Sigrún Davíðsdóttir's Icelog

One of the problems with the debate in Iceland on capital controls is that so few seem to grasp the essentials. Consequently, politicians and special-interest agents on a mission can get away with saying almost whatever they fancy without being challenged. Once in a while, foreigners dive in, equally ill-informed, thwarting the debate further for Icelanders who, as so many small nations, tend to swallow everything coming from abroad. A case in point is a recent FT article by Gillian Tett with a somewhat misleading description of the Icelandic situation only some weeks after the IMF published a most informative report on Iceland. IMF gives some intriguing hints on two key issues: the Central Bank of Iceland and the legal routes out of the capital controls’ impasse.

Practically all nations forced to save themselves by slamming on capital controls struggle to get rid of them. It is by now an all too familiar problem that the shelter, provided by the controls for solving the original problem calling for controls, tends to turn into a hammock for in-action. Iceland is no exception.

The situation in Iceland however offers further complexities: getting rid of the controls will not prove easy at the best of times – but the overwhelming sense among control-watchers is that there might be wheels within the capital control wheels: first of all, steering the two new banks, Arion and Íslandsbanki, now owned by the failed estates of respectively Kaupthing and Glitnir, into hand-picked, politically-palatable ownership in what could be called “the asset sale of the century” (Icelog on this topic). Secondly, the government is seeking to preferably score a “victory” (à la Argentina) over the foreign creditors by securing funds from them for the state.

Iceland’s attraction for pundits in search of a good case to prove their point

Over the past few years, Iceland has been seductively attractive to economists and pundits looking for a story to prove their points/theories. Writing in July 2010 à propos an article by Paul Krugman on Iceland I pointed out that “when it comes to small countries (or exotic topics) it seems permissible to express opinions without knowing very much – or even anything at all.” – Those in the know and understanding are few and far between.

One myth has been that by letting its banks fail, Iceland’s cost of the collapse was almost negligible (more on this here). The cost partly rose from misguided attempts to save two private banks, possibly because of some domestic interests at stake. In addition, there was the cost of propping up the Icelandic “Sparkassen-system.” Thus, the cost of the collapse and resurrecting the country’s economy is more likely to be one of the highest for every country over the last few decades, ca. 20-25% of GDP.

In a recent article in the FT Gillian Tett joins the company of Krugman and many others on the well-trodden path of misunderstandings regarding the Icelandic collapse, subsequent events and the state of affairs right now. Apart from it being slightly shocking that such an esteemed paper as the FT does not take more care with what it prints the article provides a good opportunity to sum up the essentials on post-collapse Iceland and the capital controls. However, Tett’s general point certainly is valid: there is an essential topic for debate on emergency measures that are used as delaying tactics instead of a necessary shelter to work on solutions.

What happened when the banks collapsed?

Tett writes:

When the three banks collapsed, the government decided to save the domestic parts of the system (and its own taxpayers) by piling pain on to foreign creditors and depositors. So bank bonds held by foreigners were tossed into default and turned into implicit equity claims on the collapsed lenders – and bank deposits that foreign investors held in Icelandic krona were trapped in the country by capital controls.

True, the idea was to save the domestic part. The dilemma was how to dismantle a banking system ca. eight times the GDP of Iceland without drowning the whole economy at the same time. (The Icesave saga is about depositors in Landsbanki’s accounts in the UK and the Netherlands and EU’s passport rules for the financial sector; remarkable there was a mini-rerun of the passport conundrum in the UK following the Cyprus crisis; some aspects of Iceland vs Cyprus here).

Consequently, the operations of the three largest banks were divided into domestic and foreign operations. There were, and still are, persistent rumours that during the hectic days in early October 2008, when the emergency Act was being finalised, the policy really was called “f**k the foreigners.” Hardly shocking: a country staring into the abyss will go to great lengths to save itself, thinking less about others.

As explained in the Financial Services Authority, FME’s, annual report 2009 (there was no annual report in 2008) following the emergency Act (Act 125/2008) passed on October 6 2008 the three largest banks – Kaupthing, Landsbanki and Glitnir – were taken over by the FME and divided into “old” banks (destined to be wound up or liquidated at some point) and “new” banks. Like any estate of a failed private entity these failed banks are controlled on behalf of creditors, now by Winding-up Boards, one for each bank.

The three so-called new banks were turned into fully operating domestic banks. Following a crash settlement in the days after the October 2008 collapse the FME oversaw the finalising of financial instruments, based on valuation of assets transferred, between the old and the new banks. The new banks for Kaupthing, Landsbanki and Glitnir are respectively Arion, Landsbankinn and Íslandsbanki.

Thus there was a clear dividing line – not that “bank bonds held by foreigners were tossed into default.” And as in any failed company the creditors hold claims in the three failed/old banks.

According to the FME assets and liabilities of the new banks the “principal asset classes were loans to customers, on the one hand, which were further subdivided into loans to large corporations, small and medium sized enterprises and retail loans and, on the other hand, other assets. Liabilities consisted almost solely of deposits, which were valued at principal value. Gross loans to customers (that is the outstanding loan balances before any provisions or adjustments) represented over 80% of gross assets in each of the three new banks. Large corporate group loans (with liabilities in excess of ISK 2.5 billion) represented ca. 40%-70% of total gross loans to customers and ca. 55%-85% of corporate loans to customers across the three new banks at the respective carve-out dates.”

The problem that called for capital controls

The original problem, calling for capital controls, was foreign-owned ISK, or “nonresident holdings of liquid krona” as the IMF calls it. At the time these funds were over ISK600bn, but following CBI auctions these funds now amount to ISK322bn (at the end of February 2014) or 18% of GDP; 67% of gross reserves. These funds mostly originated from so called “glacier bonds” – bonds issued in Icelandic króna, ISK, often sold to wealthy individuals, popular in Germany and the Netherlands. At the time, both the government and the CBI chose to ignore the potentially destabilising effect of these, in spite of the effect of similar flows on some Asian countries in the 1980s and the 1990s.

These funds are no longer the greatest threat to Icelandic financial stability. In addition, it seems that at least some part of these funds willingly stays in Iceland because of the (still) high interests there.

But what is now the problem if it is no longer these liquid foreign-owned ISK? Tett talks about the bank bonds held by foreigners being “tossed into default and turned into implicit equity claims on the collapsed lenders – and bank deposits that foreign investors held in Icelandic krona were trapped in the country by capital controls.”

The main obstacles towards lifting the controls are the ISK assets of Glitnir and Kaupthing, in total ISK450bn (end of 2013; further here) and the two Landsbanki bonds of which ISK226bn is still unpaid (more here; more on the numbers and how they are found in CBI’s latest stability report).

The bondholders now hold a claim on the estates, as happens in any other failed company. They were inevitably mostly foreigners since the banks’ fast growth was fuelled by international lenders and not by domestic deposits and domestic bond sales.

It is also worth noting that in total, 5.7% of the claims are owned by Icelanders, or just over ISK100bn, mostly held by the Eignasafn Seðlabanka Íslands, ESÍ (the CBI holding company). These funds could possibly be part of the solution, i.e. used in swaps with foreign creditors. (See here for numbers and facts, in my digest of the latest IMF report and here for my latest overview of numbers and possible solutions).

Why is it important to lift the controls?

“In the past few weeks the government has indicated that it wants to start removing these controls to attract more investment to the energy sector and to create a more “normalised” financial system,” writes Tett.

The story is a lot longer than just a few weeks. The left government, in power from spring 2009 until the elections last spring, did got very far with plans to remove the capital controls – also because it was too weak to tackle the issue towards the end – but some progress was made. The CBI presented a plan in 2011, still the basis as no new plan is in place (here is an Arion bank analysis from December 2011 of that plan; the time frame has since been lifted, meaning that the plan is no longer anchored in time but to certain benchmarks).

During the election campaign the Progressive party, which until early last year seemed destined to be close to a wipe-out in the spring elections, attracted an unexpected following by promising voters debt relief funded by creditors, i.e. funds that would “inevitably” flow to the state as the controls on the two bank estates would be lifted. The numbers mentioned escalated from ISK300bn to as much as ISK800bn mentioned just before the election. However, when the debt relief was presented last November it was not funded by these “inevitable” sources of money but from a bank levy, also on the estates and from people’s own pension savings, a step IMF warns against in its last Iceland report.

It is misleading to say that the scope for lifting the controls is only to attract FDI for the energy sector. And it certainly is not just to normalise the financial sector, but to normalise the whole economy. As the CBI now points out at every opportunity the capital controls do in themselves induce a long-term risk, i.a. here:

Capital controls limit possibilities for cost-efficiency in business and distort the premises for investment decisions. The longer the control regime remains in force, the greater is the risk that investment options will be determined to a growing extent by possibilities of returns within the controls, while at the same time emphasis grows on seeking ways to circumvent the controls. The structure of business and industry could therefore in time develop differently within the control regime than without it. Options decline in number, and output growth and living standards deteriorate.

This spring, numerous individuals and organisations in the business community univocally called for government action towards lifting the capital controls. But no matter the policy it will realistically take some years until the controls are lifted. In addition, Iceland will also have to come up with a credible vision for the króna and the future. There are also those who believe some controls will be needed for years and possibly decades to come.

