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End of central bank independence in Iceland – the pessimistic view

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The leaders of the Icelandic coalition government are struggling to appoint a governor of the Central Bank of Iceland. It now seems that the most likely outcome is that more than one will be appointed, whether it will right away or later. This spells the end of an independent central bank in Iceland. The stumbling process prompts the question how likely it is that a government that cannot agree on appointing a governor of the Central Bank will be able to chew through all the very difficult decisions needed in order to lift the capital controls.

In its last report on Iceland the International Monetary Fund sent some thinly veiled sharp messages to the Icelandic government: one was on the importance of respecting the independence of the Central Bank of Iceland; the other was the importance of an orderly path in resolving the estates of the collapsed banks, i.e. composition and not bankruptcy (more on this in an earlier blog).

It now seems that the government is just about to ignore the first advice, on the all important independence of the CBI. After mulling over the three most suitable candidates a “bizarre” selection committee put forward it now seems that the government cannot choose one candidate. Instead, it seems to be planning to change the management structure of the bank – and put more than one governor at the helm (more on the selection and its implications here).

Bjarni Benediktsson minister of finance said in a Rúv interview last night that considering the increased work load at the bank it made sense to appoint more than one governor (as if this need has suddenly become desperately clear).

The truth is that the government has been mulling over these changes more or less during the year since it came to power but apparently never could make up its mind as to what to do. This surfaced i.a. when the governorship of the present governor was not prolonged literally hours before it would have been renewed automatically.

At the beginning of May Benediktsson appointed a committee to review laws regarding the CBI. The committee was to come up with proposals before the end of this year. Those on the committee are Friðrik Már Baldursson, one of the applicants for the post of governor, Ólöf Nordal who was on the selection committee and is an ex-MP and ex-vice chairman of the Independence party. The third committee member is professor Þráinn Eggertsson at the University of Iceland.

Now there is suddenly no time to wait for the proposals of this committee as to the future of the CBI. Instead, it has all to be decided on the hoof and in a hurry before a new governor or governors will be appointed. New governor(s) has/have to be appointed before the end of August when the time in office of the present governor, Már Guðmundsson, expires.

From the three candidates seen as equally merited by the “bizarre” selection committee – Már Guðmundsson and two professors, Ragnar Árnason and Friðrik Már Baldursson – Guðmundsson is undisputedly the best qualified. For political reasons, the government is unable to rest with Guðmundsson continuing. This seems to be accelerating the process of management changes at the CBI where one or two of the professors would be hired as well.

Benediktsson seems to be indicating that more than one could be appointed. How that is possible – i.e. to make changes and then just appoint from the present pool of applicants – seems questionable but well, remains to be seen.

Seen from the outside, imaging this whole process happening in another Western civilised country, tells a sad saga about the state of affairs in Iceland. Regrettably, the CBI has been kept in a limbo since end of February when it became clear (unexpectedly since it was done last minute) that Guðmundsson’s time in office would not be automatically extended. Bearing in mind that Guðmundsson is eminently respected and has shown himself to be a capable governor and the CBI has been doing important work towards lifting the capital controls all of this is even more regrettable.

In addition, this whole unfortunate saga of the CBI is a sad example of how this government struggles to make up its mind on important issues. The unsettling thought is that since it seems so difficult to choose a governor of the CBI how is this government ever going to agree on i.a. the tough issues that need to be dealt with in lifting the capital controls. Maybe I’m being overly pessimistic here but if things continue in this way the four years of this government in power will come to pass without any of the decisive steps needed. – A case in point is that the time to decide on the Landsbanki bonds agreement has now been extended from August 8 to end of September… because the government had not made up its mind, yet.

With nothing being done regarding the capital controls would mean four more years for Iceland in the wilderness of controls – a truly dispiriting thought. (And I sure hope I’m wrong.)

