Sigrún Davíðsdóttir's Icelog

What is the reaction to the EFTA Court’s Icesave ruling in Iceland and abroad? In Iceland, there is no gleeful victory, in Brussels people worry about the effect on perception and depositors’ protection and in the UK and the Netherlands politicians sense that there is no obvious way to recuperate their respective cost of paying Icesave depositors

I keep being asked if Icelanders are celebrating after the unexpected Icesave ruling of the EFTA Court. The answer is: no, not really. There is no victorious glee, as far as I can sense, but a huge relief. A friend who sat at a café in Reykjavik the morning after the judgement mentioned palpable relief but said people were also talking about the irresponsible behaviour of Landsbanki and the other banks.

The measured mood can be seen here where Prime Minister Johanna Sigurdardottir (the second lady from the right) took a few dance steps while waiting on Monday to go on air after the EFTA Court judgement on Monday – very small steps, no big swings.

It will be interesting to see how and if the EFTA Court judgement will influence the electoral campaign in Iceland where election is expected latest in April. After the leaders of the Progressive Party declared they would propose a vote of no confidence against the Government they then changed their mind. After all, the voters will have a say very soon.

It seems that Facebook – a much used tool in Icelandic public debate – was overflowing with unflattering comments about politicians who were in favour of earlier Icesave agreements. However, many do recognise that the judgement was truly unexpected. At the time, negotiating an agreement to end the dispute and eradicate the accompanying uncertainty seemed like the sensible thing to do at the time.

Membership of the European will be an election topic. At first, I thought the judgement would be a weapon for the eurosceptics – after all, it had paid to go against the received wisdom of negotiating. Now I am less sure. It can also be reasoned that the EFTA Court – part of the European Economic Area pillar – did save Iceland from the British and the Dutch claims. The Dutch and the British opted to use the European Economic Area, EEA, Treaty and EFTA Surveillance Authority to challenge the Icelandic position of not paying. At the end of that path lay victory for Iceland. – Suffice it to say that the judgement is not a clear-cut weapon for any one party.

The view from Berlaymont

It is no exaggeration to say that people at Berlaymont and elsewhere in EU institutions are gobsmacked and shaken by the EFTA Court ruling. So is indeed everyone else who has read the ruling. To have it black on white – albeit from the EFTA Court and not the European Court of Justice (but there should be homogeneity between the two) – that the Directive on deposit guarantee schemes does not protect depositor in a major collapse shook the ground under the whole European banking system though depositors may not have noticed it. At least not yet.

An excellent legal reading of the judgement on European Law Blog summarises the judgement regarding the Directive by saying it “might be called a lifejacket, but it doesn’t mean it’s built for emergencies.

The ruling is based on the deposit Directive as it was in 2008 – it has been changed since – but it has, as far as I can see, not been changed in such a way as to make it unequivocal that the state is the final guarantor. If the idea with the changes in 2009 was to make states guarantee deposits a short sentence saying that they did, could have been inserted. That was not done. Understandably so, because it raises moral hazards as is pointed out in the ruling.

The Directive was designed to give depositors the feeling the state did indeed guarantee the DGS and make investors think that no, of course the state doesn’t do that. This was always an impossible task, it just went unobserved – until the EFTA Court judgment on Icesave. – It is, I believe, still not clear from the Directive that the state guarantees a result.

According to the statement by Stefaan de Rynck, Michael Barnier’s spokesman, the Commission will study the judgement but so far, it has not changed an iota in the Commission’s understanding of the Directive: “The Commission maintains its interpretation of the current Deposit Guarantee Scheme (DGS) in the EU.  The deposit guarantee schemes in the 27 Member States also apply in the event of a systemic crisis, and Member States are responsible to ensure that national deposit guarantee schemes effectively pay the compensation guaranteed by EU law within the whole single market.” – I have also heard that not everyone in the Commission is unhappy with the judgement. Some think this clarification was useful because the Directive was flawed as it was and the changes have not repaired the flaws.

