in an economy with close to full employment in a country of 332.000? The stated cost of $5bn to $9bn amounted at the time to 25 to 40% of Icelandic GDP. – In short, the figures were outrageously unintelligent.

The figures came from a Legatum report, Frozen Capital: a Case Study of Icelandic Distortions by Shanker Singham and Molly Kiniry, published in autumn 2016. At the same time, the Legatum Institute held a debate on Iceland and the capital controls (which by then had been lifted except for the offshore króna controls), Post-Brexit Briefing: Frozen Capital – A Case Study of Iceland. Judging from the recording, using Iceland as an example of harmful trade distortions was greatly undermined by the fact that the speakers, Singham and Iain Martin former editor of the Scotsman were rather uninformed on Iceland, in line with the report.*

My own inquiry at the time showed that the DCI Group orchestrated the Iceland Watch ad campaign in autumn 2016 on behalf of three of the four American funds that held Icelandic offshore króna – Autonomy Capital, Eaton Vance and Discovery Capital Management. My understanding was that DCI, on behalf of the funds, had turned to the Institute of Liberty, i.e. the initiative came from the DCI, just as it had used Institute of Liberty and other organisations in fighting Obamacare.

Legatum’s Brexit reports

The Legatum report on the Icelandic offshore króna was remarkably unenlightened but had, for obvious reasons, a rather limited effect.

A Legatum report in November last year on Brexit, The Brexit Inflection Point; the Pathway to Prosperity, by Singham, Radomir Tylecote and Victoria Hewson is a different matter, dealing not with a minor matter in a liliputian nation but the a vital issue for a rather bigger nation and 27 other European countries.

The November report was not the first Brexit report from Legatum but it caught much greater attention than the earlier ones because by November, the British media had become aware of Legatum’s role in Westminster. Some journalists who gave it a close reading were less than impressed. FT’s Martin Sandbu wrote of “Beware the global Britain con trick.” In the same paper, Martin Wolf wrote on “Six impossible notions about “Global Britain” referring to the White Queen in C.L. Lewis book Through the Looking Glass who claimed to believe six impossible things before breakfast. Singham published an answer to Wolf’s article on CapX and a shorter version in The Telegraph, £) but ignored other critics.

Earlier Brexit-related reports were Mutual Interests: How the UK and EU can resolve the Irish border issue after Brexit published in September 2017. The point that caught media attention was that the border issue could be solved by technology; a claim that proved short-lived. In April there was a report on A new UK/EU relationship in financial services – A bilateral regulatory partnership. Two reports papers in February dealt with the negotiations and trade, Brexit: World Trade Organisation Process and Negotiation of Free Trade Agreements and Brexit, Movement of Goods and the Supply Chain. In November 2016 a report dealt with the Cost of EEA Membership for UK Briefing.

All reports were written by Singham, mostly in cooperation with other Legatum staff. The general tone is the one of the same kind of impossibility that Martin Wolf pointed out.

Legatum’s “Brexiteering”

At the Legatum Institute its main Brexit expert, Shanker Singham has the titles Chair, Special Trade Commission and Director of Economic Policy and Prosperity Studies.

Singham has two LinkedIn profiles; one states he is managing director for Competitiveness and Enterprise Development Project at Babson Global, the other that he is the Director of Economic policy and prosperity studies at Legatum and the CEO and Chair of Competere Group, operating all over the world. There is little information on Competere but according to the Legatum website it is an “Enterprise City development company incubated at Babson College.”

On the latter LinkedIn profile Singham states that Competere was set up in 1997 but later rebranded and has “successfully engaged governments around the world who seek to harness the power of the market economy through a comprehensive pro-competitive regulatory framework. Our economic reform practice is based on the use of our econometric modelling to help (23) countries successfully realize their own reform efforts.”

In the summer of 2015, Singham incorporated Competere Limited with 1,000 GBP in the UK. A year later the company was in deficit of just over £17,000.

Together with a Washington lobby group, Transnational Strategy Group and EPPA Brussel, Competere has set up a Brexit “practice group.” TSG claims to be a “boutique international business and foreign policy consultancy focused exclusively on achieving real results for clients.” EPPA claims to be a consultancy for “creating a constructive dialogue with policy-makers” elaborated with a quote from FT’s Martin Wolf: “We need a balance between markets and governments.” EPPA does not seem to flag the cooperation with TSG and Competere on its website (at least not within easy sight).

Singham, who has a dual UK US citizenship, worked at Squire Sanders, a US law firm from 1995 to 2013. Since April last year Michael Cohen, president Donald Trump’s personal lawyer has had a strategic alliance with Squire Sanders, now Squire Patton Bogs. Cohen is one of many in Trump’s inner circle with alleged ties to Russia and Russia’s president Vladimir Putin.

Singham’s co-author on the Brexit report in November, Radomir Tylecote, was active on the Vote Leave campaign before the 2016 referendum as was Victoria Hewson, the third author of the report.

Molly Kiniry, Singham’s co-author on the Icelandic report and other Legatum publications, is also listed as a consultant with Competere since 2016, earlier at Babson Global. She writes regularly for Daily Telegraph, where two of her recent columns dealt with “The virtue-signalling British Politicians snubbing Trump are embarrassing themselves” and “Americans are sick of sending money to other countries for no discernible benefit.” – The connection with Daily Telegraph is interesting given that the paper is owned by the Barclay brothers, two Brexiters with their wealth firmly offshore.

Former Chief Executive of the Vote Leave campaign Matthew Elliott, now a frequent voice in the British media, is a Legatum senior fellow. Georgiana Bristol, Legatum’s Corporate Membership Director, ran fundraising for Vote Leave. Two well-known names from UK politics have recently joined the Institute as Fellows: the fervent Brexiter ex-MP for Labour Gisela Stuart and Sir Oliver Letwin and MP. He voted remain, was briefly in charge of Brexit after the 2016 referendum before being replaced by David Davis by Theresa May and has been seen as a Tory intellectual close to libertarian ideas.

An ex-Legatum employee is already a Whitehall Brexit-insider: Crawford Falconer, who was on Singham’s trade commission at the Legatum Institute, is working as a Brexit negotiator under International Trade Secretary Liam Fox.

Legatum’s CEO Baroness Stroud has in the past made some unsuccessful attempts to be chosen as a Conservative Party candidate. She set up the Centre for Social Justice in 2004 with Ian Duncan Smith for whom she acted as a specialist adviser 2010 to 2015 at the Department for Work and Pensions. Stephen Brien, who leads Centre for Metrics at the Legatum is on the board of CSJ and was also Duncan Smith’s adviser, 2011 to 2013. Legatum and CSJ have had some collaboration.

From corruption to Brexit

In 2015 the Legatum Institute organised some events on corruption chaired by Anne Applebaum, i.a. one where she interviewed Sarah Chayes on her book Thieves of State: Why Corruption Threatens Global Security. It was at that time I first noticed Legatum. I welcomed Legatum’s focus and the clout and eminent experience that Anne Applebaum brought to the Institute as its director of Transitions Forum 2011 to 2015, focusing on new threats to democracy.

Judging from Legatum’s website the Transitions Forum no longer exists. Applebaum is now Professor in Practice at LSE’s Institute of Global Affairs where she leads Arena, a programme on the challenges of disinformation.

Legatum’s expanding role in Westminster has drawn media attention. A whole-page FT article in December 2017 on “Legatum: the think tank at intellectual heart of “hard” Brexit” claims the focus of Legatum shifted in autumn of 2016 when Baroness Stroud became a director and a trustee.

Former employees, said to be worried about the direction taken by the Baroness talked of purges. According to them, the organisation seemed to use its influence in Westminster “to push for a libertarian and socially conservative agenda that goes beyond its educational remit as a charity emphasising “prosperity and human flourishing”.” The question posed was if Legatum’s activities were compatible with its status as a charity.

FT mentions that Brexit minister David Davis has taken fees from Legatum. That was however in 2009 and 2010, according to They Work For You: £5000 for a speech and, interestingly, unspecified travel expenses to attend a conference at the Milken Institute that attracts those with libertarian leaning. According to information on They Work for You neither Michael Gove, Boris Johnson nor Liam Fox have accepted funds from Legatum. Davis gave however a talk at a Legatum Brexit event in January 2017, Gove was a guest speaker at the Legatum’s summer party in 2016 (according to Legatum’s 2016 annual accounts); neither seems to have been paid for their input according to the They Work For You data.

In late November Daily Mail published an article on Legatum’s political connections, ‘Putin’s Link to Boris and Gove’s Brexit Coup’. According to the paper, Singham had helped two Cabinet members, Boris Johnson and Michael Gove, to pen a letter to Prime Minister Theresa May. In the letter, not meant for publication, the duo called on May to put pressure on Chancellor Philip Hammond to prepare for “hard” Brexit, to use Brexit to scrap EU rules and regulations and to appoint a new “Brexit Tsar.” No Tsar has officially been appointed but the tabloid maintains that Singham effectively has that role.