Correct proportions, correct numbers

According to Tett, Iceland’s “sovereign debt is “just” 84 per cent of gross domestic product, according to the International Monetary Fund. But if you add the remaining liabilities of the banks – which are implicitly owned by the government – the total debt ratio is 221 per cent, and there is little chance of the island repaying it in full.” (Emphasis mine).

According to the IMF’s latest report Iceland’s sovereign debt was 89.9% last year and projected to be 86.4% this year. The three new banks are not “implicitly owned by the government”: the state owns 13% of shares in Arion and 5% in Íslandsbanki with the estates of Kaupthing and Glitnir respectively owning the rest. The government owns 97.9% of Landsbanki with the employees owning the tiny rest.

Further, Tett writes that “any relaxation will force a new debate about that debt mountain, since the $7.4bn of krona held by foreigners in Iceland’s banks will almost certainly flee if controls are removed without any clarity on how creditors who hold Icelandic bank debt will be treated. And a flight of capital could spark a fresh crisis.”

“That debt mountain” seems to refer to the 221%. What the $7.4bn of foreign-owned krona assets refers to is not entirely clear: the foreign-owned ISK in Glitnir and Kaupthing are in total ISK450bn, $3.9bnbn – and the original overhang is ISK322bn, $2.8bn.

Thinking that the controls will be lifted “without any clarity on how creditors who hold Icelandic bank debt will be treated” seems to indicate a fundamental lack of understanding of the problem: this is exactly the main problem now being worked on and no lifting can or will happen until it is solved. As the CBI and the IMF have repeatedly pointed out any steps towards lifting the controls will have to include a plan as to how to deal with foreign-owned ISK in Glitnir and Kaupthing. And not until then can the estates start paying out to the creditors (see here).

“The good news,” according to Tett, “is that the government announced this week that it has appointed external advisers for talks with creditors. But the bad news is that finding any resolution could prove very hard. A group that represents about 70 per cent of bond holders wants its claims to be settled by selling the successors to the collapsed Icelandic banks to new foreign owners.”

True, it is good news that there are foreign advisers (given that their expertise will be used wisely). The bad thing is not, as Tett points out, that it could prove hard to find a solution. The bad thing is, as I have pointed out earlier, if the government does not have any plan to get their advise on – or is not ready to accept their proposals (perhaps because it is focused only on a solution that will move the ownership of Arion and Íslandsbanki to Icelandic owners with the right political pedigree).

Finding a solution is indeed not necessarily very hard (see here). Again, it will not be easy if the government is hell-bent on not just lifting the controls but also securing some special interests at the same time. According to the Act on Financial Undertakings  no. 161/2002 (the “Act on Financial Undertakings”) votes of parties controlling at least 2/3 of share capital or guarantee capital need to accept all major decisions of the estates.

Iceland is not Argentina – or at least not just yet/does not need to be

Tett is not the first to mention Iceland and Argentina in the same sentence as if the two countries shared the same problems: “So there is every likelihood the country will either end up in a protracted court fight, like the one between Argentina and its “holdout” creditors; or that the government keeps playing for time by extending those supposedly “temporary” controls indefinitely.”

Argentina defaulted and has for a long time (in)famously been involved in legal warfare with some of its creditors (my favourite Argentinian commentaries are those by Joseph Cotterill on the FT Alphaville). Iceland has not defaulted and its problems are, so far, contained in the estates of the three failed private banks.

However, if the Icelandic government strides into the field and incurs liabilities by legal measures, which might make the creditors sue the government, i.a. because of breech of property rights, the situation could turn Argentinian. With foreign advisers, no doubt aware of all of this, as well as being concerned about reputational risks, as is indeed both the IMF and the CBI, it seems unlikely (though by no means unthinkable) that the Icelandic government will by accident or recklessness (or both) unwittingly find itself exposed to legal wrangling with the creditors.

I have argued earlier that the government is incidentally already exposed to such a risk. After a change in the capital controls Act last year, the minister of finance has to agree to certain steps regarding the fate of the estates. It is easy to think up several such scenarios resulting from this. I.a. the creditors could take legal action if they at some point feel that by inaction the minister is indeed a hindrance to payouts.

As many other pundits Tett is recounting the Icelandic financial disaster saga to prove general points. “The first is that “emergency” policy measures that distort the financial world tend to become addictive. Second, this addiction is very hard to break when there is an unpleasant debt overhang, be that of the public or semi-public sort.”

With gross debt rising in the world these are indeed important and never too oft repeated lessons to be learnt from the Icelandic collapse saga. The Icelandic reality is not quite what Tett makes out of it but does never the less support the lessons she wants to draw from the Icelandic fall and recovery.

*All the essential information on Iceland, its economy and capital controls are here: the IMF pages on Iceland – and the CBI financial stability reports.

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By overturning an earlier court decision an appeal court in Luxembourg now seeks to establish an investigation into “money laundering, fraud and criminal conspiracy.” Benjamin Bodig, lawyer for the Landsbanki victim group, says it “opens the door to discover the truth and could lead to its victims being recognised as aggrieved customers” according to an article in Wort.

In October it will be six years since Landsbanki collapsed. The Luxembourg clients, mostly elderly foreign pensioners owning property in Spain and France, who had taken out equity release loans from Landsbanki have now for years sought to have investigated how Landsbanki handled these loans and the investment that were part of the loans and also the actions of the liquidator, Mme Hamilius.

Special prosecutor in Iceland has already charged Landsbanki managers for market manipulation and breach of fiduciary duty. These charges are still being dealt with by Icelandic courts. In France there is now an investigation into the Landsbanki practices as well. From what I have seen regarding Landsbanki operations in Luxembourg there is good reason to investigate the bank’s operation, both before and after the collapse.

The actions against Landsbanki in France and Luxembourg would not have happened if it were not for the heroic attempts by the Landsbanki victim group to have these operations investigated. Their attempts in Luxembourg were met by remarkable lack of interest on behalf of the authorities, the height of which was when Robert Biever Procureur Général d’Etat, state prosecutor, sided openly with the liquidator, echoing her view that the Landsbanki Luxembourg clients raising concerns just did not want to repay their loans, as mentioned in an earlier Icelog.

As I have written earlier this “case has shown that when it comes to unified European financial  sector it only works for banks, facilitating cross-border operations. For clients and consumer protection this sector has as many holes as a Swiss cheese. A food for thought: if cross-border operations only work for banks and not for clients they should not be allowed.”

Here are some earlier Icelogs on the remarkable story of this case that authorities in Luxembourg have ignored for so long.

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According to a new IMF report on Iceland recovery in Iceland “is continuing and the growth outlook is positive, but crisis legacies continue to weigh on the economy. The government is undertaking efforts to address them but this entails significant risks.” IMF points out there are two legal avenues being discussed to release the old banks from capital controls, composition agreement that “would provide an agreed roadmap for exit and the other involving bankruptcy proceedings (liquidation) with an uncertain exit from controls.” – This is a clear hint to the Icelandic government, which way is the least risky.

At times, IMF reports are like a recording of the dialogue between staff and the authorities they speak to. In the newly released IMF report on Iceland there are some interesting parts where the staff says one thing and the authorities something else.

The main topics of interests, apart from capital controls, are the Housing Finance Fund, HFF, FME (the financial services authority) and fiscal policies. Also the Fund stresses the importance of a strong and independent Central Bank – especially interesting now that its structure is under review and a new governor will soon be appointed. Prime minister Sigmundur Davíð Gunnlaugsson has time and again strongly criticised governor Már Guðmundsson and CBI staff.

It is worrying that according to the IMF necessary and planned reform at the FME have not been carried out, there is insufficient funding for much needed IT reforms and on the whole the FME suffers from funding cuts. I.a. progress of new industry rules for risk management and asset classification has been slow, which does not bode well for financial stability.

Capital controls and the estates of the failed banks

The foreign-owned ISK, or “nonresident holdings of liquid krona” as the IMF calls it, amounts to 18% of GDP; 67% of gross reserves. These holdings “are slowly being released via the established FX auction mechanism.” It is assumed that consistent with Icelandic 2011 liberalisation strategy this crisis legacy might well be released by the end of 2016.

The easing of controls on the estates of the old banks is a different and more difficult matter.

The three old bank estates control an estimated 44% of GDP in (net) domestic assets, ie ISK assets in addition to 84% of GDP in (net) fx assets, crucially held overseas and owed to foreign or “non-resident” creditors. These assets are closed in by the capital controls.

The IMF estimates that once lifted the estimated fx outflow caused by Icelandic private individuals and corporate entities, also pension funds, might amount to 20-45% of GDP.

The question is how to resolve the issues of the estates, how to release them from the capital controls. Payouts can only happen when the estates are wound up/liquidated. As the IMF points out: “Two broad legal avenues are being discussed, one involving composition agreements that would provide an agreed roadmap for exit and the other involving bankruptcy proceedings (liquidation) with an uncertain exit from controls.”

The reader can be in no doubt as to which route the Fund favours.

In a video interview with the Financial Times finance minister Bjarni Benediktsson said that foreign creditors have already been paid billions of euros. From his words it could be understood that these funds were euros, earned by exporting Icelanders. The footnote to his words is that priority creditors have been paid ca. ISK1000bn, or ca. 55% of Icelandic GDP so far – but this comes from the estates’ own fx funds, mostly held abroad, not from balance of payment, BOP, sensitive funds. – Or as is pointed out in the IMF report: “Significant payments have also been made to priority creditors of the old bank estates from recovered external assets.”