No doubt, the ruling will be read back and forth over the coming weeks. But one thing could be taken as a lesson, not from the ruling but from action taken in Iceland in October 2008: make deposits priority claims in case of a bank collapse. This has indeed put the foreign Landsbanki depositors in a better place than would have been in a comparable situation with any other bank.

Another point Iceland emphasised is that a state facing a situation like the Icelandic one, will do whatever it takes to save its own interests – and it will not necessarily use a deposit guarantee scheme. Iceland moved domestic deposits to a new bank. The British Government moved Kaupthing Edge deposits to the Dutch ING (which interestingly went bust shortly after).

I can see that deposits need to be protected – but I have some aversion to DGS as I find the moral hazard too great. On this topic the Court quotes an article by Joseph Stiglitz – a first time the Court quotes anything but another judgement in its own ruling (see paragraph 167).

There are some concerns within the EU Commission that the European Court of Justice might have ruled differently on the Directive, ie that the EFTA Court’s ruling was more narrow than its rulings hitherto, leaving a sense of divergence between the EFTA and EU pillar of the single market. After all, there should be homogeneity between or within the two pillars. However this feeling will develop DGS and especially the joint one now being discussed are not a matter for courts to decide but, as Michael Waibel points out in his summary of the judgement, “a matter for the parliaments to decide.”

The Court concludes that the Directive does not apply to systemic failure like in Iceland. But that does not mean depositors are unprotected as seen from the examples of above. And the very best deposit guarantee is to regulate and supervise banks so they simply don’t fail. In any case, as paragraph 161 in the EFTA judgement reminds the reader, a state will not only use one tool to save a bank but all tools needed: “They may benefit from other provisions of EEA law regarding financial services, as well as the activities of supervisors, central banks, and governments.”

What will the Dutch and the Brits do?

The feeling is that the Dutch are most unwilling to forget the Icesave dispute, the British less so. Therefore, the Dutch are no doubt seeking and searching for ways to recuperate the costs accrued by paying out Icesave depositors. The deposits themselves will come – and are coming – from the Landsbanki estate. Not the cost.

As far as I can sense there is no willingness in the corridors of Berlaymont to support Dutch Icesave grievances. The Berlaymontians are worried but neither for the Dutch nor the British but for the EU financial system, EU consumers and depositors.

There are all sorts of rumours as to what the Dutch are mulling over. It is even being mentioned they are looking at the nuclear option – of leaving the EEA. (Normally, the EEA countries are said to be Iceland, Norway and Liechtenstein but since the EU is part to the EEA treaty so are the EU member states.) As the Grexit debate clarified there are no provisions for leaving the EU. With the EEA it is different. If the Dutch left it would put the EEA – already a bit of an eyesore in the EU landscape for some – it would put that construction in jeopardy. The question how much political goodwill the Dutch would reap from an action that does look more like a tantrum of a spoiled kid than a carefully planned policy. The EU does not much need yet another event to challenge its equilibrium.

At the beginning of the Icesave dispute the Dutch and the British had two options to pursue their goal of recuperating costs. There was the EEA/ESA route, eventually chosen and, since the two states were of the opinion that Iceland had promised to pay but later retracted an earlier promise, there was the option to sue Iceland for contractual breach.

For the British there was no single contract but what they consider a string of broken promises. For the Dutch, in addition to a similar string, there is a Memorandum from October 11 2008, signed by the then Dutch Ambassador and two Icelandic civil servants – the director of the Icelandic deposit guarantee fund, TIF and the permanent secretary of the Ministry of Finance.

In to the Memorandum the Dutch Government declared it would lend Iceland what amounted to EUR20.887 (the European minimum guarantee of EUR20.000 with added currency cost) – there was no total amount mentioned – against 6.7% interest (quite hefty at the time of low interest rates). This money would then be put at the disposal of the Dutch Central Bank and used to pay out the Icesave depositors.