Daily Mail pointed out that Legatum’s founder Christopher Chandler and his brother Richard got rich in Russia following the collapse of the Soviet Union. The tabloid tells the story of the brothers taking part in a boardroom coup in Gazprom in 2000, installing Alexey Miller, close ally of Vladimir Putin from their St Petersburg years. This enabled Putin getting a share in Gazprom’s profit.

Chandler and the Legatum Institute deny all allegations of Russian ties and also denied allegations made by The Sunday Times and Sunday Mail in early December regarding its status as a charity.

Legatum, on- and offshore

Legatum Group ( is based in Dubai where it was set up in 2006 by Christopher Chandler. It describes him as former President of Sovereign Asset Management he set up in 1986 with no mention of his earlier Russian activities. Its website lists a whole raft of philanthropic organisations under its umbrella, the Legatum Institute being one of them.

The Legatum Institute’s own website is somewhat vague on the Institute’s funding. Under the heading “How we are funded” there is a list of four other philanthropic enterprises, funded by the Legatum Foundation (, also listed under, but the link attached leads only to a website with the four enterprises.

There are two relevant Legatum entities listed with Companies House, The Legatum Institute Foundation, which is the registered limited company operating in London and the Legatum Institute, a fund registered in the Cayman Islands.

The Foundation is registered with the Charity Commission. Out of the £4.4m of its total income in 2016, £3.9m came from Legatum Foundation Limited, according to the Legatum Institute Foundation’s 2016 full accounts at Companies House. That year the Foundation received £437K from other sponsors than its “lead sponsor, Legatum Foundation ltd … demonstrating its continued journey towards financial independence.”

The accounts do not hold any information on the real sponsor, Legatum Foundation Limited nor is it registered in the UK, judging from Companies House. The Legatum Institute Foundation has confirmed it will fund the Institute until end of 2019. As can be seen from the above figures there is still some funding to cover to match the Foundation’s funding.

According to the FT the charity has 40 donors in addition to its lead sponsors, but interestingly the charity is unwilling to disclose who these donors are – a peculiar situation for a charity.

The Legatum Institute fund was registered in the Cayman Islands in 2008. Its objective is “Philanthropic development.” The three present directors, Alan McCormick, Mark Stoleson and Philip Vassiliou, are all registered at Legatum Group’s address in Dubai. According to the 2016 full accounts of the Cayman fund at Companies House, its assets in 2016 were $8,9m, $24m in 2015.**

Christopher Chandler and Mark Stoleson have recently obtained EU passports through the widely criticised Maltese passport-for-investment scheme.

Legatum fits the “Dark Money” format of billionaire-funded partisan US think tanks

Intriguingly, Legatum’s founder and main sponsor fits the model of the American billionaires who for decades have been funding make-believe institutions to influence politics and confuse public debate. Christopher Chandler keeps firmly out of the limelight and his name off documents: people working from him are directors of his companies. The array of Legatum entities, on- and offshore, is rather bewildering and runs contrary to the transparency that charities could be expected to adhere to.

There are indications that some of those fighting for Brexit are inspired by Russian and American ideas of how to gain power by dividing and ruling, by sowing disharmony. The Kremlin propaganda machine is inspired by Vladimir Putin’s longtime political technologist Vladimir Surkov and his ideas of “non-linear wars” and other means of profiting from confusion and shifting alliances.

Paul Manafort, Trump’s campaign manager, has been indicted with conspiracy against the US, tax evasion and money laundering, as part of the investigations into Russian collusion in the US presidential elections. The Ukrainian journalist and politician Serhiy Leshchenko has explained how Manafort operated in Ukraine by putting into practice the politics of division and social polarisation.

There is of course nothing wrong with airing one’s views. But airing it on false premises is insidious and undermines public debate. And false or biased information is one way of playing the politics of division.

As Jane Mayer describes so well in her book, key strategy of billionaires is to fund organisations that produce something that looks like “research” but is indeed propaganda. This has been an effective strategy in fighting for the interests of the tobacco industry and the petro-industry, not to mention Obamacare. The damage is done when the media embraces this research as equally valid to thoroughly researched material. The danger is media unwilling to or uninterested in distinguishing between the propaganda and carefully researched studies.

Another aspect of the propaganda-driven organisations is the opacity of their sponsors, normally offshored and out of sight. The offshoring should indeed be a sure sign of warning.

These propaganda organisations have so far not been prominent in the UK. Legatum Institute, funded by Christopher Chandler, seems to fit the US model of a propaganda-driven “think tank.” Thus, their reports should be read with that in mind. The two reports, on Iceland and Brexit, certainly seem a poor addition to an enlightened discourse on these two topics.

* I pointed these figures out to a Legatum employee who forwarded them to Singham. His response was that the data was “based on the application of our ACMD productivity simulator (for more information, please see the attached link).” He agreed I made a valid points regarding the employment effects and Iceland’s small size. Consequently, they would “probably … not focus on employment effects too much in the deeper analysis.  While capital controls are generally distortionary from the perspective of an open and liberalized trading environment, the precise manner of their amendment or repeal also can have distortionary effects. The data is picking up the implicit national treatment violation as a function of the key variables on property rights and foreign investment in our simulator.” – The analysis on the website is still as it originally was, with the implausible figures.

**According to Companies House records 8 March 2018, the Cayman fund is now in administration.

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Written by Sigrún Davídsdóttir

February 3rd, 2018 at 11:12 pm

Posted in Uncategorised

Paradise Papers and the onshore heart of the offshore industry

with 3 comments

The Paradise Papers emphasises, yet again, that the damaging effect of offshore is much more pervasive that robbing countries of tax. Offshore creates a two-tier business environment, hiding ownership and in general throwing an opaque veil over the offshored part, thus undermining competition, regulation and ultimately the rule of law. The offshore alchemists also need the rule of law – the heart of the offshore industry is firmly onshore in countries with the stability provided by rule of law. As juicy as it is to read about famous individuals benefitting from insane offshore projects, the offshore enablers are onshore in fancy metropolitan offices, the heart of the offshore industry. Shaming, scrutinising and exposing the enablers needs to be part of anti-offshoring policies.

Yet again, a major leak is deepening our understanding of how wealthy individuals and companies make use of the offshore universe. The Panama Papers provided insight into wealth management of private individuals. Apart from further insight into the same, the Paradise Papers show how big companies like Apple and Nike use the power of wealth and offshore craft to negotiate tax reductions with governments and authorities.

In addition, the leaks underline that offshore isn’t just about tax. It’s about secrecy and opacity; the concept of secrecy jurisdiction as the Tax Justice Network defines it gives a much clearer understanding of the nature of offshore. And secrecy undermines markets, governments and the rule of law.

Intriguing as it is to think of warm and exotic places like the Bahamas or Seychelles, places lacking any infrastructure needed to oversee the oceans of money floating through them, at least on paper, the heart of the offshore industry is firmly onshore. It is in cities like London and countries like Switzerland and the US where the best paid offshore experts and enablers live and work.

Iceland – (possibly) the most offshorised country in the world

Through serendipity and coincidence, the first thing I started digging into after the collapse of the three main Icelandic banks in 2008 was their offshore operations, mostly in Luxembourg. A whole new dimension of the Icelandic banks and businesses opened up when I discovered how to search the Luxembourg Gazette for Icelandic links.

Apart from the well-known Icelandic tycoons operating abroad I found dozens of Luxembourg companies connected to people I had never heard of. When I contacted some of them it turned out they were mainly owners of small companies. One of them had sold a small fishing boat for around £15.000.

In all of the cases I looked into, the banks had suggested the client should offshorise, set up a company in Luxembourg and move their funds abroad – a good example of the role of the enablers. If the client both paid tax and the offshore fees offshoring didn’t make much financial sense; it was more lucrative to hide this from the tax and then for example have a foreign credit card to make use of the funds in Iceland, out of sight from the Icelandic Inland Revenue (which now keeps an eye on the use of foreign credit cards by Icelanders in Iceland).

What made the Icelandic offshoring so interesting was its pervasiveness: in no other country I know of did the banks set the asset bar so low, i.e. they advised offshoring as little as £10.000-15.000. After the collapse, some of these owners discovered how difficult and costly it was to revert the offshorisation and move their funds again to Iceland.

A 2016 report (in Icelandic) on Icelandic offshore assets, published in the aftermath of the Panama Papers, estimates that Icelandic assets in low-tax regimes 2015 amounted to ISK580bn, just over 25% of GDP that year. A staggering amount, four times the Danish figure; it explains to some degree why so many Icelandic names were found in the Panama Papers.

Offshore ultimately undermines the rule of law

In a small country like Iceland it is easy to see how offshore creates a two-tier business environment where only the onshore is in sight but the offshore part hidden from authorities and the public.