Guiding principle in lifting the controls: transparency

Further to the general principles that should guide the lifting of the capital controls:

Staff encouraged a transparent, comprehensive strategy that addresses all potential outflows. The approach should be consistent with macroeconomic and financial stability, and conditioned on BOP prospects. Staff noted the importance of carefully considering the legal and reputational risks surrounding the strategy for addressing potential BOP pressures now locked in by capital controls, including the resolution of the old bank estates. Staff emphasized the benefits of a cooperative approach that would minimize risks to long-term growth, the prospects of which remain closely tied to economic and financial links with the rest of the world. In this context, staff welcomed the authorities’ recent organizational changes and planned engagement of advisors, which could help facilitate a resolution. Consistent with past advice, staff noted that appropriate use of incentives could help encourage lasting solutions. The authorities generally agreed with these points. They noted the Landsbankinn bond restructuring could be a useful development, but needs to be assessed in the context of a more comprehensive plan. With respect to the old bank estates, they stressed they would move on to other approaches (e.g., bankruptcy proceedings (liquidation)) should a cooperative settlement not materialize.

In short, the Fund favours carrots but the Icelandic government certainly is not going to throw away the stick, i.e. bankruptcy proceedings (although yes, the Fund gives warning words re orderly vs. disorderly exit from controls).

There is mutual understanding that the strategy to lift controls needs to be linked to a credible balance of payment analysis. “Staff welcomed the CBI’s ongoing BOP work and urged that it be the basis for discussion with key stakeholders.” – This is interesting since part of the task of the new foreign advisers apparently is a BOP analysis. As the Fund underlines, the CBI is working on it; the CBI analysis should be the basis for discussion with stakeholders, i.a. the creditors.

Further, here is an interesting insight into how the Fund vs. the Icelandic government perceives the situation: “Staff reiterated that a revised liberalization strategy should be paced to maintain adequate reserve coverage and that supporting debt management—including Eurobond issuances to maintain FX reservees as repurchases to the Fund take place—will be a necessary component. The government expressed concern with the higher debt and interest costs from such issuances. Staff emphasized the precautionary role of reserves and noted that public sector debt levels would not change.”

The risks in lifting the capital controls

The IMF is not trying to minimise the various risks threatening the Icelandic economy – the word “risk” is used 66 times on the 62 pages (where ca. half of the pages is mostly diagrams).

Here the risks regarding lifting the controls is neatly summarised – and some of it is beyond the control of Iceland:

Staff and the authorities agreed that risks are tilted to the downside. A protracted period of slower global growth could dampen exports and foreign direct investment. Surges in global market volatility have so far had only muted direct effects on Iceland but a sharp deterioration in external financing conditions could complicate refinancing of large external payments coming due during 2015–16 and delay the easing of capital controls. Efforts to resolve the old bank estates could result in faster capital account liberalization, boosting confidence and investment and raising long-term growth. However, missteps could result in a more protracted impasse leading to a weaker business climate, lower investment, asset bubbles from locked in liquidity, eroding competitiveness, and weaker growth. Lifting capital controls before the necessary conditions are in place could destabilize the krona, lead to higher inflation and reserve losses, and lower confidence and growth. Even without liberalization steps, deeper depreciation pressures could emerge that could be difficult to counteract.

As to deciding what to do and when clearly implies some “damned if you do and damned if you don’t”:

It was known when capital controls were imposed that the negative effects would grow faster than the benefits as time went by, and the authorities are resolute to take significant steps towards removing the controls in coming months. The steps taken will be conditions-based. However, there is no risk-free liberalization of capital controls, and the microeconomic costs are accumulating. The risks must therefore be weighed against the costs of delay.

By now, many countries have tasted the intoxicating mélange that capital controls are and there is abundant experience of their effect. It is well known that with time, the benefits originally reaped by capital controls dwindle and the negative impact increases. It is never easy to tell when exactly this turning from positive to negative is reached. Considering how loudly Icelandic business leaders are now complaining about the deadening effect of capital controls it is clear that at least for some businesses this point is already reached.

In general, creditors want to negotiate and creditors to the failed Icelandic estates do not seem to be any exemption from the general rule. As I have underlined earlier, there are strong forces in Iceland, with strong interests, pleading for the “disorderly” and “un-cooperative” approach to the estates. With the IMF report the Icelandic government now has some clearly spelled out advice in words such as “orderly” and “cooperative.”

*All emphasis in quotes is my own.

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So far, every move by the Icelandic government towards lifting the capital controls has taken more time than anticipated and yielded less than promised. Now a managing committee to steer a whole crowd of foreign advisers is in the making: again, it was announced a while ago and although the foreign advisers have already had meetings in Iceland the managing committee is still not in place. If this isn’t to be yet another underwhelming exercise the government has to resolve the tension centring on an orderly composition agreement for Glitnir and Kaupthing or a disorderly bankruptcy and “ISK-ation” creating a mountain of foreign-owned ISK – and whether the Landsbanki bonds agreement passes or not. After all the political rhetoric the solution has to look like victory – but even that would not be too difficult.

The foreigners are coming – not the foreign creditors but foreign advisers. After shunning any foreign assistance the government now has it in abundance. According to Rúv, JP Morgan will advise on the financial side, White Oak Advisory London will advise on the legalities and to figure out what needs to be done there is Cleary’s Lee Buchheit, in Iceland of Icesave fame, and Anne O. Krueger IMF’s deputy manager 2001-2006.

Deciding on foreign advisers has clearly been a tortuous step. Already in April, two months ago, the rumour was that the names would be announced “next week.” Having gotten this far is promising. What is less promising is that in order to orchestrate these formidable forces there is to be an Icelandic managing committee, which – as so often – the government seems to be in great difficulty to agree on. The setting up of this committee was announced some weeks ago, then apparently just about to happen, but no, so far no committee although the foreign advisers have already visited Iceland.

The non-existent managing group is unfortunate in itself but even more so because the delay indicates that the government has not yet made up its mind as to how to proceed regarding the lifting of the capital controls. The greatest obstacle is, as explained earlier on Icelog, how to resolve the estates of Glitnir and Kaupthing: the government still seems to dally with the idea of bankruptcy, including converting fx assets into ISK, in effect an “ISK-ation”of the assets.

In addition, the government has sent the Central Bank of Iceland on an uncertain course, apparently because of a disagreement within the government. With reforms in 2009 the independence of the bank was strengthened. The question is if there will now be a U-turn with the appointment of a new governor.

The two party leaders, prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson, have oscillated between optimism and pessimism as to how hard the task was and the time it would take to take decisive steps towards lifting the controls. It is now over a year since the present coalition led by the Progressive Party with the Independence Party came to power. In terms of action regarding the capital controls that is mostly a lost year.

The all-Icelandic working group, set up in November, presented its results in March but there was little there in terms of realistic scenarios or solutions. Apparently the approach to Glitnir and Kaupthing and composition or not, i.e. “ISK-ation,” split the group.

A solution leading to a market access – or a specific Icelandic solution

The next stages of the winding-up proceedings must safeguard financial stability and ensure that domestic entities have access to foreign credit markets. Finding a comprehensive solution to the estates’ affairs is a prerequisite for lifting of the capital controls.

The above is how the CBI spells out in its latest Financial Stability Report the goals regarding the lifting of the capital controls. There has to be a comprehensive solution – and any solution that doesn’t ensure access to international credit markets is no solution at all.

Market access is an excellent measure. A specific Icelandic solution, which converts fx assets into, for foreign creditors, useless ISK, thus creating new mountains of foreign-owned ISK for which there is not enough fx, does not seems to be a market-opening solution.

An important lesson from the Greek and Argentine default is that the large majority of creditors do indeed want to negotiate a deal. The Icelandic situation is not comparable to Greece and Argentina – Iceland isn’t about to default – but as explained earlier on Icelog the state could incur liabilities if creditors deem the state is blocking payments from the estates or impairing recovery, such as inducing “ISK-ation.”

So far, the government has refused to negotiate with Glitnir and Kaupthing creditors, clinging to its mantra that these are estates of failed private banks. True, but solving the ISK problem of the estates is a key step towards lifting the controls, truly an issue of supreme national importance. By hiring foreign advisers, the government seems indirectly to accept it has to negotiate.

The three problems that need to be solved

It is often heard in Iceland that surely the problems underlying the capital controls are fiendishly complicated. In a way, they are actually not complicated though certainly not risk free. Three things need to fall in place:

*ISK assets of Glitnir and Kaupthing, in total ISK450bn (end of 2013)

*Remnants of the old ISK overhang (“hot” foreign-owned ISK which originally caused the outflows that demanded capital controls), in total ISK322 (at the end of February 2014)

*The two Landsbanki bonds of which ISK226bn is still unpaid

The Kaupthing ISK assets are mostly tied in its ownership of Arion. If Arion could be sold for fx the Kaupthing ISK problem is solved. Glitnir poses more of an ISK problem: selling Íslandsbanki for fx will only solve ca. half of its ISK problem. Here, the classic solutions would be a write-down, extended pay-outs or a combination of both.