That Iceland never paid according to the agreement can be explained by the fact that the loan was never issued. Further, these civil servants signed on behalf of their Governments but no further governmental contract or agreement was made. However, the Dutch might still try to use this – as far as I can see rather feeble ground – to sue Iceland for contractual breach. The Dutch may claim they have some further documentation but I find it difficult to believe there are still unknown documents related to Icesave (though I would not exclude it).

Icesave – the end?

Is the January 28 EFTA Court judgment the end of the Icesave saga? As far as I can see it is the end to the dispute between the three countries – Iceland, Britain and the Netherlands. It also seems the EU has come to the same conclusion.

However, the effect of the judgement on the Directive will rumble on for a while with EU’s legal heads and other studying it closely. The EU Commission must figure out how to respond. It won’t be easy to reach the same opaque equilibrium as previously now that the EFTA Court has spoken. A drastic rethinking on DGS, also in terms of a pan-European scheme in a planned banking union, would be desirable. But that is perhaps hoping for too much.

Addita: In response to an FT Editorial on Icesave here is a letter of mine to the FT, published January 31:

A misleading version of Iceland’s recovery

Sir, After all the excellent FT reporting on Icesave it is astounding that your editorial should have turned the history of Iceland’s recovery into a heroic saga of a small island challenging the big powers and the bankers of this world.

This is a highly misleading version of the recovery saga. Correct, it didn’t bail out the three banks but smaller financial institutions were bailed out, to the exorbitant cost of 20-25 per cent of gross domestic product.

What Iceland has, however, done wisely is to write down debt, both of companies and private individuals, as well as easing its bankruptcy law, thereby avoiding a zombie economy. This part, not the Icesave saga, is “the victory for law and economic sense”. That is what debt-ridden countries could learn from the Icelandic recovery.

In general, not only in Iceland, voters tend to vote for the future by evaluating what the various political programmes means for them instead of focusing on the past. Voters can punish politicians for their policy but I rather doubt they will punish the parties for their stance on Icesave – I would guess their perspective is broader.

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I have earlier pointed out the similarities between the Kaupthing connections with the Qatari investor Sheikh Mohammed bin Khalifa al Thani and Barclays contacts with another al Thani and Qatari investors. As recounted in some details here, with Kaupthing documents, the Kaupthing saga with the Qatari investor, who bought shares in Kaupthing in September 2008 publicised at the time as showing the Qatari faith in Kaupthing, was indeed a saga of a very favourable Kaupthing loan to the Qatari investor.

This saga had surfaced in the Icelandic media but was fully documented in the SIC report in April 2010 and more recently in charges brought by the Office of the Special Prosecutor against three Kaupthing managers – Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson and Kaupthing’s second largest shareholder at the time, Olafur Olafsson. It did more than strife my mind if the Qatari share-buying in Barclays mirrored the Kaupthing story: that Barclays had lent them the money. Now the FT (subscription) is writing that this is indeed being investigated.

A recent Bloomberg article on the Libor probe refers to an investigation against Barclays chief financial officer Chris Lucas related to “payments made to Qatar’s sovereign wealth fund, the bank revealed last year.” Lucas, who had sought anonymity in the Libor investigations, is also mentioned in the FT article.

As the rumours about alleged fraud started surfacing after the Icelandic bank collapse in 2008 I heard various Icelandic bankers maintain, rather miffed, that they had not done anything differently from bankers in other banks. These words are now taking on a new meaning as we get more insight into what was actually going on in other banks, especially in the UK.

The Icelandic banking saga was laid open in the Icelandic SIC report. Unfortunately, no similar work has been done in the UK or elsewhere, with one exception: the only work comparable to the SIC report, that I am aware of, is Anton Valukas report on Lehman (earlier Icelog on Valukas’ Lehman report here), which was both extensive and thorough and a fantastic read. Recently, Valukas, in his first interview (CBS 60 Minutes) on the Lehman report, has expressed his surprise that no action has been taken against Lehman managers on the basis of his report.