The operations of banks and businesses, the main players in the boom up to the collapse of the banks in October 2008, were thoroughly exposed in the 2010 report of the independent Special Investigation Commission, SIC. One of its findings was that fourteen foreign entities with unidentified owners owned more than 10% in 410 Icelandic companies (see Vol. 9 p. 79-83; in Icelandic).

Hidden ownership can be (ab)used in various ways. With ownership hidden abroad, large shareholders can control companies but avoid take-over regulations. Small investors who might steer clear of investing in companies of certain owners or under majority control, will be misled if some shareholders hide ownership offshore.

The latest example of intriguing interplay of offshore and ownership is the story of Alisher Usmanov in the Paradise Papers and his allegedly hidden ownership of Everton, in addition to his 30% of Arsenal; possibly a breach of Premier League rules.

The offshorised life: offshorised watch, offshorised children

Apart from the insight into the offshore craft, how offshore experts organise the offshore affairs of wealthy individuals and international companies, the story of the self-acclaimed “tax alchemist” James O’Toole is shows how offshore is now a life style.

O’Toole is a British lawyer, an offshore enabler. He runs a company called Ashton Court Chambers and has himself offshored his life down to assets such as his £25.000 Rolex. Not a major financial asset though slightly more expensive than an Icelandic fishing boat but valuable enough to be offshorised. To satisfy British tax authorities O’Toole surmised it would be enough to pay his own offshore watch-holding company £50 a month to make it look like a wholly legitimate set-up.

Another example of Ashton Court tax alchemy is the “Educational Purpose Trust,” set up in Mauritius in 2013. It’s not for the benefit of school children on the island but for children of some wealthy individuals, clients of Ashton Court attending British private schools. Once their application was accepted (no examples of the contrary) the applicants were asked to make a “charitable donation” to EPT, exactly equivalent to the school fees/grant, in addition to a donation of £1000 – not for administration but for an “orphan child.”

Legal or not? Not the most pertinent question

Much of offshore activities is entirely legal. But the distinction between legal and illegal is far from always visible to the naked eye.

Statements issued by lawyers working for those whose names have come up in the Panama Papers and now in the Paradise Papers, claiming there is nothing illegal in the exposed schemes are rarely worth the paper they are printed on. These statements almost never come with any tangible evidence. The statements mainly show that those offshorised are likely to be well lawyered.

Further, the question of legality isn’t even the most important question. The effect of offshore is to hide and that in itself is the damaging effect. The corroding influence is the two-tier business environment, the visible onshore, the invisible offshore.

The offshore effect on poor … and rich countries

In exposing hidden offshore wealth, the focus is often on how poor countries lose substantial amount of their wealth abroad, often due to the vicious combination of corruption and offshorisation.

Offshoring corrupt funds exacerbate the underlying corruption. In order to make full use of corrupt money at home it is crucial that it can’t be seen who really owns the funds. That is done by offshoring them: by sending the money out of the country and back ownership and origin of the funds become invisible. Creating this invisibility is largely the work of offshore alchemists – bankers, lawyers and accountants – in London and other Western countries.

However, I would argue that the corrosive effect of offshored wealth is no less damaging to the wealthy developed countries but measuring and demonstrating this effect is more difficult.

The two-tier business environment is one thing: it undermines competition and regulation by exempting part of the business community from rules and regulation. Further, offshore funds make it easier for big business and wealthy individuals to influence politics, again by creating loops to send money out and get them back, for example when paying lobbyists, funding think tanks and in other ways influencing the political debate and legislation.

Ultimately, if flow of funds from offshore into these activities is pervasive enough, it could be argued that the rule of law, the fundament and pride of Western democracies, is dangerously undermined. What the offshore enablers don’t seem to understand is that undermining the rule of law is also harmful to their business: after all, the reason why it’s better to run an offshore business from London rather than Kinshasa is exactly the rule of law. Rule of law provides stability in addition to respectability.

That is why the heart of the offshore is onshore. Without the onshore heart, where offshore experts at the Big Four – PwC, EY, Deloitte and KPMG – and others in similar position feel at ease, the offshore business and its enablers would be a lot less potent. Actions to throw open the offshore universe, the secrecy jurisdictions, need to be directed at the onshore heart of the offshore industry.

The onshore presence, found at fancy addresses in gleaming offices in London, New York and elsewhere gives the offshore business legitimacy and gravity. Gravity the offshore enablers use to influence the legislative process, politicians and regulators in Western democracies in order to nourish the socially harmful industry of offshoring.

Shared by Tax Justice Network blog.

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Written by Sigrún Davídsdóttir

November 14th, 2017 at 11:12 am

Posted in Uncategorised

What is Deutsche Bank hiding in Iceland?

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Deutsche Bank has studiously tried to hide some transactions with Kaupthing in 2008 – and in December 2016 probably thought it had succeeded when it agreed to settle for €425m to Kaupthing and two now bankrupt BVI companies set up in 2008 by Kaupthing. The story behind these deals figured in two Icelandic court cases and one of them, the so-called CLN case, has now taken an unexpected turn: the Supreme Court has ordered the Reykjavík Country Court to scrutinise the transactions as it reopens the CLN case. But what is Deutsche Bank hiding? “It’s not unlikely that an international bank wants to avoid being accused of market manipulation,” said Prosecutor Björn Þorvaldsson in Reykjavík District Court on October 11.

In early 2008 Kaupthing managers were rightly worried about the sky-rocketing credit default swap, CDS, spreads on the bank; in spring of 2008 the spreads had crept up to 900 points, a wholly unsustainable rate for any bank. According to multiple sources over the years, Deutsche Bank came up with a simple plan: Kaupthing should buy CDS on itself linked to credit linked notes, CLNs, Deutsche Bank would issue. Except Kaupthing should not be seen doing it: finance it, yes – but through two BVI companies owned by trusted clients in deals set up by Deutsche Bank. Thus, the market manipulation was neatly out of sight.

Only later did it transpire that Deutsche Bank was not only the broker in deals it knew were set up to manipulate the market – hence the remark by Prosecutor Björn Þorvaldsson – but it was actually on the other side of the CDS bets, a player in that market. Consequently, the bank profited handsomely, both from fees and from the actual CDS deals.

In the Deutsche Bank universe this unglorious saga of transactions to manipulate the market etc is however not at all true. Yes, Deutsche Bank admits it was the broker but it knew nothing of the purpose of the transactions, had no idea Kaupthing did finance the two BVI companies and certainly was not on the other side of the bets. This is what Deutsche Bank has stated in a London court and in witness statements in criminal proceedings Iceland (where Deutsche Bank is not being charged).

However, outside of the Deutsche Bank universe (and well, probably in some hidden corners inside Deutsche given the email trail that has surfaced in Icelandic court) there is abundant evidence showing the Deutsche Bank involvement. Certainly, Icelandic prosecutors are in no doubt Deutsche Bank was involved in the planning, knew of the Kaupthing funding and made money from the funds.

Kaupthing had poured €510m into the CDS bets. Early on, the administrators of Kaupthing and the two BVI companies eyed an interesting opportunity to claw these funds back. Until December last year, the administrators, in separate actions, have been suing Deutsche Bank in various places over these transactions.

When the legal fights were about to come up in court Deutsche Bank relinquished: to avoid having the whole well-documented saga exposed in court, with evidence running counter to the Deutsche Bank version of the CDS saga, Deutsche Bank finally agreed to pay €425m, around 85% of the millions that went through Deutsche Bank into the CDS schemes.

Intriguingly, in 2010 the Serious Fraud Office, SFO, had its eyes on Deutsche Bank’s CDS transactions with Kaupthing but this case seems to have evaporated as so many of the suspicious deeds in UK banks.

The story of these CDS transactions is a central part in the still on-going so-called CLN case. Kaupthing bankers have been charged for fraudulent lending and breach of fiduciary. Below, the focus is on the role of Deutsche Bank in the CDS transactions – what its real role was and why Deutsche Bank was in the end so keen to settle when nothing in the original 2008 agreements obliged it to pay anything back.

DB’s own version

In June 2012, Kaupthing hf, an Icelandic stock corporation, acting through its winding-up committee, issued Icelandic law claw back claims for approximately € 509 million (plus costs, as well as interest calculated on a damages rate basis and a late payment rate basis) against Deutsche Bank in both Iceland and England. The claims were in relation to leveraged credit linked notes (“CLNs”), referencing Kaupthing, issued by Deutsche Bank to two British Virgin Island special purpose vehicles (“SPVs”) in 2008. The SPVs were ultimately owned by high net worth individuals. Kaupthing claimed to have funded the SPVs and alleged that Deutsche Bank was or should have been aware that Kaupthing itself was economically exposed in the transactions. Kaupthing claimed that the transactions were voidable by Kaupthing on a number of alternative grounds, including the ground that the transactions were improper because one of the alleged purposes of the transactions was to allow Kaupthing to influence the market in its own CDS (credit default swap) spreads and thereby its listed bonds. Additionally, in November 2012, an English law claim (with allegations similar to those featured in the Icelandic law claims) was commenced by Kaupthing against Deutsche Bank in London (together with the Icelandic proceedings, the “Kaupthing Proceedings”). Deutsche Bank filed a defense in the Icelandic proceedings in late February 2013. In February 2014, proceedings in England were stayed pending final determination of the Icelandic proceedings. Additionally, in December 2014, the SPVs and their joint liquidators served Deutsche Bank with substantively similar claims arising out of the CLN transactions against Deutsche Bank and other defendants in England (the “SPV Proceedings”). The SPVs claimed approximately € 509 million (plus costs, as well as interest), although the amount of that interest claim was less than in Iceland. Deutsche Bank has now reached a settlement of the Kaupthing and SPV Proceedings which has been paid in the first quarter of 2017. The settlement amount is already fully reflected in existing litigation reserves and no additional provisions have been taken for this settlement. (Emphasis here and below is mine).