The original overhang no longer poses a major problem. Judging from the CBI auctions these offshore-ISK owners do not seem strongly inclined to leave the high interest environment in Iceland for the low interests in Europe and the US. As long as interests remain low in the Western world the international environment is favourable for lifting the controls – but this favourable situation will of course not last forever.

On May 8 an agreement on the Landsbanki bonds was signed. The CBI is now assessing the agreement and the exemption from controls that is part of the agreement. Application for exemptions seems to have been sent in some time after the agreement was reached, which together with vacation time explains that it is taking the CBI some time to conclude on the Landsbanki bonds packet. As far as I understand the government will not make its own assessment but follow the CBI advice on the agreement.

New Landsbanki is state-owned, those who negotiated on behalf of the bank will have kept the ministry of finance informed and the new agreement broadly followed what the CBI had outlined. Yet the minister of finance, who formally needs to accept the agreement, has expressed some doubts.

In an interview with Rúv July 6, Benediktsson said he foresees a sale of Landsbanki. He envisages that the state keeps 40% of Landsbanki with the rest sold off, limiting other shareholders to 10-20% share of the bank. Strangely enough Benediktsson did not mention that according to the bank’s CEO last December the bank would need to extend its debt to the Landsbanki estate – and, as if in a parallel universe, the minister did neither mention this nor the Landsbanki bonds agreement.

Who is really in charge?

During the election campaign last year the Progressive Party repeatedly stated that there would unavoidably be money for the state coffers from the resolution of Glitnir and Kaupthing. These funds should be used for a debt relief for those who were too well off to have profited from earlier debt relief. When the debt relief plan was presented in November it turned out that it was funded with a banking levy, both on living and dead banks.

At the time I took it to imply that after all Benediktsson, known to doubt funding from the resolution of the estates, did after all have the upper hand in the government. That seems less certain now. Reviewing the first year I would now rather conclude that the prime minister clearly has enough political strength to decide whatever he wants to and then lets Benediktsson pick the policies the prime minister does not have strong views on. This is worrying because political clientilismo has long been strongly connected to the Progressive Party.

Whatever the power divide, this government clearly suffers from lack of communication. Time and again the prime minister says one thing and the minister of finance another. Most tellingly, the disharmony is spelled out in lack of action, on lifting the capital controls in general and now, specifically, in appointing a managing committee and deciding on the next steps.

The CBI under siege

Part of the disharmony within the government has been policies regarding the CBI. After much back and forth – if there should be a reform, three governors instead of the one now, if present governor Már Guðmundsson should continue or not – the position of governor was finally announced but without any clarifications on changes or not.

Guðmundsson has now applied, as have nine other candidates. None can really match Guðmundsson’s professional qualifications but there is a lot of speculation that professor Ragnar Árnason is the government’s favourite. Some doubt his qualifications – his expertise is fisheries economics – but the rumour is persistent. Another candidate, and now possibly more likely though he is less mentioned, is professor Friðrik Már Baldursson.

Morgunblaðið, with former prime minister and leader of the Independence Party Davíð Oddsson as its editor, has waged a forceful campaign against Guðmundsson. The story is that after Guðmundsson took office as governor his salary turned out to be less than he had been made to understand it would be. He sued the bank but lost. Morgunblaðið exposed earlier that the CBI had paid his legal bill. The National Audit Office has now investigated the matter and in its report finds no fault with Guðmundsson. Morgunblaðið claims the investigation is untrustworthy because the sister of the director of the National Audit Office is the head of internal audits at the CBI. In Iceland, many feel certain that Oddsson, who was ousted as a CBI governor, will not rest until Guðmundsson has been driven out of office, even though Guðmundsson played no part in ending Oddsson’s CBI career.

Many feel that the selection process has already been undermined by the choice of a selection committee, which has two lawyers and only one economist. One of these two lawyers, Stefán Eiríksson, is at present the head of the Reykjavík police and is applying for a new public position, as the head of a governmental body that oversees transport in Iceland. Central Banking has already published an article about what it calls “a bizarre committee.”

Who will be chosen as the next CBI governor will be an important indication as to whether the government respects the independence of the bank – or not.

No pay-outs to creditors until the resolution route is chosen

There has been much toing and froing from prime minister Gunnlaugsson and finance minister Benediktsson regarding how and when the controls could be lifted. Considering how tortuous every step has been there is little to underpin optimism on a quick solution as to what to do. Yet, there seems to be determined optimisms amongst the creditors and they have shown remarkable cohesion.

The foreign advisers will most likely need some time to delve into the Icelandic situation. But the fundamental thing is for the government to make up its mind as to what needs to be done and what its aim is and yes, who should be on the managing committee. The lack of clarity explains the sluggish moves so far and in spite of advisers, the latest moves are not entirely convincing.

In the Landsbanki estate priority creditors will get the lion share of the estate’s assets and they have already been paid out along the way. But that has now stopped and since last year the CBI has not given the necessary exemptions. The CBI has also closed down the route for Icelanders to buy foreign life insurance and make limited capital payments towards pension: buying insurance was legal but the capital transfer goes against the controls although this has been going on for some years. This hardening attitude can be interpreted in various ways: that the controls are here to stay, that the CBI is showing the government its tough side etc.

Glitnir and Kaupthing now hold ca. ISK1000bn of fx, that could mostly be paid out without a risk to Icelandic financial stability. However, pay-outs are only possible once the estates are resolved. And they cannot be resolved until either a composition agreement is in place or the estates forced into bankruptcy.

The pension funds and the capital controls

Voices in Iceland have complained that creditors will be able to exit before the Icelandic pension funds. Before the collapse, the funds placed 30% of its investments abroad, which means that its Icelandic investments and the Icelandic investment environment is, under all circumstances, crucial to the funds.

Icelandic business leaders have increasingly voiced their frustration and CEOs of both big and small companies have aired the possibility of moving their companies abroad. Fewer investment options in Iceland due to the capital controls would raise the cost of the controls for the pension funds. It can be argued that lifting or easing the controls, thus improving the business environment in Iceland, is more important for the funds even though they have to wait for a while to invest abroad.

With the sluggishness so far, the advisers and the lost times it now seems unlikely that any negotiations with the creditors will start until September, at the earliest. Even more so, if the advisers will be given the task of doing all calculations, balance of payment and everything else, from scratch.

Getting foreign advisers on board has been seen as a necessary prerequisite for negotiations. That may be true – but hiring advisers and consultants is also a tried and tested, and usually an expensive, option when no one has a clue what to do and those in charge cannot make up their minds.

Complicated but not complex solutions

Given the fact that over the last few years the CBI has worked hard on issues related to the estates and capital controls it is frustrating that the government does not dare negotiate with the creditors but chooses to start a time-consuming process with an apparently unclear course and yet another committee with a difficult birth.

This is all the more frustrating because there really are some relatively simple solutions in sight. This is not to say that negotiating would be easy – no doubt the creditors will drive a hard bargain. It would be strange if they would not. But it is clear that the creditors do want to negotiate and find an end to this matter.

Last November, Lord Eatwell presented an independent report at the behest of Glitnir on macroeconomic balances and capital account liberalisation in Iceland where he pointed out balance-of-payment neutral solutions to the foreign-owned ISK. I have heard others air the same opinion. This is just one of many ways that could be explored. Using assets owned by the CBI asset holding company for swaps is another. Und so weiter.

According to the rumour mill in Iceland the creditors do not want to negotiate. Nothing could be more far from the truth. In general, creditors do wish to negotiate and the same counts for creditors to the Icelandic estates. This is, as far as I can see, a way to create a reason for not even attempting to negotiate but go straight down the bankruptcy route. Any solution has to look like a big fat victory for the Icelandic government – and even that would not be too difficult.

Again, having found experienced advisers might seem promising. But if the course of events will be a version of “if you don’t know where you are going you ain’t likely to get there any time soon” the outlook is bleak. Apart from the political disharmony it is no less worrying that there are strong forces pushing for bankruptcy: some Icelanders are apparently hoping to make a lot of money out of the tumult it would lead to and political favours have long been part of Icelandic politics. All of this is worrying for the Icelandic economy and for all those living in Iceland.

*Update July 9 2014: here is the press release, sent out today, regarding the foreign advisers. After announcing a managing committee, as mentioned above, to work on behalf of the Ministry of Finance and Economic Affairs and the so-called “Ministerial Committee on Economic Affairs and the Steering Group on Removal of Capital Controls” it turns out that no formal group will be set up. Instead,  four experts have been engaged to work alongside the foreign advisers: Benedikt Gíslason adviser to Benediktsson; Supreme Court attorney Eiríkur Svavarsson, earlier in the In Defense group, fighting against the Icesave agreement; Freyr Hermannsson head of reserves management at the CBI and Glenn Victor Kim, currently at Moelis & Co and LJ Capital, served previously as senior adviser to the German Finance Agency re the European Financial Stability Facility (EFSF). Kim will lead the work of the four external experts. – According to the press release, the first task of White Oak Advisory and Anne Krueger will be “to set out the macroeconomic conditions considered necessary with regard to maintaining economic stability.” Tomorrow, the report of the IMF mission to Iceland in spring is expected to be published. Both the IMF and the CBI have worked extensively on these issues. Hopefully, the new advisers will not need to start from scratch here.