The alleged Barclays deal with the Qatari is yet another addition to an ever more extensive saga of widespread questionable dealings within banks, showing a staggering lack of morality and integrity. These men were not only handsomely remunerated but in some cases knighted – and so far, the bill has been passed on to shareholders whereas none of the doers has been held accountable. That could be changing now with the Libor probe but it is still too early to say if charges will be more successfully pressed than in the SFO case against Kaupthing.

*Feb 3: Chris Lucas, Barclays finance officer for almost six years, is stepping down later this year, according to Sky News. It is unclear what sort of a leaving pay-packet he takes with him. – FT reports that Barclays general counsel Mark Harding is also leaving.

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Iceland has its Faust, Sæmundur the wise – but in the Icelandic tales of Sæmundur he beats the devil. For some reason this fairy tale comes to my mind now.

The EFTA Court has today dismissed the ESA application re Icesave. Here is the Court’s press release, highlights are mine:

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On Monday January 28, at 11.30am, the EFTA Court will deliver its judgement in the Icesave case brought by the EFTA Surveillance Authority, ESA, against Iceland.

The ESA summary of its case against Iceland is:

The EFTA Surveillance Authority submits that by failing to ensure payment of the minimum amount of compensation to Icesave depositors in the Netherlands and in the United Kingdom within the time limits laid down in Directive 94/19/EC, Iceland has failed to comply with its obligations arising under Articles 3(1), 4(1), 7(1) and 10(1) of Directive 94/19/EC. Additionally or in the alternative, the EFTA Surveillance Authority submits that Iceland has breached the prohibition on discrimination on grounds of nationality under Article 4 EEA. 

Here are some of the key issues to bear in mind once the judgement has been read: 

1 EFTA Court judgements are only yes/no rulings – a yes / no as to X having failed/not failed to comply with certain EU directives / European Economic Area Agreement.

2 The Court does not meet out sanctions, only answers “yes” or “no” as mentioned above. Consequently, the fact that no sanctions will be mentioned in the judgement can’t be seen as a partial victory for those the Court finds against.

3 A judgement from the EFTA Court is a proper judgement, not only “advisory” – and there is no instance of appeal. This is the final instance in deciding a failure or not when it comes to an EU/EEA directive/agreement. (According to a Sky report the president of Iceland Olafur Ragnar Grimsson has stated that the judgement is only “advisory.” That is not correct.*)

4 In cases where ESA is the applicant ESA is also a guardian of the judgement in the sense that ESA will keep an eye on if the judgement is fulfilled or not. – However, it is not necessarily crystal clear right away, from the judgement, what action needs to be taken.

5 In one case ESA has brought a country twice to the EFTA Court for the same reason. This happened in a case against Norway, related to public service pension payment, which ESA deemed to fail to comply with a EU directive on gender equality.

Three years after the original judgment ESA concluded that Norway, having had ample time, had fail to make the necessary changes to comply with the directive. Although Norway had started taking action ESA waited no longer and brought another case:

,,More than three years after the EFTA Court required Norway to recalculate the survivor pension of approximately 4000 pensioners, less than half of them has received the payment they are entitled to. The EFTA Surveillance Authority has therefore brought Norway to the EFTA Court for not complying with the judgment.

This is the first time that the Authority has had to take an EFTA State to the EFTA Court for failure to comply with a Court judgment.” – Full text here.

The interesting parallel here is that Norway was supposed to fulfil the judgement by a financial compensation, ie paying 4000 pensioners an extra sum – but yes, three years later they hadn’t yet done so. This case is still in the consultative process, not yet at the Court.

6 The only authority with constitutional rights to speak on behalf of Iceland is the Icelandic Government. Anyone else, ia the president of Iceland, can of course have his or her opinion but these opinions carry no authority as to what action Iceland will take on the issue, but are, in this context, purely personal opinions.

7 In case the judgement goes against Iceland (on one or both issues), the Dutch and the British Governments will most likely wait until after the Icelandic election to take Icesave again up with the Icelandic Government.