This is Deutsche Bank’s very brief story of the CNL saga and the settlement in the bank’s 2016 Annual Report. – Not admitting anything and yet, for no reason at all judging from the Annual Report, it paid Kaupthing an undisclosed sum, now known to be €425m.

Sigurður Einarsson’s letter to friends and family January 2009: the first tangible evidence of the CDS transactions

As recounted in an earlier Icelog there were rumours soon after the October 2008 banking collapse that Kaupthing had funded transactions connected to the bank’s CDS in order to manipulate the spread, thus lowering the bank’s ominously high financing cost.

At the end of January 2009 former chairman of the Kaupthing board Sigurður Einarsson told his side of the various stories swirling in the media. Yes, it was true that Kaupthing had funded transactions by what he called Kaupthing’s “trusted clients” to influence the bank’s CDS spread but it had done so on advice from Deutsche Bank.

The SIC report April 2010, the CDS story in some details

The story was told in greater detail in the 2010 report by the Icelandic Special Investigations Committee, SIC (p. 26-28, Vol. 2; in Icelandic). It was clearly stated and documented that Deutsche Bank came up with and concocted the plan. Summarised, the SIC recount of the CDS transactions is the following:

Kaupthing set up two BVI companies, Chesterfield and Partridge, for the sole purpose of carrying out the CDS transactions. Chesterfield was owned by three companies, in turn owned by four Kaupthing clients: Antonios Yerolemou, Skúli Þorvaldsson and the fashion entrepreneurs Karen Millen and Kevin Stanford, respectively owning 32 %, 36% and 32%. The Icelandic businessman Ólafur Ólafsson owned Partridge, also through another company.

Kaupthing lent funds to the four companies owning the two BVI companies that acted in the CDS transactions – all the companies were in-house with Kaupthing, which carried out all the transactions. The beneficial owners were only asked for consent to begin with but were not involved in the transactions themselves.

All of the owners were, as Einarsson said in his letter, longstanding and “trusted clients” of Kaupthing. In 2001, Yerolemou, a Cypriot businessman prominent in the UK Cypriot community and a Conservative donor, had sold his business, Katsouris, to Exista, Kaupthing’s largest shareholder and stayed close to Kaupthing, also briefly as its board member. Stanford had a long-standing relationship with Kaupthing as with the other Icelandic banks and Ólafsson was the bank’s second largest shareholder.

Like Einarsson, the SIC report traced the origin of the transactions to Deutsche Bank:

At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthing, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the ‘most “bang” for the buck’. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is ‘no question’ that they should do this. 

Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. ‘It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.‘” (As translated in Akers and Anor v Deutsche Bank AG 2012.)

According to the SIC the CLN transactions “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.” The SIC report came up with the total amount lost by Kaupthing on these trades: €510m, all of which had been paid to Deutsche Bank as the broker of the underlying deals.

The administrator of Partridge and Chesterfield also wondered about Deutsche Bank’s role

Further information came up in a London Court in 2012: soon after Kaupthing failed, Partridge and Chesterfield unavoidably went bankrupt; after all, their only assets were the CLN linked to the failed CDS bet. Their administrators, Stephen Akers from Grant Thornton London and his colleague, quickly turned to Deutsche Bank to get answers to some impertinent questions regarding the two companies. When Deutsche Bank was not forthcoming Akers took a legal action demanding from Deutsche Bank documents related to the transactions. A decision was reached in February 2012.

In his affidavit in the 2012 Decision, Akers said: It is very difficult to see how the transactions made commercial sense for the Companies. This request for information is in part to explore how the Companies might have expected to benefit from the transactions, to identify what the Companies’ purposes and objectives in entering into the transactions were and how the Companies were expected to repay the loans from Kaupthing if there was movement in the market in the ‘wrong’ direction (as transpired). … The Joint Liquidators are keen to understand, through requests for information and documents from key parties, why these particular transactions were entered into by these particular companies. 

46. From the information that the Joint Liquidators have been able to gather about the transactions …, it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing.

In his Decision, Justice Newey holds up the “possibility of market manipulation” quoting the above statement from the SIC report, noting the report’s conclusion “that the CLN agreements “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.””

In the 2012 Decision it’s pointed out that “Deutsche Bank strongly denies any suggestion that it entered into the CLN transactions in order to manipulate the market. In other respects, too, it takes issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing.”

DB was right that the CLNs were not in any way unusual – but the CLNs per se were not the problem that drove Akers to collect information but the whole transactions. However, there is abundant documentation, inter alia emails to and from Deutsche Bank etc. to show that Deutsche Bank was indeed aware that Kaupthing was financing the two companies’ bet on the Kaupthing CDS. And Deutsche Bank definitely advised Kaupthing in this set up, again born out by emails.

The “bang for the buck” email, quoted in the SIC report was written by Venkatesh Vishwanathan, a senior Deutsche Bank banker who oversaw the CDS deal with Kaupthing. In his witness statement in the Akers 2012 case he gave his interpretation: “I say the way to proceed would involve ‘hitting the right moment in the market to get the most bang for the buck’ because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get ‘bang for its buck’ by Deutsche selling CDS protection.”

Vishwanathan’s interpretation runs contrary to what Akers claimed and other sources support: that the transactions were set up for Kaupthing, via the two companies, in order to influence the market.

DB placed Wishwanatahn on leave in 2015, in autumn 2016 he had sued the bank for unfair dismissal. According to his LinkedIn profile, Wishwanathan now lives in Mumbai (he has not responded to my messages).

Additional evidence: the Icelandic CLN case

In 2014, Sigurður Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of Kaupthing Luxembourg Magnús Guðmundsson were charged of breach of fiduciary duty and fraudulent lending to the two BVI companies, Partridge and Chesterfield, causing a loss of €510m to Kaupthing.

The charges (in Icelandic) support and expand the earlier evidence of Deutsche Bank role in the CDS trades. Deutsche Bank made for example no attempt to be in contact with the Kaupthing clients who at least on paper were the owners of the two companies. Deutsche Bank was solely in touch with Kaupthing. When the two companies needed for example to meet margin calls its owners were not averted; Deutsche Bank sent all claims directly to Kaupthing, apparently knowing full where the funding was coming from and who needed to make the necessary decisions.

But who was on the other side of the CDS bets, who gained in the end when the Kaupthing-funded companies lost so miserably?

According to the Icelandic Prosecutor, the three Kaupthing bankers “claim they took it for granted that the CDS would be sold in the CDS market to independent investors and this is what they thought Deutsche Bank employees had promised. They were however not given any such guarantee. Indeed, Deutsche Bank itself bough a considerable part of the CDS and thus hedged its Kaupthing-related risk. Those charged also emphasised that Deutsche Bank should go into the market when the CDS spread was at its widest. That meant more profit for the CLN buyer Chesterfield (and also Partridge) but those charged did not in any no way secure that this profit would benefit Kaupthing hf, which in the end financed the transactions in their entirety.”

DB fees amounted to €30m for the total CDS transactions of €510m.

The oral hearings in the CLN case were in Reykjavík in December last year. I attended the hearings, which further not only supported the story of Deutsche Bank’s involvement but provided ample tangible evidence as witnesses were questioned and emails and other documents projected on a screen.

The side story in the al Thani case

A short chapter in the CDS saga is the fact, already exposed in the SIC report, that Kaupthing had indeed planned with Deutsche Bank to set up yet another company to trade on Kaupthing’s CDS. Kaupthing issued a loan of $50m to Brooks Trading Ltd, via another company called Mink Trading, both owned by Sheikh Mohamed Khalifa al Thani. The purpose was to invest in CLN linked to Kaupthing’s CDS, via Deutsche Bank, identically structured as the CDS transactions through Chesterfield and Partridge. CDS transactions through Brooks were however never carried out.

Sheikh al Thani played a role in another Kaupthing case, the so-called al Thani case; the Sheikh was not charged but the three Kaupthing managers, charged in the CLN case, and Ólafur Ólafsson were sentenced to three to 5 ½ years in prison. The bankers for fraudulent lending, breach of fiduciary duty and market manipulation; Ólafsson was sentenced for market manipulation.