*Here is an earlier Icelog on the May 8 agreement on the Landsbanki bonds – and here is a blog on the numbers and the main issues regarding the capital controls.

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“I’m just doing it for you guys,” Birkir Kristinsson was caught on tape saying to one of his fellow bankers at Glitnir. Kristinsson, the brother of Magnús Kristinsson – owner of fishing industries in the Vestman islands and a big borrower in the Icelandic banks – has been sentenced to five years in prison together with three Glitnir colleague two of whom also got the same prison sentence. The fourth was sentenced to four years in prison. Kristinsson has appealed and so will the three others most likely do.

This case is not one of the big ones involving major investors or bank managers and the numbers are not as high as in some of the other cases, most noticeably the al Thani case. It was however an important judgement because there are other similar cases snarling their way through courts.

Three Glitnir employees – Elmar Svavarsson, Jóhannes Baldursson and Magnús Arnar Arngrímsson (also accused in the Aurum case, acquitted in the Reykjavík District Court; case appealed to Supreme Court) – were indicted for loans to a fourth Glitnir employee, Birkir Kristinsson.

The loans, totaling ISK3.6bn, €23m, were issued between December 2007 and July 2008 to a company owned by Kristinsson, used to buy shares in Glitnir, thereby effectively creating a misleading share price. In addition, the three employees ignored the bank’s rules on lending. Later, the three made sure Glitnir i.a. bought back own shares at double the market price to insulate Kristinsson’s company from losses. Kristinsson was indicted for participating in the scheme.

Svavarsson and Baldursson, as well as Kristinsson were sentenced to five years in prison and Arngrímsson to four years. They were sentenced for market manipulation and breach of fiduciary duty. The four bankers are, with the exception of Birkir Kristinsson, not household names in Iceland. However, this is yet another banking-collapse case from the Office of the Special Prosecutor. Since there are other similar cases this verdict is indicative but none of these cases is over until ruled on by the Supreme Court.

The verdict, from June 22, is here, in Icelandic.

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Earlier this year, Djúpivogur – a fishing village on the East coast about as far from Reykjavík as possible – suffered the same fate as some other fishing villages in Iceland: the fishing quota that sustained the village was moved to a village close to Reykjavík. But instead of suffering in silence the people of Djúpivogur have made a video that resonates the struggle of small communities around the globe in a changing world. 

The Icelandic fisheries policy, built on transferable quotas that follow the vessels, has secured that fishing is a thriving business in Iceland and  at the same time it has helped secure sustainable fishing. Or that is the official story. This apparently successful fishery policy has however been less successful in securing livelihood for small fishing villages along the Icelandic coastline: as fishing industries get bigger and more concentrated some villages have lost quotas or, in some cases, the quota has sailed away as fishing vessels are harboured in new places.

End of March, this happened in Djúpivogur, with just under 500 inhabitants. The fishing quota, which had been processed in the freezing plant, would now be landed and processed in Grindavík, meaning that around 50 people would lose their jobs, a heavy blow for this small village and the whole economy in this part of Iceland. The owners of the freezing plant, who planned to operate only in Grindavík, offered people help to move to Grindavík, where they could get work.

Some of those hit by the changes accepted being moved to Grindavík. But others thought of a different reaction: a video (brilliantly made by Arctic Projects) in Icelandic was made to make it clear to people what was going on. The video went viral in Iceland, became a news topic showing a different aspect of the planned changes in Djúpavogur. This had already made news at the time it happened but as often with such news, it only got attention for a day or so.

Following the video and the attention it caused the owners of the fishing industry decided to postpone the move for a year – and Djúpivogur suddenly got plenty of attention, also from politicians who have so far mostly ignored this unfortunate side-effect of the Icelandic fisheries policy: the fisheries thrive as a business but small villages live and die at the whim of these businesses. It’s not an easy situation to resolve but the people of Djúpivogur have given faces and voice to what happens when the quota sails away. Djúpivogur has been a thriving place, with start-ups and other creative businesses attracting young people back home after education and work experience elsewhere. It now demonstrates the fishery dilemma in a nut shell: it’s better for business to have transferable quotas but it’s the death of communities when the whole quota in that village is moved elsewhere.

As the introduction to the video says:

The purpose of this video, made on behalf of the Djúpivogur local council, is to alert people and politicians to the plight of Djúpivogur. The community has now fallen victim to the flaws of the Icelandic fisheries management system when it comes to small communities. Since 1984, the Icelandic fisheries management system has been based on individual transferable quotas that are allocated to individual vessels. If the vessel’s home harbor changes, the fishing quota goes with it. Although the stated aim of the fisheries Act is to “promote employment and settlement throughout Iceland”, its implementation, supported by politicians, is actually a serious threat to small communities around the country. The people of Djúpivogur demand of the government that it guarantee the community a fair share of the fish stocks belonging
to the Icelandic people.

The people of Djúpivogur were widely heard in Iceland. Here is the English version, which introduces this problem to the wider world where, though for other reasons than in Iceland, many small communities fight for their lives. It is difficult not to be touched by the emotional thrust of this striking little video story.

Take five minutes to watch this video and contemplate this Icelandic story from Djúpivogur, a small community that feels it has plenty to offer its inhabitants if only the transferable quotas were allocated not only according to the needs of the fishing industry but also in tune with the needs of those who live in the fishing villages. The video gives an insight into life in Iceland, the certain harshness and unpredictability – and the resilient wish to develop further the good life at Djúpivogur – a striking parallel to life in so many other parts of the world.

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I have often been asked for Icelandic travel tips. Here is a mini-guide to some of my very favourite places in Reykjavík and what to do and see (last updated in May 2020). Yes, there is much more to see and do but these are just some of my un-missables if you spend a few days in Reykjavík. Sorry, only one hotel tip because I simply have no insight into that part of visiting Reykjavík. Airbnb is widely available in Reykjavík. – I know, for the time being Iceland is an eye-waveringly expensive destination but if you choose where and how to spend your money (see below re food etc), the chances are good you will get a great experience! Given our COVID-19 times, Icelanders have been quite successful in managing a rapid spread to begin with, now down to days with no new cases.

Food:

Whereas fast food is expensive in Iceland fine dining comes at a very reasonable price – and is quite often rather good. Here are some that don’t disappoint (but don’t expect really good wine; also the service is normally very friendly but often not very professional).

Grillið (The Grill) at Hotel Saga is one of the oldest fine-dining restaurants in Reykjavík and probably the best right now. It’s on the top floor of a luxury hotel with an absolutely fantastic view over Reykjavík and the surroundings, wholly meriting the Michelin star it has. Siggi Helgason is in charge of all the dining at Hotel Saga, a dedicated young chef who has seen the world. I have to declare interest, family relations. Siggi is very interested in making the most out of all things Icelandic, also very Nordic style cuisine but he had worked in England, Ireland and elsewhere and picked up good things on his trips. A seriously professional cook. The new Grillið chef has also an international experience and that shows.

Dill used to be in the Nordic House, by the University of Iceland campus, built by the famous Finnish architect Alvar Aalto and worth the trip just for that. However, the restaurant has been downtown for some years. It used to be Michelin-starred, lost its star last year, 2019 but regained it in February 2020 after the cook who built it up but had left for New York, returned to reclaim the star; mission accomplished! The Dill cuisine is the Icelandic version of the Nordic cuisine and the staff has always been enthusiastic about their food.

Other good places, all in the centre

Óx on Laugavegur is a restaurant I would love to try but it’s new, takes only very few people and when I’ve tried I haven’t been lucky enough to get a table. They very quickly got a Michelin star. You book and there is a set menu you pay for, adding wine once you are there.

Lækjarbrekka  has been around for decades and has had a revival recently – lovely ambience and great food.

Mat Bar is an ambitious place, at Hverfisgata, close to the National Theatre, which is an intriguing building for those interested in architecture, an attempt to seek Icelandicness in architecture. The food at Mat Bar is inspired by Italy but is also in search of using Icelandic ingredients.

The restaurant at Hotel Marina, right on the harbour as the name indicates, is very lively during happy hour and in the evening, also good for lunch.

Kopar is a restaurant by the harbor – always seems packed and in the evening heaving with partying Icelanders, more though in winter than in summer. Try to get one of the tables upstairs by the windows with a truly fantastic view over the harbour. Crab and seafood is their specialty.

Hotel Holt is a luxury hotel from the sixties, has been up and down, haven’t been there for some years, not sure where it is at these days. It’s full of Icelandic art from early 20th century – go to see Kjarval there in a private setting and the bar is just great for seeing it. This is a place for fine dining, they’ve had and lost a Michelin star, I’ve had some great food there but also pretty unmemorable food. Dark wood, dated but in an interesting way and yes, the bar is great.

And just off the centre, out on the Reykjavík beach is Nauthóll, see below.

Matur og drykkur (Food and drink) is out on Grandi, by the harbour, a neighbourhood rapidly turning into a favourite destination for various food places. They specialise in classic Icelandic (i.e. often Danish-inspired) but done in a modern way with a twist. It used to be a great favourite of mine and though it is still good it’s stuck a bit, foodwise. But it has had an interesting and innovative take on Icelandic classics and great vibe.