8 The Icesave case – if and how the British and Dutch demands for Iceland reimbursing the European minimum guarantee for Icesave depositors in respective countries – was a bone of contention in Iceland for several years following the collapse of the Icelandic banks in October 2008. From those opposing an agreement, it seemed as if the financial future of Iceland could only be assured by not paying.

It is interesting to note that although Iceland did not save its three largest banks, financial bailouts of smaller institutions have indeed not come cheap, probably costing Iceland 20-25% of its GDP and still counting. (Comparable cost in Ireland is 40%, in the UK 5%). This cost has hardly been mentioned at all in Iceland and has only recently become clear.

An ESA overview of all relevant actions re its case is here.

*When a national court seeks the opinion of the EFTA Court, a so called Note for Guidance, this opinion is for guidance only. An EFTA Court judgement is, like a High Court ruling, not only advisory. As is stated in the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice  (ESA/Court Agreement) (main part), article 33: “The EFTA States concerned shall take the necessary measures to comply with the judgments of the EFTA Court.” In other words, an EFTA State has to comply with the judgements of the EFTA Court.

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Alors, on Monday January 28 the EFTA Court will rule in the Icesave case, which ESA applied to put to the court.

The thrust of the case is:

Having studied some EFTA Court judgments where ESA is the applicant it is fair to conclude that it is not promising to be on the receiving end of an ESA action: ESA almost never loses a case as ESA is clearly most careful in choosing and preparing its action. But ESA will not win its case on statistics – and it is notoriously difficult to gauge a judgement.

I have not met a single informed person, unrelated to the Icelandic case, who thinks that Iceland is likely to win but there is not much debate on the issue in Iceland right now. The heat is out of the Icesave issue in Iceland.

One Icelander has however aired his strong view, president Olafur Ragnar Grimsson. He used an interview with Sky in Davos today to send icy regards to former Prime Minister Gordon Brown (whom Grimsson might run into in the Davos corridors of power) and his Government at the time for putting Iceland on a list of countries harbouring terrorism when Landsbanki assets were frozen following the collapse of the Icelandic banks.

Correct, this was a harsh action, caused Iceland and Icelandic companies serious problems and it is difficult to see it was necessary – but it doesn’t only show Brown’s panic at a time when some British banks were teetering on the brink of collapse. It also shows an extreme frustration within the British Government and Whitehall, built up over more than half a year, by lack of reaction from the Icelandic banks to demands by the FSA and by lack of understanding – so as not to say misleading information – from the Icelandic Government. Grimsson did not mention this rather unflattering part of the Icesave Saga. The UK authorities took action – albeit brutal and harsh – and saved Icelandic authorities from themselves closing down the banks.

The presentation made by the Icelandic Government during 2008, until the banks collapsed in early October, is spelled out here (see paragraph 26-30)in the ESA application to the EFTA Court. This is one of ESA’s arguments for its case.

But even if the Court rules in favour of ESA Monday will not mark an end to the Icesave saga. The Court will only rule on a yes/no to alleged failures by the Icelandic Government to comply with EU directives and the EEA Agreement. It will not order Iceland to anything. However, the judgement will no doubt be used by the British and Dutch Government to knock on the door of the Icelandic Ministry of Finance to remind Icelanders that well, Iceland still hasn’t paid what these two countries think they are owed.

Iceland’s refusal to pay the Icesave debt has, misleadingly been presented as a popular uprising against bailing out banks. The debt to the two Governments arose as they bailed out depositors in Icesave – not banks, bankers or bondholders. Deposit holders who may well argue that they kept their money in Icesave because they heard Icelandic politicians, for example in this Channel 4 report, as well as bankers, tell them that their money was save and Iceland had a deposit guarantee scheme, just like the UK and the Netherlands.

At the hour of extreme national anxiety the Icelandic Government made the understandable decision to secure domestic deposit holders. But that hour has long passed and the UK and the Netherlands think it is high time to get their money back.

*See earlier Iceogs on Icesave here. Here is the ESA page with all relevant information re the ESA Icesave case.