The 2008 last minute CBI loan to Kaupthing

The evidence brought out in the CLN case – the tracing of the transactions, emails, phone calls etc. – shows that the Kaupthing managers were extremely focused on exactly these transactions. Kaupthing was teetering and yet they never wavered from paying to Deutsche Bank, the agreed sums and the margin calls that followed. It almost seemed as if nothing else mattered in their world, a sense further strengthened by some back-dated documents related to the CDS transactions.

The last payments were made just as the bank was collapsing, 7 October 2008; the bank went into administration 8 October. During these last weeks, foreign currency was scarce at the bank in Iceland where the payments originated. On 6 October, prime minister Geir Haarde addressed the stunned nation on radio and television at 4pm, to announce the Emergency Act enabling Icelandic authorities to deal with collapsing banks in an orderly manner. – Hreiðar Már Sigurðsson, then CEO of Kaupthing but only for 48 more hours, has said in court that when he heard of the Emergency Act he knew it was over for the banks.

At noon of 6 October, Geir Haarde and the governor of the Central Bank, CBI, Davíð Oddsson, who both knew the Emergency Act was coming later that day, agreed the very last lending to the banks: Kaupthing would be given a loan of €500m. This, to permit Kaupthing to meet payments the Bank of England and the FSA were demanding as a guarantee for the bank’s UK subsidiary, Kaupthing Singer & Friedlander.

The reasons for this loan have never been completely clarified (see Icelog on this story): documents and an audio of the phone call between Oddson and Haarde remains classified in spite of valiant attempt by the Icelandic media to unearth this evidence. The CBI has promised a report on the Kaupthing loan “soon” but so far without a publication date.

Whatever the motivation, the CBI issued the loan directly to Kaupthing without securing it would be used as promised, i.e. to strengthen Kaupthing’s UK subsidiary. Instead, part of it was used 7 October when Kaupthing paid, via the two BVI companies, the last €50m CDS transactions to Deutsche Bank.

This is how much the CDS transactions mattered to the Kaupthing managers who never, not even in the mid of the cataclysmic events engulfing the bank these early days in October 2008, took their eyes off the CDS transactions with Deutsche Bank.

When the Deutsche Bank December 2016 agreement surfaced…

In January 2016, the Reykjavík District Court acquitted the three Kaupthing managers of the fraudulent lending and breach of fiduciary duty they had been charged with in the CLN case. In February this year, the Office of the Special Prosecutor (now Office of the District Prosecutor, encompassing the earlier OSP and other duties), appealed that decision to the Supreme Court.

In March 2016, I reported on Rúv (in Icelandic) that Deutsche Bank had indeed come to an agreement with Kaupthing: on-going legal cases, mentioned in Deutsche Bank’s annual reports 2015 and 2016 (but not in earlier reports), had now been settled with Deutsche Bank agreeing to pay Kaupthing more than €400m.

The agreement had been sealed in December 2016. Kaupthing made no big deal of the millions accruing from Deutsche Bank – no press release, just silence.

I pointed out that what Deutsche Bank had stated in the 2012 court case in London was not in accordance with other sources. Also that the bank had mentioned the Kaupthing claims in its 2015 Annual Report but stated it had filed defence and continued to defend them.

I concluded that Deutsche Bank 1) refuted it knowingly participated in transactions knowing set up to mislead the market 2) refuted that Deutsche Bank planned the transactions 3) denied knowing Kaupthing was itself financing the transactions aimed at lowering its CDS spreads. Further, I pointed out that statements from the Prosecutor in the CLN case showed that Deutsche Bank was not only the broker in these transactions but was actually on the other side of the bet it set up for Kaupthing and gained handsomely when Kaupthing failed.

I did at the time send detailed questions to Deutsche Bank regarding the bank’s statements in the 2012 London court case and its version of the case in its annual reports. Deutsche Bank’s answer to my detailed questions was only that bank was not commenting “on specific aspects of this topic,” only that “Deutsche Bank has reached a settlement over all claims relating to credit-linked note transactions referencing the Icelandic bank Kaupthing. The settlement amount is already fully reflected in existing litigation reserves.”

In my email exchange with Deutsche Bank I mentioned that this matter had wider implications – Deutsche Bank has stated in court and in its annual reports that it had nothing to do with the CDS trades except selling the CLN related to it. Thus, it could be argued that the stance taken by Deutsche Bank, compared to abundant evidence, has been misleading and that has much wider implications than just being a matter between Deutsche Bank and Kaupthing. – The answer was, as before: settlement reached, no further comments.

It’s interesting to note that at the time Deutsche Bank reached an agreement of paying €425m to Kaupthing it was struggling to reached its required capital level, looking for €8bn. That did allegedly force the bank to finish several outstanding cases, the Kaupthing case being one of them.

Why did Deutsche Bank change its mind and meet 85% of the Kaupthing claims?

Following my March reporting on the agreement between Deutsche Bank and Kaupthing where Kaupthing did indeed recover around 85% of its CDS transactions with Deutsche Bank the three Kaupthing managers charged in the CLN case, now fighting an appeal by the Prosecutor, turned to the Supreme Court asking for the case to be dismissed: according to them, the basis of the claims had been the €510m loss to Kaupthing – and now that there was apparently hardly any loss the case should be dismissed.

Their demand for dismissal came up at the Supreme Court 11 October where the Court stipulated that in order to understand the demand for dismissal the Court needed to get a deeper understanding of the Deutsche Bank agreement with Kaupthing. The District Prosecutor had obtained a copy of the agreement handed to the Court but not made public in its entirety.

During the oral hearings that day Prosecutor Björn Þorvaldsson maintained that the agreement did not change the charges in the CLN case to any substantial degree: the loans had been illegal, no matter if the money was then much later clawed back. He said that according to the agreements in 2008, Deutsche Bank had been entitled to the funds and Kaupthing had no claim for clawing them back.

So what did then change, why did Deutsche Bank decide to meet the Kaupthing claims and pay back €425m of the original €510m it got from the CDS transactions?

The Prosecutor said one could only guess: 1) Perhaps Deutsche Bank wanted to hide that the Kaupthing loans to the two companies did indeed end up with Deutsche Bank 2) Did Deutsche Bank see it as harmful to the bank’s reputation that the details of the transactions would be exposed in a court case? 3) Was it accusation of being part of market manipulation that irked Deutsche Bank?

As Þorvaldsson said in court 11 October: “It’s not unlikely that an international bank wants to avoid being accused of market manipulation.”

The Supreme Court ruling on issues related to the Deutsche Bank Kaupthing agreement

The Supreme Court decided on the dismissal request 19 October. According to the Decision, Deutsche Bank signed two agreements in December 2016 regarding the 2008 CDS transactions. One was an agreement with the two companies involved, Chesterfield and Partridge. The other one is with Kaupthing.

The aim was to effectively end three court cases where Kaupthing was suing Deutsche Bank in addition to cases brought by the two companies against Deutsche Bank. According to the agreement the two companies and Kaupthing agreed to put an end to their legal proceedings against Deutsche Bank – and Deutsche Bank concurred to pay €212.500.000 to Kaupthing and the same amount to the two companies, in total €425m. Further, the agreement stipulated that Kaupthing (as the largest creditor of the two companies) would get 90% of the Deutsche Bank payment to the two companies. In total, Deutsche Bank paid €425m to end all dispute, whereof over €400m would go to Kaupthing.

The thrust of the arguments, on one side the Prosecutor, on the other side the three defending bankers was that the Prosecutor said that issuing the loans was the criminal deed, that’s what the three were being charged for – whereas the three defendants claimed that since Deutsche had now paid most of the transactions back it showed that the bank felt legally obliged to pay on the basis of the 2008 contracts.

In its Decision the Supreme Court scrutinised the final settlement of the CDS transactions concluded at end of October 2008, which indicated that Deutsche Bank did indeed not feel obliged to pay anything back to the owners of the CLNs. Same when Icelandic police interrogated two (unnamed) Deutsche employees: nothing that indicated Deutsche Bank thought it was obliged to pay anything back.

The Supreme Court concluded that based on the information at hand on the December 2016 settlement it was neither clear “why the bank (DB) agreed to issuing these payments, what the arguments were nor what material was the basis for the claims by Kaupthing and the two companies in their legal actions against Deutsche Bank. It is also not clear what was the nature of the (December 2016) payments, if they related to earlier contracts (i.e. the 2008 contracts) or if they were damages and if they were damages then what was their nature.

Based on this, the Supreme Court then decided against dismissal, as demanded by the three bankers, sending the case back to the Reykjavík District Court for a retrial where questions regarding the December 2016 settlement should be clarified in addition to the charges brought by the District Prosecutor.

This means that although Deutsche Bank settled with Kaupthing and the two companies the actions of Deutsche Bank will be scrutinised by Icelandic Court, probably already next year.