In 2016 I did a day-trip to the Vestman-islands in order to have dinner at Slippurinn the other restaurant owned by Gísli Matthías Auðunsson, my favourite Icelandic chef – the food and the whole experience of going there, even if it’s not a sunny day like they come once in a decade, is superb. Gísli is from the islands, loves making use of all there is to have there and some more and both the food, the service and the environment has the warmth and loveliness stemming from doing things with a big heart and soul.

Gísli now also has Skál! (Cheers!), at Mathöllin, Hlemmur, a food hall with many stalls/restaurants – my casual dining absolute favourite – a Micelin Bib, for those who pay attention to Michelin. Gísli does the great modern take on Icelandic ingredients and, last but not least, has some seriously good wines, also natural wines.

There is now a new food hall, Mathöll, at Grandi, Grandagarður 16 (doesn’t seem to have a website yet) have not been there yet but seems a great place. Grandi is by the harbour, great to walk around and design destinations and more food around there.

Two casual places: Public House on Laugarvegur, Icelandic-Asian fusion and Von mathús og bar, in an artists’ community in a lovely setting in Hafnarfjörður – two very exciting new-comers on the Icelandic food scene.

Marshallhúsið is a large building out on Grandi, another Grandi destination. It used to be an industrial building, connected to the harbour. It is now all about art, see below, and food. Restaurants have come and gone there, as happened but now it’s La Primavera, an Italian restaurant run by people who have been in the restaurant business for ages. Very worth the visit and I love the space. Good for meeting friends because there is plenty of space. And upstairs there is the Kling and bang gallery, see below.

I’m often asked where to go for typical Icelandic food. Well, facing Hallgrímskirkja is Café Loki. It’s been around for a long time, had dinner some two years ago and yes, it’s really like being invited to dinner with an old and generous, warm-hearted Icelandic aunt (sorry, men didn’t much cook some decades ago). I have to admit that old-fashioned Icelandic food isn’t my favourite, didn’t really grow up with it but this is absolutely the ideal place to get this type of homey Icelandic cooking. I had a plate of herring and it was very very good. Their “rúgbrauðsís”, ice cream with rye bread is, no exaggeration, one of the best ice creams I’ve ever had – ice cream lovers, don’t miss it!

Here is a list of Icelandic Michelin places.

Fast food – but not really

Don’t be tempted to have a bite at fast food joints – except of course Bæjarins bestu, a by now world-famous hot dog stand in the centre – because fast food is unreasonably expensive in Iceland and normally not very good.

Rather, if you are hungry go to a supermarket, buy smoked salmon and “seytt rúgbrauð” – dark, slightly sweet rye bread – and enjoy with butter and Icelandic cucumber. Icelandic fish roes – salmon, trout and lump fish is a delicacy not to miss. Look out for “skyr,” slightly sour dairy product, similar to German “Quark,” delicious on its own or with milk and muscovado/dark sugar; look for the frozen Icelandic berries, fantastic with skyr, the by now internationally famous Icelandic dairy speciality, type of yoghurt or fresh cheese, since it fits in with modern cravings for protein-rich food; “flatbrauð,” “flatbread,” is unleavened bread, good with smoked salmon or smoked lamb, “hangikjöt.” “Harðfiskur,” literally “hardfish,” is dried fish, tastes a bit like prawn crackers but the fish taste is stronger without being overpowering.

My all-time favourite food shop is Melabúðin, Hagamel 39, in the Western part of Reykjavík. A family-run shop with all sorts of delicious Icelandic food, also from some small producers. It’s open until 8pm, pretty crowded around 6pm but that is part of the charm. I love going there because I invariably run into people I know and they have the best of everything. If you want an all Icelandic immersion buy their cooked and warm “svið” – lamb head – or “slátur” i.e. “lifrarpylsa” liver pudding and “blöðmör” blood pudding as well as all the typical Icelandic delicacies and the more adventures ones where inventive producers make new products from typical produce. Now, drink that with some of the new Icelandic beers and turn an everyday meal into a veritable feast. Perhaps a moveable one for those travelling around or staying in tents.

My favourite supermarket is Nettó, in the far West, at Grandi, open 24 hours, with consistently low prices, good selection of health food and chocolate, often Danish brands.

Frú Lauga Bændamarkaður, Mrs Lauga Farmers’ market, is a shop at Laugalækur 6, close to the large swimming pool in Laugardalur. There are several good fishmongers in Reykjavík. My favourite is Fiskbúðin Vegamót, Nesvegur 100 – fresh fish, frozen seafood, “seytt brauð” and various things that are found at any good Icelandic fishmonger.

Streetfood is now a growing part of the Icelandic food scene. Look for the wagons along the harbour. On Saturdays and Sundays there is a food market in the centre, in Fógetagarðurinn, mostly streetfood.

Sægreifinn, the Sea Baron, is in a barack by the harbour, started by an old fisherman whose speciality was lobster soup. He is no longer around but the place still offers the soup, also minky whale (but some restaurants have a sign saying “meat us, don’t eat us” meaning they don’t serve whale meat, for animal welfare reasons; difficult to hunt whales without making them suffer) and other fish on skewers. – An original place, best for lunch. I normally don’t go there, find it slightly too touristy, it is much loved by many foreigners but Icelanders also love it so I revisited with Icelandic friends: it is cheap, chic and really good. Had the soup and skewers again, with Icelandic beer, sat outside and it was quite enjoyable.

Icelanders love ice cream and it is not just a summer thing – in Iceland you eat ice cream all year around, also out in the cold. There are now many ice cream shops in Reykjavík. One of the older ones, more or less with a constant queue, the default choice, is Ísbúð Vesturbæjar, Hagamelur 67. Valdís out at Grandi is a popular one, as the queues there witness. Valdís now also has a shop in the centre, at Laugavegur 43, entrance from Frakkastígur. And there is Valdís in Akureyri, in case you go North.

I have recently been to the ice cream shop at Laugalækur 8, love their old-fashioned milk ice cream, dipped in chocolate and rolled in grated coconut. And it is next to Frú Lauga. They also do an unusual variety of hot dogs. Everyone in Reykjavík has their favourite ice cream shop; in my opinion they are all good – not like the best in Italy etc but good in the sense that there is great variety, also in ice cream-based deserts and it is a good place for watching Icelanders being Icelanders. Don’t miss it – a very Icelandic guilty pleasure.

Cafés

The best coffee is at Kaffismiðjan or Reykjavík Roasters – on a little side street off Skólavörðustígur, close to the landmark Hallgrímskirkja (on the hill). A great hang-out place with good cakes etc and open wifi and my absolute favourite when I’m in Reykjavík. Kaffismiðjan has a bigger place with a bigger food selection at Brautarholt 2, great for meeting people, hanging out, working. And now there is the third one, at Ásmundarsalur, almost in the shadow of Hallgrímskirkja, at Kárastígur 1. Ásmundarsalur is also an exhibition space. Built in the 1960s, the style is in the direction, on my top-five best cafés in the world, in my humble opinion.

Mokka is a café that hasn’t changed since it opened in the sixties. Also a gallery with art of varying interest but always great atmosphere. Their hot chocolate is famous.

There are three Súfistinn cafés but my favourite is in the Mál og menning bookshop on Laugavegur 18.

Many swear by Kaffifélagið on Skólavörðurstígur being the best café with the best coffee. The coffee is good but it is more to drop by rather than hang around since it is small. If you want to see big part of the Reykjavík intelligentsia and big media names, they meet at Kaffifélagið around 9 in the morning!

A great place to visit in the evening is Kex Hostel, an incredibly cool and quirky place, close to the harbour, where you meet a great selection of young  Icelanders (and the slightly older ones, when I’m there). In the evening there is often live music. It’s open from breakfast until late, serves food all day. In the office building opposite the Office of the Special Prosecutor has its abode so that building is full of secrets from the banking bubble times in the years up to October 2008 and all financial wrong-doing since then.

The Botanical Garden is a heavenly place, off the beaten track but also the biggest park in Reykjavík. Flóran is a lovely café there, also open in the evenings but opening hours are seasonal. All is made in-house and a lot of the ingredients grown at the café. Fabulous place for children and grown up and everyone who loves plants and quirky surroundings.

When Kaffi Vest opened in October 2014; who would have thought it possible to run a café in the Vesturbærinn, a suburb but yes, that is now possible. It has great decor, good vibe, open from morning to late. The food is a bit erratic but the vibe is good. And it is just opposite Vesturbæjarlaugin, the swimming pool and Melabúðin, the best deli for food shopping.

A propos hotels: I would stay at Kex if I were traveling to Reykjavík as a tourist: well located, quirky and accommodation offers for all budgets.

The Icelandic beer deserves a mention by now. There is a veritable surge in craft beers and I have not had anything but just great beer from this thriving flora of small breweries. It is now one of the things I look forward to enjoy when I visit but happily Einstök beer is now available in UK, i.a. at Oddbins and at least in what used to be my local Oddbins I was told it sells really well.