Updated: According to Sky Grimsson said the judgement will only be advisory, and that “it will not lead to any financial obligations or transactions of any sort”. – As far as I know, an EFTA Court judgement is all but advisory. It is the final say in our earthly realm of reality – there is no other court that can rule on a breach of EU directive/EEA Agreement or not, for an EEA country.

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A small island, with a banking sector eight times its GDP, weak supervision, foreign money flowing in and some Russian connections. Iceland or Cyprus? Both.

With Cyprus now struggling to finalise bailout terms it is interesting to reflect on how similar the two islands are. In early October 2008, as the Icelandic banks were crashing, the Governor of the Icelandic Central Bank David Oddsson (leader of the conservatives 1991-2005, prime minister 1991-2004, CBI Governor 2005-2009, now editor or Morgunbladid) stunned the nation and the international community by announcing that Iceland did not need to turn to the IMF – Russia was willing to lend Iceland, apparently enough to pull the country out of financial quagmire.

Interestingly, this loan never materialised nor was it clear how or why the offer was made. Apparently the Russian ambassador did mediate the offer but then did not have the backing in Kremlin he either had understood or misunderstood he had. There is no lack of rumours as to why Kremlin might have been interested in bailing out the Icelandic government and who stood behind this. It is only safe to assume that the offer is unlikely to have been a fabrication of the staunchly conservative Oddsson but does indeed indicate some Russian interests in the Icelandic banks.

With Cyprus, Russian money flow and it is clear that there are huge Russian interests at stake. The Russian interests materialised in December 2011 when Russia lent Cyprus €2.5bn, maturing in 2016. Until last autumn, Cyprus seemed to hope for further €5bn from Russia but it now seems clear – at least for the time being – that more is not forthcoming from that part of the world.

The island has, through close contacts for many decades, been the chosen port into Europe for Russian money – also the money rising from dodgy privatisation deals and the oligarchs. Among those who made use of Cypriot money route are Bjorgolfur Thor Bjorgolfsson and his father Bjorgolfur Gudmundsson, who used money made in Russia in the ‘90s to buy Landsbanki; father and son have had companies registered in Cyprus.

It is clear that Cypriot supervision of the financial sector was more than lacking when it comes to supervising the flow of money from Russia and elsewhere. It seems fair to assume that there is money in Cypriot companies whose beneficial owners are unknown and money in Cypriot banks untested by the “know your customer” rule.

The key programme objective number 1, according to the Memorandum of Understanding is:

to restore the soundness of the Cypriot banking sector by thoroughly restructuring, resolving and downsizing financial institutions, strengthening of supervision, addressing expected capital shortfall and improving liquidity management;

But there is nothing specific on how this should be done, what is the target and how this will be verified. And there is nothing about the corruption thought to hover over the Cypriot banks, enabling the flow of dirty money into the tiny island economy. After all, why do funds float to countries like Cyprus – and for that matter Luxembourg – if not to do something that cannot be achieved in the more mature economies of Europe (though it is an uncomfortable thought why rich Russians are now so prominent in London)?

I have earlier stressed the correlation between the Eurozone crisis and corruption. Cyprus fits the case. It is an uncomfortable thought that the European Union might – yet again – close its eyes to corruption and deal with the Cypriot banks as if they were all about cricket and fair play.

Fortunately, most articles on the Cyprus bailout mention the Russian money, lastly articles in NYTimes, by Thomas Landon and James Kanter, who quotes Olli Rehn saying that a precondition for aid is that Cyprus needs to adopt “new laws against money laundering.”

If the EU insists on something more than just constructing some Potemkin villages, a bailout will hardly happen any time soon. Even after the next presidential election in February – a term now often mentioned – seems too soon. The euro was put in precarious conditions when EU postponed for two years to deal properly with Greece. Cyprus, with a GDP of around €20bn, is a much smaller problem and postponing a bailout there will hardly have Greek-portioned consequences.

Corrupt money is not just about ethics and morale but about the lethal effect of corrupt money management. If nothing is done now regarding the Cypriot banks, it is yet another victory for evil forces, which ultimately distort competition and crowd out healthy companies.