A short revision of dodgy Deutsche Bank transactions

As other international banks, Deutsche Bank has had a lot to answer for over the last few years and paid billions in fines for its rotten deeds. Contrary to Iceland, bankers in the UK and the US, have mostly been able to wipe the cost of their criminal deeds on shareholders (and why on earth have shareholders such as as pension funds and other public-interest organisations been so patient with banks’ criminal deeds?)

In April 2015 Deutsche Bank settled LIBOR manipulation cases with US authorities, paying $2.175bn and £226.8m to the UK Financial Conduct Authority, FCA as mentioned in the bank’s 2015 Annual Report.

In January this year it paid £163m to the FCA, the largest fine ever paid to the FCA, for “serious anti money-laundering controls falings” in the so-called mirror trades, where $10bn were sent out of Russia to offshore accounts “in a manner that is highly suggestive of financial crime.” At the same time, US authorities fined the bank $425m for the same offense, pointing out that “Deutsche Bank and several of its senior managers missed key opportunities to detect, intercept and investigate a long-running mirror-trading scheme facilitated by its Moscow branch and involving New York and London branches.” – Many years ago, a source said to me Deutsche Bank really should be called Russische Bank.

In May, the US Fed fined Deutsche Bank $41m “for failing to ensure its systems would detect money laundering regulations.”

In additions, there have been fines for violating US sanctions. Lastly, there is focus on Deutsche Bank and its tight connection to US president Donald Trump. And so on and so forth.

Summing it up – seen from Iceland: why Deutsche Bank would want to settle

In this context it is interesting that Deutsche Bank has decided to pay €425m to Kaupthing, a high sum in any context, even in the context of fines Deutsche Bank has had to pay over the years.

From all of these various sources it is easy to conclude as did the State Prosecutor in October that yes, one reason why Deutsche Bank would want to bury it involvement in Kaupthing’s CDS trades in the summer of 2008 is that this looks like a market manipulation by a major international bank. Further, Deutsche Bank has questions to answer regarding its own involvement in the market, i.e. it did not only broker the CDS deals, knowing full well who financed the two BVI companies, but it was actually a player in that market, making a lot more from the deal than only the fees.

Updated 14.6.2018: a retrial has been ordered, the case will come up next winter. This time, there will also be some focus on DB’s role in order to understand the context better though neither DB nor any DB bankers are charged. 

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Written by Sigrún Davídsdóttir

November 3rd, 2017 at 9:38 pm

Posted in Uncategorised

That’s a bit late, Mr. Brown

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“If bankers who act fraudulently are not put in jail with their bonuses returned, assets confiscated and banned from future practice, we will only give a green light to similar risk-laden behaviour in new forms.”

According to The Guardian, Gordon Brown adds, in a convoluted way, that if the conduct of bankers was dishonest judging from what would be considered reasonable and honest, then there was a case for Britain following the example of Ireland, Iceland, Spain and Portugal and in launching prosecutions.

So, now we know: Gordon Brown former prime minister and leader of the Labour Party now thinks banks and bankers should have been investigated and prosecuted in connection to the financial crisis; the crisis that struck in August 2007, when Brown had been prime minister for only a few months. He had however been Chancellor of the Exchequer for a decade.

We know of his change of heart because this is what he writes in his coming memoir, My Life, Our Times.

He’s right that something has been in Ireland, Spain and Portugal but only in Iceland were the banks investigated in a fairly concise way. So far, over twenty bankers and others connected to financial wrongdoing in the months and years up to the 2008 banking collapse have been sentenced to imprisonment.

Better late than never – but this is a staggering admission from the man who more than anyone formed that atmosphere that allowed the banks to act with impunity. From his seat of great power he watched the crisis unfold and followed its aftermath until the Labour party lost the elections in the spring of 2010: Brown first had ten years as a Chancellor and then three years as prime minister to shape the banking environment.

Soon after the events in the UK in early October 2008, when the Icelandic banks, also operating in the UK, collapsed and British banks like RBS, HBOS and Lloyds TSB were bailed out, the Serious Fraud Office, SFO, started scrutinising the ongoings. It did look at the Icelandic banks but it had its eyes also on the interaction between the Icelandic banks and international banks operating in London. One case was mentioned in The Guardian in June 2010, focusing on an intriguing connection between Kaupthing and Deutsche Bank. Nothing has apparently come of that investigation.*

We know that the SFO was suffering at the time from lack of funds which in turn led to difficulties in attracting highly skilled people who would always be able to get better paid jobs elsewhere. Gordon Brown, as Chancellor and as prime minister, did little to nurture the SFO.

It’s good that Gordon Brown has seen the error of his earlier days, an error that profoundly shaped the atmosphere of impunity the banks operated in – but it’s very very sad that he totally wasted the opportunities he had to stimulate a healthy atmosphere where banks, like any other business and bankers, like any other persons, would be scrutinised, investigated and, if needed, prosecuted, without fear or favour.

*This case touched an Icelandic criminal case, the so-called CLN case. More evidence has come up on this lately, more coming soon on Icelog.

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Written by Sigrún Davídsdóttir

November 1st, 2017 at 5:57 pm

Posted in Uncategorised

From the pots and pan revolution to the Panama Papers and other scandals

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The outcome of the election provides no clear option in forming a government but it is clear that Icelandic politics is changing: the Independence Party, earlier the backbone of Icelandic politics, has lost  its strong position which it partly held because the Left kept splitting but on the Right the Independence Party was the only option. That is no longer the case. The many small parties now seem a fixture on the political scene in Iceland. Contrary to many other countries, nationalism and xenophobia do not colour Icelandic politics though these leanings can be detected. The narrative is unclear: the country of the pot and pan revolution votes in offshore company owners.

The opposition – especially the Social Democratic Alliance – won the election with the government losing twelve seats but it’s not a victory that they can make much use of. The favour of Icelandic voters is now split between eight parties in Alþingi but the political interest is huge with voter participation at 81.2%, up by just over one percentage point from 2016.

There have not been fewer women in Alþingi for a decade, so much for the land of gender equality – two of the new parties, the People’s Party and the Centre Party as utterly male-dominated. The Left victory, indicated by polls, did not materialise. The liberal global current that brought the Pirates, Revival (Viðreisn) and Bright Future 21 seats in 2016 has evaporated; these parties now hold ten seats and Bright Future did not get a single MP.

Forming a government will be tricky, even more so if this government is to last for more than a year or two.

Independence Party: the centre of power that was

The GOP of Icelandic politics is still old but no longer the grand centre of power. Gone are the elections when the party could count on the support of 30 to 40% of voters. In the party’s 2009 wipe-out it lost nine MPs, fell from 36.6% of the votes to 23.70% and 16 seats. It rose to 29%, 21 seats, last year but is now back at 16 seats and 25.2%. If it continues to attract only older voters, as is now the case, the party has a lot to worry about: it will, literally, die out.

The party’s position over the decades was strong: the Left kept shifting like a kaleidoscope the Independence Party ruled undivided and alone, except for very brief interludes. With Bright Future and in particular Revival, the latter is now lead by an ex-Indpenedence Party minister, those on the Right had and have other options.

Bjarni Benediktsson, though young and energetic, has not been able to shift or strengthen the party. He is however an undisputed leader, there are no obvious candidates in sight. Panama Papers companies, his IceHot1 registration on an affair website and his family’s connection to dubious deals and a pedophile have not undermined him. Rumblings in the party are just that, rumblings; unity on the surface.

The politcal centre 

Bright Future did not particularly like to place itself on the Left Right axis but it was largely seen as a liberal party, palatable to those on the political Right. It was pro-EU, as is Revival. Bright Future instigated the fall of the government but did not reap any benefits from that. In government it did not manage to make its mark. Bright Future leader Óttarr Proppé did not have a strong enough message though his sartorial style of three piece corduroy and turtlenecks certainly stood out.

The Progressive Party did the remarkable feat of not losing ground, kept its 8 seats, though its former leader Sigmundur Davíð Gunnlaugsson left the party and raked in 10.8% of votes, probably a bit from everyone but most from the Independence Party. Progressive leader Sigurður Ingi Jóhannsson is of the pure Progressive mold, level-headed and portly, ready to work with both the Left and the Right and now wooed from both sides.

The Pirates, the voters’ darling last year, did lose four MPs, now have six. In spite of measured policies and no reasoned promises they did not cut a striking figure on the political scene.

The new political forces: male-oriented populists with a touch of xenophobia

The most remarkable political entry is that of Inga Sæland who rose to fame on the Icelandic X Factor. Sæland is a divorced mother of four and has done this and that. Counting herself as one of them her motivation is to improve the life of poor people in Iceland. Her party, the People’s Party, running for the first seemed to be destined for not making it into Alþingi. At the leaders’ debate two days before the election Sæland, asked what she wanted to achieve in politics, burst into tears, she was so passionate for her causes.

Whether it was the tears or her politics, Sæland secured 6.8% of the votes and four seats. For a party lead by a single mother – many of them in Iceland – it’s rather remarkable that she is the only woman MP of her party’s four MP.