Shopping

Before I knew other cities intimately I assumed that modern gold and silver jewellery was something found everywhere but that is of course not at all the case. However, in Iceland there is plenty of choice when it comes to contemporary jewellery. I doubt there is another city in the world with as great a choice of it as Reykjavík offers. There is historic reason for it: in the decades after the war not much could be imported to Iceland, Icelanders were flush with money and some of it was spent on in the silver- and goldsmith workshops, set up under Danish influence. The best thing to buy in Iceland is silver jewellery, both in terms of price and design.

Skólavörðustígur and Laugavegur are filled with little shops of Icelandic design, plenty of jewellery shops around there. Also shops with contemporary clothing and Icelandic design.

There is so much that comes and goes in Iceland but Kirsuberjatréð has been around for decades now and sells a great selection of Icelandic design, both jewellery (fabulous!), other accessorise and things for the home.

Cintamani and 66North are Icelandic sport labels, the latter with a shop in Bankastræti. Cintamani is no longer in the centre but has an outlet in Hafnarfjörður and on-line. The fishmongers at Borough market in London wear 66North!

For those interested in modern design, and not necessarily Icelandic, and eclectic vintage Stefánsbúð, offering Danish Henrik Vibskov, also Hamnett etc is a top destination, right in the centre, on Laugavegur. Sorry, I tend to be hyperbolic when it comes to good Icelandic destinations but Stefánsbúð is my favourite shopping destination in the whole wide world – small, great vintage selection (this is not charity-shop dirt-cheap, they know what they are selling, but very reasonably priced for the good selection) in addition to cool labels. Don’t forget to check the jewellery, especially the contemporary selection made by a Japanese designer, living in Paris!

A quirky place is the antiquariat on Klapparstígur 25-27, off Laugavegur – huge for a second hand book shop, stuffed with books, mostly in Icelandic but also many in other languages, and some weird things.

One of the best music shops in the world. I know, Icelanders are prone to hyperbole but this isn’t saying too much, 12 tónar at Skólavörðustígur 15, of course with all kinds of Icelandic music and other good music.

Art and museums

Contemporary Icelandic art is thriving. The most interesting galleries are i8 in Tryggvagata, right by Hotel Marina and the Sea Baron. Hverfisgallerí at Hverfisgata 4 is a recent addition to the Icelandic gallery scene. The old rebel and wild-at-heart Kling og bang was without a home for a while now but now has a great home at Marshall húsið, another great Grandi location, Grandagarður 20. In the same building there is an art space owned by Iceland’s most famous artist (though Danes claim hims too because he grew up in Denmark), Ólafur Elíasson.

The most successful commercial Icelandic gallery is i8, also international art. Another good one for Icelandic contemporary art is Hverfisgallerí.

You find the two main public museums/galleries in the city centre, the National Gallery,  a lovely café there, good for lunch. The same at Reykjavík Art Museum. In the East part of town there is Kjarvalsstaðir, dedicated to works by the greatest Icelandic artist, Kjarval. Seen in connection to art during his time (1885-1972) his work is truly original, inspired by Iceland in a very special way.

For weirdness and total experience there is the Einar Jónsson museum, by Hallgrímskirkja. The museum was designed by the artist (1874-1954) himself who is spiritually connected to the British arts and craft and symbolism. His bedroom is normally not open but ask if you can possibly see it. This is “Gesamtkunst” though without the music!

Sigurjón Ólafsson was a sculptor who studied in Denmark before moving to Iceland with his Danish wife. They lived in Laugarnes, close to the container harbour of Sundahöfn. There is now a beautiful little museum there and a café. There are also regular concerts at the museum.

There are often art exhibition at Hallgrímskirkja, keep an eye on their programme.

To do and see

Harpa is the concert hall on the harbour. Half-built when the Icelandic banks collapsed in Oct. 2008 it was then finished after a hefty debate if such extravagance was permissible in times of crisis. The glass “case” encasing it is by the Icelandic artist Ólafur Elíasson who did the sun installation at Tate Modern.

The best thing about life in Iceland are the swimming pools – plenty of them around in Reykjavík and around the whole country – with varyingly hot tubs and normally also with a sauna/steam bath. My favourite is on the outskirts of Reykjavík, Seltjarnarnesslaug.  A good time to go is in the morning or after a long day; open until 8 or 9pm, depending on the season. I like Seltjarnarnesslaug because the water is salty, instead of chlorine.

Those who like a properly long pool go to Laugardalslaug. Swimming in Iceland is a website with all you need to know about this topic. Even if you don’t particularly like swimming don’t miss out on the experience of swimming the Icelandic way: outdoors, no matter the weather, the essential Icelandic experience.

All pools have outside dressing rooms (yes, closed-off, separate for male and female) and that is for me part of the true experience of swimming in Iceland. Again, try it, best in an Icelandic company.

Nauthólsvík is the Reykjavík beach. You don’t need to be a heroic viking, there is a hot pool there but if you want to dip your toe into the Atlantic that’s the place, especially if you stay close to where the hot water flows into the sea there. The facilities are modern and I love the vibe there, as well as the cold water. Not to be missed. Right by there is a nice restaurant, Nauthóll, good both for lunch and dinner – modern architecture, glorious view.

There is of course the famous Blue lagoon – I used to think it was totally worth it, also for the architecture and being in the middle of a lava field but it’s just so crowded and ridiculously expensive that I’m no longer sure, I would rather go to any of the pools. Now, there are of course a lot less tourists so perhaps the Blue Lagoon is worth visiting again. You can take a bus out there, ca. 45 min. drive (it’s close to Keflavík Airport). Absolutely any pool in Reykjavík gives the whole Icelandic experience of swimming (and remember to shower naked and wash well, very important if you want to be an acceptable swimmer in an Icelandic pool!)

To see a bit of Iceland in a day, do the Golden Circle tour, covering the glorious Þingvallavatn, a huge lake in a sunken lava field, the famous Geysir (which has given its name to all hot springs in the English language) and the great waterfall, Gullfoss (the “gold waterfall”).

There is now another spa/lagoon type of pool at Laugavatn, ca. 60 km east of Reykjavík, passing Þingvallavatn. A lovely place where the viking-minded can swim in the lake. Wholly recommended!

No need to mention whale watching, plenty of offers but check out this company that runs tours from the old harbour, close to Hotel Marina and Sea Baron.

In Mosfellsbær, a Reykjavík suburb, there is a small waterfall called Álafoss. In early last century this was the centre of the Icelandic wool industry and the label was called Álafoss. Then it went bankrupt but the old factory and surrounding buildings now house artistis, a tourist shop (what Icelanders call sea puffin shops because that seems to be The Icelandic Souvenir for some reason). Sadly, the café had closed last time I was there, last year but there is a knife workshop and other activities, a great place to visit. In the knife workshop, look out for faces glued to the floor: five politicians who, according the the owners, gave away the banks when they were privatised in 1998 to 2003. These faces are familiar to most Icelanders above a certain age and bear witness to the time before the boom that led to the collapse of the three main Icelandic banks in October 2008.

If you have a car one of the most fantastic things is to drive out of town – it does not really matter where to because everywhere there is something to see and it is marvellously easy to find a place where no man-made things are in sight and you can feel around in the world!

The Northern lights season has passed for the time being. The weather is changeable, you will come to understand the word if stay for more than just a few days. Here there is all you need to know about the weather in Iceland, right from the Icelandic meteorological institute, Veðurstofan. But for me, the weather in Iceland is always just great because no matter what, it is always an experience.

Further away

In July 2016 I stayed at Barðaströnd, where the Westfjords start. I stayed at Þverá, part of Nordic Lodges, wholly recommended – they have three other cottages in other parts of Iceland – and aided by fabulous weather and glorious sunsets the time spent there was fantastic. The Westfjords are definitely not crowded. I visited Bíldudalur and the Icelandic Sea Monster Museum, Patreksfjörður, various pools, check Swimming in Iceland, Selárdalur, Rauðisandur, Látrabjarg, the nearby museum and last but not least Ísafjörður.

En route I visited Stykkishólmur with Roni Horn’s installation Library of Water and the Volcano Musem. Another lovely destination.

This summer, 2018, I spent a week in Ísafjörður, only a 35 min. flight from Reykjavík, the best part of a day in a car, thoroughly recommend it. Stayed at the old Faktorshúsið. The restaurant at Tjöruhúsið is justly famous for its fabulous fish buffet, all kinds of fish impeccably cooked, served by lovely people. Some will claim it’s the best fish restaurant in Iceland and that wouldn’t be saying too much. Húsið is another lovely café and restaurant, great atmosphere and for the time being has the best coffee in Ísafjörður. I hugely enjoyed a two hours RIB boat trip and yes, we saw whales showing off their tails very close by, utterly mesmerising. The old museum, Turnhúsið next to Tjörhúsið and a couple of other old houses, is a place to dive into the history and harsh Icelandic living in earlier centuries, until not that time ago!

Drive carefully in case you are driving, the roads are not what global urban dwellers are used to but have a good trip – or, as we say in Icelandic, “góða ferð!”

*Last updated 23 May 2020. 

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Acquittals in major cases brought by the Office of the Special Prosecutor have made headlines in Iceland and elsewhere. In addition, it has now surfaced that an expert, called in to be a lay judge in the Aurum case is the brother of Ólafur Ólafsson, one of the four indicted in the al Thani case.  Jón Ásgeir Jóhannesson, at the time Glitnir’s largest shareholder, was indicted in the Aurum case, together with Glitnir’s ex-CEO Lárus Welding and two Glitnir employees. Both were acquitted.