*An earlier Icelog on Cyprus is here, with links to documents such as the Memorandum of Understanding and IMF data on Cyprus – and here is an earlier blog, linked to an article of mine on Le Monde Diplomatique English website, on the correlation between crisis and corruption.

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The other day, talking to a friend who is interested in computer systems and how to obtain data, he told me a thing I hadn’t heard of and found very fascinating. In some of the groundbreaking whistleblower stories of recent years the data was acquired in a very clever way.

As everyone who knows anything about computers is aware of it’s very difficult to copy things from a computer system without this being logged somehow and somewhere. In other words, it’s neigh impossible to copy or print without leaving a traceable path.

Alors, what does a person – let’s say a banker or someone working for a pharmaceutical company, just to simplify the story – who is itching to share some interesting information on an organisation he/she thinks is doing something that shouldn’t be done? Well, this person just picks up his/her mobile phone and takes photos of the information on the screen. Data obtained in this way has already figured in some well-known cases.

This very simple way doesn’t leave a trace and employers can’t very well point cameras at all staff. The answer might be a thin distorting film on the computer screen that makes it impossible to take photos of anything on the screen. But so far, that’s not a standard. This simple trick of photographing the screen must send shiver down the spine of all those working on security and of all those who think information can’t be ripped from their computer systems.

This simple action is cutely retro: it’s the same technique as used during the Cold War and in classic spy stories.

Not that I would exhort anyone to steal information – just reporting what I heard, #just saying.

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One of the most spectacular lending stories from the collapsed Icelandic banks, from Glitnir, comes up in the Reykjavik District Court as oral hearings in the Aurum case start Monday January 7. This is essentially a story how Glitnir’s two main shareholders – Jon Asgeir Johannesson and his long-time business partner Palmi Haraldsson – got a loan of ISK6bn, ca €35.5m, from the bank and ended up getting rid of the loan by selling, for 1 krona, the company where the debt was placed (yes, this sounds crazy but this was Icelandic banking for favoured clients pre-collapse).

Those charged are Johannesson, for  exerting undue influence on Glitnir CEO Larus Welding and Bjarni Johannesson who managed Glitnir’s business relations with Johannesson and his companies. A third Glitnir employee, Magnus Arnar Arngrimsson is also being charged. The charges relate to the three Glitnir employee regard breach of fiduciary duty.

From these ISK6bn it is alleged that Johannsson and Haraldsson each personally got ISK1bn whereas the whole amount was lost to the bank. The loan saga is recounted in an earlier Icelog. Here is further to the charges brought now by the Office of the Special Prosecutor and here is an earlier log on Aurum, also connected to an international freezing order, which the Glitnir ResCom secured against Johannesson in the summer of 2010. Earlier, the Glitnir ResCom brought a case against Johanesson and Glitnir managers for losses caused by the Aurum lending.

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The long-awaited judgement in the Icesave case, the action brought by the EFTA Surveillance Authority against Iceland, is due at 11.30 on January 28 in Luxembourg where the EFTA Court resides.

The thrust of the case is:

Much has been said and written and about this dispute and it is excellent that ESA took action so as to clarify the issues at stake. In addition, a clarification of a state’s obligation regarding the deposit guarantee scheme is of European and general interest.

Here is a link to earlier Icelogs on Icesave.

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Before the end of January the EFTA Court might have ruled on Icesave. The largest battle for assets ever to take place in Iceland (since the 13th century) – ultimately for the power over Arion bank and Islandsbanki – will be, by far, the biggest issue in Iceland. At the core of it are the negotiations on composition for the holding companies of Kaupthing and Glitnir, the owners of the two respective banks. The capital controls are one variable in this equation. In addition, the Office of the Special Prosecutor will continue to churn out charges during 2013.

1) It now seems likely that the EFTA Court will rule on Icesave in or around the third week of January. As Icelog has explained earlier, there really are two questions that the Court is ruling on: Did Iceland breach the Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes – Has Iceland ‘breached the prohibition on discrimination on grounds of nationality under Article 4 EEA?’