To begin with Sæland struck a tone of xenophobia but only at the very beginning. Later she emphasised the need to live with an influx of foreigners, utterly denied any racist leanings and made no such references. Instead, her message was populist promises of better life for the poorer part of society.

Sigmundur Davíð Gunnlaugsson showed that 10.8% of Icelandic voters do not care about his lying about his offshore company. His voters seem more taken up with his promises of giving Icelanders shares in Arion bank where the government only owns 13% but has options to buy more. Gunnlaugsson’s other policies were less striking but continued his earlier message of subsidised agriculture and anti-EU tones. He has earlier flirted with nationalism and xenophobia and the same could be heard this time.

Less liberal voices, fewer women

Compared to other European countries where nationalism and xenophobia have been on the rise, the same is not the case in Icelandic politics. These tendencies can be detected close-up but the parties that have flirted with them, the Centre Party and the People’s Party have not particularly gained from it.

This is all the more remarkable because the influx of foreigners in Iceland has been very large since 2000: foreign inhabitants have gone from 2.6% in 2000 to 8.9% now. The largest nationality is Polish who have integrated well. In general, foreigners come to Iceland to get work, more than plenty of work to be had.

However, given the leanings of the two new parties, it can be argued that outward looking liberalism and globalisation is now weaker in Iceland than earlier. Due to the electoral system, the densely populated area around Reykjavík has less weight than the countryside.

The People’s Party and the Centre Party have an aura of anachronism in the sense that women are largely absent, except for the People’s Party leader. Otherwise, the appearance is portly elderly males. In total, these two parties hold eleven seats with only two of them filled by women.

In its world view the Centre Party also has an aura of anachronism: its leader has been prone to look back in search for political references rather than the future when his old party was strong because agriculture was a strong sector. Gunnlaugsson is interested in city planning: during his time as PM he even gave the Reykjavík city council drawings – not much more advanced than a kid’s drawings – of houses he thought should be built in the city centre in stead of more modern buildings already planned. If the drawings hadn’t come from the PM Office most people would have considered this a rather embarrassing and amateurish attempt to have a say.

The political narrative in Iceland: rambling and flip-flopping 

Iceland very much debuted on the international scene as the first crisis-hit country in October 2008. The pots and pan revolution, which drove out an Independence Party-led government with the Social Democrats and also drove out a former Independent leader then governor of the Central Bank Davíð Oddsson, gave Iceland the image of a feisty young nation. The Office of a Special Prosecutor, which investigated and prosecuted people related to the banks, further supported that image.

However, it’s difficult to square that image with the fact that the Independence Party is still the largest party and the ousted Panama Papers ex-PM Gunnlaugsson secured almost 11% of the votes on Saturday. Icelanders may have flared up in the winter of 2008 and 2009 but they have partly turned to the conservatives, although riddled with scandals. And to Gunnlaugsson’s party, centred not only the political centre like the Progressives, his old party, but around Gunnlaugsson himself – after all, the Independence Party and the Centre Party together hold 36.1% of the votes.

Yet, the pots and pan spirit hasn’t quite disappeared – the Pirates are still in Alþingi and the Left is emboldened – but there certainly is no clear narrative of a country that doesn’t tolerate financial scandals, old family dynasties and their special interests. Flip-flopping and looking at persons rather than principles and ideals is still the Icelandic way to political choices.

Options for forming a government

With the Left Green touching 30% in opinion polls up to the election the Left clearly felt its time had now come. That’s less clear now though the Social Democrats have made a spectacular comeback, doubled their last year outcome. Its leader Logi Einarsson did not seem to have much going for him but rose and shone in the campaign, proved to be relaxed and passionate. He himself claims he has not been media trained and so, has preserved spontaneity and the human touch.

Forming a government is about making a team working towards the same goals. Bjarni Benediktsson did not achieve that with his government. He might have another go, will try to woo the Left Green. However, the opinion forming is that the government has lost, the opposition won.

Jakobsdóttir is adamant that a Left government could and is in the making but more time is needed. For her, it’s crucial that she will succeed, will be able to harness the momentum though she has already lost some of it. Otherwise, she could be destined to become the leader of great promise but ultimately unable to deliver power to her party, unable to show in a tangible way that she can be more than just a popular person.

When pundits were musing on the outcome before the election no one seemed to give it a serious thought that Gunnlaugsson could return to government. His gain came as a surprise but although no one is saying it aloud, it is highly unlikely he will be invited to join any government. He has a reputation for being unreliable also in the literal sense: as a PM he was often away, no one knew where, he rarely showed up in Alþingi for debates and as an MP he has stayed away though without calling in his substitute; most likely that will continue.

Contrary to the anchor of stability as the Independence Party likes to portray itself the party has been in the last three governments that sat for less than a mandate term. The Left government in power from 2009 to 2013 is the only government after the 2008 collapse that sat a whole term, or rather stumbled through it, more dead than alive due to enormous infighting in the two coalition parties Left Green and the Social Democrats who led the government.

Iceland is booming as growth figures around 7% of GDP show. Certainly an enviable situation, seen from the perspective of 0 to max 2% GDP growth in so many other European countries. But doing the “right thing” hasn’t necessarily benefited those in government since 2008 (see my pre-election blog) – and navigating the good times has never been easy in tiny Iceland. As we say in Icelandic: það þarf sterk bein til að þola góða daga, it takes strong bones to stand the good days – and that counts for governing in times of surplus.

Final results:

Bright Future: 0 seats, -4 seats; 1.2%
Progressive Party: 8 seats, as in 2016; 10.7%
Revival: 4 seats, -3; 6.7%
Independence Party: 16 seats, -5; 25.2%
People’s Party: 4 seats, new; 6.9%
Centre Party: 7 seats, new; 10.9%
Pirate Party: 6 seats, -4; 9.2%
Social Democrats: 7 seats, +4; 12.1%
Left Greens: 11 seats, +1; 16.9%

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Written by Sigrún Davídsdóttir

October 30th, 2017 at 2:47 pm

Posted in Uncategorised

While waiting for the elections results

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Short and sharp election campaign has come to an end. Foreign media, especially in the other Nordic countries, finds it difficult to understand that a prime minister, Bjarni Benediktsson, who has been anything but forthright on his business affairs before and around the 2008 banking collapse might well yet again be the leader of the largest party.

In addition, there is suspicion that the minister of justice dealt differently with clemency case for a pedofile because the Benediktson’s father helped the pedofile seeking clemency. And the disgraced leader of the Progressive Party Sigmundur Davíð Gunnlaugsson, forced to resign laster year as PM and party leader due to the Panama Papers is back in politics as a leader of his own party, the Centre Party.

Trust has been an issue in the election campaign but no matter these issues Benediktsson’s Independence Party is on a roll and Gunnlaugsson is doing remarkably well, might get around 10% of the votes. So do Icelanders not care about ethics in politics? Well, to a certain degree they do – after all, Gunnlaugsson couldn’t avoid resigning. But all in all, other matters seem to be more important to Icelandic voters. The Independence Party voters and party member have not demanded that their leader should resign.

Environmental issues have been more prominent than earlier, a reflection of the fact that tourism is now the most important sector, contributing more than the fishing industry, the country’s mainstay for decades. However, it was interesting to notice that in the main tv debate, Thursday evening, where leaders of the eight parties, likely to get an MP elected or who have an MP, debated, three leaders did not mention the environment as important: Bjarni Benediktsson, Sigmundur Davíð Gunnlaugsson and Inga Snæland, leader of the People’s Party, a new populist party that seems to be losing  ground.

Some stats at the end: Icelanders are 343.960, registered voters are 248.502. Up for elections are 63 seats in Alþingi, the Icelandic parliament. In total, 11 parties offer candidates but seven might get candidates elected: the Independence Party, Left Green, the Social Democratic Alliance, the Centre Party, the Pirates, the Progressive Party, Revival; Bright Future, the party that withdrew from the government, causing it to fall, seems not to have gained from its decision and might disappear from the Alþingi.

My earlier blogs on the elections, here, here and here.

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Written by Sigrún Davídsdóttir

October 28th, 2017 at 11:09 pm

Posted in Uncategorised

Iceland: political instability in spite of “doing it right”

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To claim that Iceland has done all the right things since the financial crisis is hubristic. However, in the grand scheme of things it can be argued that the four governments, in power from 2008 until now, have broadly speaking done what needed to be done: the banks were dealt with without too great a public cost, an independent commission investigated the causes of the crash, matters related to the time up to the collapse have been investigated and individuals prosecuted; the economic policies have broadly stimulated growth, lately fuelled by boom in tourism. Yet, all of these sensible measures have not secured political stability as can be seen by elections held in 2016 and 2017.