Jóhannesson has however earlier been found guilty in two cases but in both cases the prison sentence was suspended. In February last year, he was sentenced in a tax fraud case to 12 months in prison, suspended, and fined for ISK62m, €400.000. In June 2008 Jóhannesson was sentenced, as part of the long running Baugur case, to three months in prison, also suspended. Following both sentences Jóhannesson is prevented from sitting on boards of companies for some years.

In a nutshell, the Aurum case concerns Glitnir staff indicted for breach of fiduciary duty, i.e. for lending money without necessary collaterals and guarantees. Indeed Glitnir lost the ISK6bn, €40m, that the bank lent in this saga. Jón Ásgeir Jóhannesson, who profited from the loan by getting €6,5m, of the loan (because Fons, the company that got the loan and couldn’t repay it, apparently owed Jóhannesson this sum of money) was charged for aiding in the alleged illegal activities. Numerous emails brought up during the oral hearings showed his direct involvement and severe pressure on finalizing the loan, which he profited from.

Ólafur Ólafsson was indicted on similar grounds in the al Thani case last December. Reykjavík County Court found him guilty and he was sentenced to 3 1/2 years in prison. That case has been appealed to the Supreme Court. In Iceland no one goes to prison until the Supreme Court has ruled in an appealed case.

In addition to two District Court judges Sverrir Ólafsson professor at Reykjavik University was called to be an expert judge in the Aurum case. Over the weekend, Icelandic media pointed out that Ólafsson is the brother of Ólafur Ólafsson. It is still unclear if this will have consequences. (Foreigners sometimes think that everyone must know everyone in Iceland – well, not quite and Ólafsson is a common last name).

Judge Guðjón Marteinsson and Stefán Ólafsson acquitted the four. The third judge, Arngrímur Ísberg, was in minority: in his opinion all four were guilty and should have been sentenced to prison. Theoretically, if a lay judge had sided with Ísberg the outcome would have been different.

From the course taken by the Reykjavík District Court in the al Thani case, where the four indicted were sentenced to 3-5 1/2 years, it is difficult to understand the reasoning of the two judges who chose to acquit in the Aurum case. The al Thani case has been appealed and a Supreme Court decision is expected in autumn or early winter. If the Supreme Court comes to a different conclusion it would not be the first time that an acquittal in a banking-related case is turned around in the Supreme Court.

The other case ruled on last week – called the Ímon case after one of the companies involved – is part of a market manipulation case brought against Landsbanki managers. Here the loan saga is similar to the al Thani case: Landsbanki lent funds to limited liability companies with little or no collaterals, here in order to fund the buying of shares in Landsbanki only days before the bank collapsed. These deals were nothing less than the largest share purchases in Landsbanki that year – these companies were each buying around 2% of Landsbanki shares. Sigurjón Árnason and Sigríður Elín Sigfússdóttir were acquitted but a lower level employee, Steinþór Gunnarsson was sentenced to nine months in prison, of which six are suspended.

So far, all the OSP cases have been appealed and that will most likely be the route with these two recent decisions.

Apart from legalities it is clear that if banking as practiced in the above mentioned cases were applied as a general rule the bank in question would be out of business fairly soon. And who wants to be a shareholder in a bank where funds are leant out in such a way that if something goes wrong the bank can’t recover the funds?

*The verdict in the Aurum case is here and the Landsbanki verdict here (both in Icelandic). 

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Jón Ásgeir Jóhannesson, Glitnir ex-CEO Lárus Welding and two other Glitnir employees have all been acquitted this morning in the Reykjavík District Court in the Aurum Case. The Prosecutor will no doubt appeal, sending the case to the Supreme Court.

It remains to be seen what the outcome will be but in the Exeter case, another financial fraud bank-related case, the Reykjavík District Court acquitted but the Supreme Court sentenced to 4 1/2 year prison term.

The verdict is not yet out on the Court website. Will read it later on.

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The Progressive Party staged a remarkable turn-around in Reykjavík, apparently because the top candidate spoke out against a planned mosque. Anti-immigrant discourse has so far not been part of the Icelandic political debate. The question is if this is now changing or if this topic will die out as quickly as flared up

After rush towards new parties in elections 2009 and 2010 the four old parties – or the “Four-Party” as Icelanders call them – got a solid outcome in the elections Saturday May 31. The Independence Party is still far from its glory of earlier decades, which ended in 2009, but the party leadership can sigh in relief that the party did make gains. The Progressive Party did not do as well but achieved nothing less than a miracle in Reykjavík: after opinion polls showing 0 seat, as has been the case since 2006 it won two seats, apparently because it questioned a planned mosque in Reykjavík.

The local elections only has an indirect effect on the government but the two coalition parties – the Progressives and the Independent Party can both interpret the outcome positively in spite of dismal polls lately: the Progressives will no doubt feel they are good at gauging the popular mood; the Independence Party might feel reassured that its bleakest hour are now firmly behind.

The social democrats gained votes and can feel mildly reassured of its outcome. It did not do quite as well in Reykjavík as opinion polls had indicated but it is the largest Reykjavík party. Its top candidate Dagur B. Eggertsson, who has de facto steered the Reykjavík Council under mayor Jón Gnarr, is likely to form a majority with Bright Future. That party ran for parliament last year, picking up some of its candidates from Jón Gnarr’s now defunct Best Party, though only a fraction of the Best Party popularity in Reykjavík. Left Green lost around the country but won a seat in Reykjavík and might very well be part of an Eggertsson led council.

The unexpected election topic in Reykjavík: a mosque

The issue of a plot of Reykjavík land for a mosque only flared up in the last few days, apparently almost by accident. The Progressives’ leading lady in Reykjavík Sveinbjörg B. Sveinbjörnsdóttir – who took the first seat a few weeks ago when the number one resigned in face of dismal opining polls – started airing her doubt about the planned mosque. She denies she took this up on her own accord but only responded to questions when meeting with voters.

Sveinbjörnsdóttir got a heavy beating from some in her own party for airing what some felt were intolerant views: the number five on the list disengaged from the party, Gunnar Bragi Sveinsson minister of foreign affairs spoke strongly against her views. Interestingly, prime minister Sigmundur Davíð Gunnlaugsson kept quiet about the issue and only spoken of his unease over the strong reaction Sveinbjörnsdóttir elicited from those who did not agree with her.

According to Icelandic law, faith communities can get a land free to build a house of worship. Needless to say, this law stems from the time when the Icelandic Lutheran community – almost entirely under the state church – was the only faith organisation building houses of worship. The Reykjavík council had given a plot of land to a Muslim community. The rumbling among the voters has been why this community should get land for free, if it should be in some other place, if the land was unreasonably big, that mosques were known to harbour terrorism and extremism and so forth.

The fact that Sveinbjörnsdóttir echoed the concern of many voters seems to have created a surge for the Progressives only over the last few days. Also it seems to have made a difference that the Progressives are in favour of keeping the Reykjavík airport whereas other parties want it moved in order to free up building land. Consequently, the party now has two members on the Reykjavík council, after having had none since 2006 – the most surprising outcome of the local elections.

Racism and intolerant views has had no following in Icelandic politics – so far

So far, racism and intolerant views towards foreigners or new foreign faith communities has had little public following in Iceland. And not entirely for lack of trying. One new party, which ran in the parliamentary elections last year preached some far right views, both on markets and foreigners but to no avail: this party got nowhere.

Earlier, the Progressives had dallied with anti-foreign view, but the same: there was no response from voters and by election time last year the party had abandoned these views. Anti-foreigners far right views simply did not seem to attract any interest. Until the issue of the mosque rose to the surface.

Immigrants in Iceland

Number of foreigners in Iceland has jumped up over the last decade. Immigrants came first to work in the fishing industry, later in the service industry. Apart from the fishing industry, hospitals and restaurants run on an immigrant workforce.

At the beginning of 2013 9.1% of the inhabitants in Iceland were immigrants. By far the largest foreign community in Iceland is the Polish community, ca. 9.400, in a country of 326.000 inhabitants, meaning the 3% of the inhabitants are Polish/of Polish origin. The highest ratio of immigrants vs Icelanders is in Western Iceland but two out of every three immigrants live in Reykjavík. Unemployment among the Polish community is 15% compared to 4% for born and bred Icelanders. The Poles have much revived the Catholic community in Iceland.

There are two Muslim communities in Iceland with a total of 645 members. An application for a plot of land to build a mosque was put forward already in 2000 and has been sloshing around in the system ever since. In the meantime, the Russian Orthodox community and the pagan community (Ásatrú, based on what is thought to have been the faith of the Vikings) got plots of land in 2007 and a Thai Temple was granted land in 2009.

The application for a mosque has surfaced in the Icelandic debate now and then but never with any particular fervour – until now.

If this indicates a surge of right wing anti-immigrant politics in Iceland remains to be seen. Judged from how these policies have fared so far it seems unlikely – but it is also possible, as often happens with these issues, that debate now might have granted these views a certain “legitimacy,” which others may feel they can now exploit: being anti-Muslim might pave the way for a further “them and us” discourse in Icelandic politics though there is nothing to indicate it except this flare around the mosque not yet built.

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