Considering the fact that deposit guarantee schemes are a contagious topic in the EU right now, with a pan-European scheme being planned as part of the European Banking Union in the making (but the Directive has been changed since autumn 2008), it seems plausible that the EFTA Court justices will rule on this issue as narrowly as possible, so as not to plant on the EU the definite understanding of this directive. But then, justices don’t always do the plausible. In any case, it is less the Directive and more the discrimination that could rattle Icelandic stoicism.

The EFTA Court is not ruling on the dispute with the UK and the Netherlands regarding the cost these two countries think they have born by paying out the Icesave deposit holders in the two respective countries (UK in full, the Dutch Government up to €100.000). If the ruling – on one or both matters (more serious financial consequences if the discrimination goes against Iceland, see the link above) – shows that Iceland was in breach, the two countries will no doubt come knocking to recover their cost. Then the Icesave dispute might start all over again, another round of negotiations – or, the three countries would agree to hold on to the last agreement.

So much for Icesave – one way or another it might be resolved this year. Otherwise, there is the 6th Icesave Christmas in sight for next year.

2) Although Icesave did take up much space in Iceland in the last few years the agreements regarding the composition of Glitnir and Kaupthing do not only revolve around assets and money but around power in the Icelandic financial sector. There is a huge suspicion against foreign ownership of the banks and this fear is being played on by those who favour a bankruptcy of the two estates and a fire sale of the two banks.

Those who whip up this fear of foreign ownership seem to ignore that nothing will happen regarding the composition except with the blessing of the Icelandic Central Bank. This is not an issue that is about to wreck the Icelandic economy. It is an issue under control, albeit without a solution so far. The CBI will focus on the stability of the Icelandic economy. The solutions sought aim at resolving a few matters at once, together with the composition: the capital controls, the overhand of foreign currency (stemming from the carry trade going on up to the collapse of the banks in October 2008) – and, as the CBI sees it, preferably selling one or both banks to foreigners, in order to have at least one bank sold for foreign currency. In addition, there is the Landsbanki bond – debt rising from the constitution of the new Landsbanki, owed to the Landsbanki estate: it has a 6 year maturity but that now seems an unreasonably short time.

This is, in short, the bundle of problems that needs to be resolved in one go – or at least all these issues need to be solved and settled considering the interaction between them. Not a trivial project – on which there is now an ad hoc working group pondering, with experts from the ECB, IMF and the EU as well as Icelandic civil servants.

3) The original plan of the Office of the Special Prosecutor was that all charges regarding the collapse of the banks should be brought by 2014. Exactly how many the cases will be is not yet clear. The Icelandic Financial Services Authority, FME, has passed on ca 80 cases the OSP, just to given an idea of numbers but the OSP makes an independent assessment of cases.

On December 28 the Icelandic County Court ruled in a case brought against the Glitnir managers, ex-CEO Larus Welding and Gudmundur Hjaltason former head of Glitnir’s corporate finance. The charges related to a complicated loan structure ultimately benefitting Milestone, one of the large Icelandic holding companies, owned by Karl Wernersson and his siblings. The OSP reckoned the loans caused Glitnir a loss of €50m and had asked for a 5 1/2 year and 5 year prison sentence. Instead, the Count Court sentenced both men to nine months in prison, six of which are suspended for two years. Legal bills are divided between the two men and the state. – The State Prosecutor is likely to appeal. The Milestone ruling is the first ruling concerning the big banks and leading bankers.

So far, managers from Kaupthing and Glitnir have been charged by the OSP, as well as major shareholder in the two banks, respectively Olafur Olafsson and Jon Asgeir Johannesson, but no one from Landsbanki has (yet?) been charged.

Updated:

It’s worth adding that the Icelandic economy is growing – not like during the pre-2008 boom years but at around 2%. Here is the latest IMF report on Iceland, with an overview of the Icelandic economy.

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