Already by summer 2011 Iceland was back to economic growth in spite of the calamities of the banking collapse in October 2008. In spring the previous year, the Special Investigative Commission, SIC, had published its report. In the following years, the Office of the Special Prosecutor, now the District Prosecutor, was busy investigating and bringing bankers and their business partners to court. Well over twenty people have been imprisoned.

Iceland was not the only country hit by the financial catastrophe starting in 2007. In countries like the US and Britain, voters’ anger is often explained by the fact that in these countries little has been done to clarify what went on in the banks, the creators of the financial turmoil that hit various Western countries in 2007 and the following years.

In a long blog in September 2015 on the Icelandic recovery I pointed out that in spite of good recovery and growth the soul of the Icelanders was lagging behind: voters did not seem to embrace the parties bringing them a growing economy. That still seems to be the case judging from the political situation. Trust in political parties and party support is unstable and swinging.

This could very well be the future in Iceland as elsewhere: no matter the growing economy voters don’t put their trust in political parties as they once did, fewer belong to political parties or identify with a single party. It really isn’t about the economy any longer but a more elusive public mood.

Elections one year, minus a day, from the 2016 elections

Last year, the election was held on 29 October. This year it is on 28 October. Last year, the election was brought about by the then PM Sigmundur Davíð Gunnlaugsson leader of the Progressive Party having to step down due to the exposure in the Panama Papers of an offshore company held by him and his wife. The 2016 election ended the two-party coalition with the Independence Party (C) led by the Progressive Party.

In autumn this year, the coalition with two new centre liberal parties, Bright Future and Revival, led by the Independence Party fell when Bright Future lost the trust in PM Bjarni Benediktsson, a story recounted earlier on Icelog. When leaked document on Benediktsson’s business dealings in 2008, conflicting with his earlier explanations surfaced recently it seemed this would weaken the party’s standing (see Icelog).

A swing from left to right – but yet an Independence Party disappointment 

To begin with, opinion polls indicated that a left government, albeit a coalition of three to four parties, was looming on the horizon – the only Icelandic left government that ever sat a full parliamentary term was the left government in power 2009 to 2013. The Left Greens and Katrín Jakobsdóttir, the party’s very popular leader, seemed to be raking up a lot of votes, at one point giving the Left Green a clear lead as the largest party. The Social Democratic has been in a limbo since the 2013 elections; its new leader, Logi Einarsson, did not seem to appeal to the voters but might have been a necessary support for the left government

In the last few days, the political landscape has been changing dramatically with the Independence Party surging ahead of the Left Greens. In a historic context the Independence Party surge is no surprise and also last year the party surged ahead in the last few days up to the elections. In one sense this indicates support for Bjarni Benediktsson and his party but the numbers are less uplifting: the party stands to lose around 3 to 5% and possibly four MPs. In addition, the forecast now would be a historic low for Benediktsson’s party, far from its 20th century earlier glory of licking the 40%.

The most surprising swing is the Social Democrats great gain in the polls. They seem to be attracting votes from the Left Green and the Progressive Party. Revival is crawling above the 5% threshold, needed to get the first MP elected. Only some weeks ago the party hastily elected a new leader, Þorgerður Katrín Gunnarsdóttir, after party founder Benedikt Jóhannesson’s unfortunate remarks on sufferers of sexual violence. Gunnarsdóttir is an earlier Independence Party MP and minister who left politics for some years after 2008 due to her links to Kaupthing where her husband worked. In a Parliament of very inexperienced MPs Gunnarsdóttir has proved a skilled politician.

Another surprise: former Progressive leader, the disgraced Gunnlaugsson, who resigned in autumn from his old party to form a new one, the Centre Party, is making good progress, well ahead of his old party. This, although Gunnlaugsson has mostly been invisible in Parliament all through the year though not calling in a substitute and hardly seen at all around in Iceland. Gunnlaugsson seems to be pinching votes from his old party and the Independence Party.

Nine parties are or have been likely to get an MP but it now seems that in the last spurt only seven parties will be represented in Alþingi, the Icelandic Parliament.

The 2016 results


(Regeneration is the party I call Revival, a name the party itself uses, Viðreisn in Icelandic)

Screenshot 2017-10-26 15.58.46

A poll of polls 26 October 2017. From the left: Independence Party, Left Green, Social Democrats, Centre Party, Pirates, Progressive Party, Revival, People’s Party, other parties below the 5% threshold. From Kosningaspá.

The attraction of the new – this time it’s the new-old Centre Party

The Pirates were the stars of 2016 election though they did not make it into government. This time they are doing less well, judging from the opinion polls.

A populist party, the People’s Party, had some chance of being the new stirring choice. The party has an unclear policy except promising a lot of money for every good cause. At the very beginning it seemed it would take up the topic of immigration only to drop it very quickly. The party is now losing ground and might not even make it into Parliament.

The new political kid on the block, Gunnlaugsson’s Centre Party is doing remarkably well, showing that Gunnlaugsson has a strong appeal in spite of his Panama Papers disgrace, a story he tries to manipulate in the face of facts when he gets the chance. Gunnlaugsson is the only leader heavily playing the immigration card. This comes as no surprise, he has been dallying with the topic before but so far, it has not proved to be a winning topic.

In this respect, Iceland has so far proven to be a real exception compared to the US and most European countries. Although immigration is rising rapidly in Iceland there is plenty of work to be had, more than can be filled by only Icelanders. For years and now decades, foreigners have been crucial for the fishing industry and now they keep the tourist industry and other services going.

Gunnlaugsson has always had a populist flare, promising handouts to voters. In the election 2013 he promised to take money from the failed banks’ creditors and give to voters. The plan, introduced with fanfare in November 2013 was nothing of the sort: it was part publicly funded part funded by those who were qualified to apply.

That hasn’t stopped Gunnlaugsson from claiming he kept his promise and again he waves a bundle of money in the face of voters: he promises to give Icelanders publicly held shares in Arion Bank, seemingly similar to the Russian handout of shares in the early 1990s. The idea is to secure a spread ownership and give Icelanders shares in coming profits – an idea that doesn’t stand up to scrutiny. Gunnlaugsson has mentioned the shares will amount to ISK150.000-200.000, €1200-1600.

Topics and European thoughts

A membership of the European Union has not been on the campaign agenda. The leader of the Social Democrats Logi Einarsson has mentioned Icelanders could vote on continued membership negotiations as early as next spring. Due to lack of interest in all things European such a vote is unlikely unless the Social Democrats are in government. This got Einarsson a headline the day he said it but it is not a reverberating topic.

Revival was very much founded in order to offer conservative voters with European leanings a new option instead of the anti-EU Independence Party. However, Revival has put little emphasis on the European ticket and has been more taken up with classic Social Democratic welfare issues.

The main election issues have been welfare, health care and to some degree education as well as classic Icelandic topics such as fishing quotas and power plants versus preserving untouched nature.

Possible outcomes – again, back to the old conservative roots

With a swing from the left to the right, the outcome might be similar to last year when I pointed out that Iceland was, yet again, returning to its old conservative roots. The Independence Party has been the back-bone of Icelandic politics after World War II, left governments have been the exception, contrary to the social democratic Nordic countries (though less so the last few years: only in Sweden the social democrats are now in power).

For the time being it is very unclear what sort of government might be in sight after the elections on Saturday. Last year, it took over two months to form what eventually was the three-party coalition. It might not be much easier this time but as things stand now it is almost certain that Bjarni Benediktsson will first be given the mandate to form a government. Last year, he only managed to do it after failing the first time around and after other leaders had tried.

What sort of coalition?

There are speculations of a coalition over the political spectre, with the Independence Party and the Left Green join forces. An unpopular choice for many Left Green voters but perhaps less so if it proves to the party’s only viable path to government.

A blue-red-green government would most likely be arch-conservative, not in the sense of the Independence Party but beholden to special interests in the fishing industry, unwilling to great changes. However, as things stand now the two parties alone will not have a majority.

Benediktsson has said that he would not be keen on leading a three-party coalition. His experience as a PM has clearly not been a happy one: unable to turn the government into a good team he failed the prime minister test. His government lacked the necessary team spirit.

Will Gunnlaugsson made a come-back in government? It is uncertain that an election victory will bring the Centre Party into government because Gunnlaugsson is highly unpopular among the politicians he was in government with. He proved highly unreliable, often incommunicado for days, not showing up at the Prime Minister office, not taking the phone from his fellow ministers. And no one knew where he was. Benediktsson, who was minister of finance in the Gunnlaugsson-lead government, is rumoured to be most unwilling to repeat the experience.

Minority governments have been a rare occurrence in Iceland, not seen for decades, contrary to the other Nordic countries. A minority government will hardly come into being until all option for a majority government have been exhausted. But then, knowing the voters would appreciate it the political party may also be preparing a real surprise: a speedily formed majority government. Given the various alphabetical options, the depressing outlook is another elections in a year’s time.

Here is my overview of the results of the October 2016 elections.

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Written by Sigrún Davídsdóttir

October 26th, 2017 at 4:55 pm

Posted in Uncategorised