 

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Written by Sigrún Davídsdóttir

August 13th, 2014 at 9:40 am

Posted in Iceland

Two schools of thought: to bankrupt… or not – and the next governor of the CBI

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The furious battle of interest in Iceland regarding the estates of Glitnir and Kaupthing ultimately centres on the ownership of the new banks, respectively Íslandsbanki and Arion owned by the two estates. There is the IMF – some “foreign abbreviation” as prime minister Sigmundur Davíð Gunnlaugsson once said – together with some civil servants and politicians who want to find a common ground with the creditors and settle on a composition agreement. Then there are those who argue for a tough treatment of the creditors, bankrupting the estates and turning all their króna holding into fx. Choosing the next governor of the Central Bank of Iceland, CBI, will indicate who is in charge and which steps will be chosen regarding the estates and ultimately in lifting the capital controls.

Control-watchers and others who follow things in Iceland are eagerly waiting to see who will be appointed the new governor of the Central Bank of Iceland. The governor will be a key player in lifting the controls and deciding on the fate of the new banks and how the estates will be dealt with. The decision is also a test for minister of finance Bjarni Benediktsson – does the independence of the CBI matter to him or is he at ease with political meddling in the bank, contrary to the advice of the International Monetary Fund, IMF, which in its last report stressed the importance of an independent central bank.

The whole affair of appointing – or not appointing – a new CBI governor has been a bit of a drama. During winter there were continuous speculations regarding possible changes at the CBI. A few times in the course of the winter prime minister Sigmundur Davíð Gunnlaugsson criticised the bank and its staff severely, i.e. for not being in awe of his great project, the “Correction” or the writing-down of mortgages for those who are able to pay and had therefore not benefitted from earlier write-downs.

Until the 11th hour, literally, it seemed that in spite of it all, present governor Már Guðmundsson would stay in place. After all, it seemed unlikely that the government would act only at the latest moment. But that is what it did – hours before the time lapsed: if nothing had been done, Guðmundsson would automatically have been reappointed for another five years.

Then came the next step: appointing a selection committee to evaluate the applicants. Now imagine if the head of Scotland Yard would have been the head of a committee selecting a new governor of the Bank of England – does it sound far-fetched and utterly ridiculous? None the less this is what happened in Iceland: head of the Icelandic police was chosen to head the selection committee with a lawyer who is the Independence party representative on the board of the CBI and earlier an MP for the party together with – finally – a well-merited professor emeritus of economics. Out of three members only one was an economist and the other two had no special insight into central banking, apart from one being on the CBI board.

The curious outcome seems to stem for a general reluctance among some suitable candidates for the selection committee to be on it. The committee’s written decision has not been published but apparently they placed three applicants equal: Guðmundsson and then two professors: professor of the University of Iceland Ragnar Árnason whose speciality is fishing and Friðrik Már Baldursson professor at Reykjavík University who is a well-merited academic who fell out of favour in Iceland after the collapse because a much disputed report on the Icelandic economy he wrote together with professor Richard Portes.

However, to place these three as equal is rather distorting the merits of the three applicants: in terms of experience and career there is no way of placing these three as equal.

The rumour mill milling

Guðmundsson is by far the best candidate but in a country where political and personal interests matter, often obliterating professional merits, strong and clear merits are not always enough. There are now wild speculations in Iceland as to what Benediktsson will do and what the appointment will indicate in terms of domestic politics.

Árnason has been seen as the most likely candidate to be appointed because of his strong ties to the Independence party. He has i.a. been the party’s representative in various ways over the last decades, written reports etc. Also, he is thought to be favoured by the invisible power centre around Morgunblaðið’s editor ex-prime minister Davíð Oddsson. What many worry is that Árnason, having been involved in various disputes at the University, is seen as a difficult person to work with.

One speculation is that because of this Baldursson might be a compromise candidate. If it is true that Oddsson has any say in this he might not be too thrilled at the thought of Baldursson at the CBI. Baldursson was instrumental in bringing the IMF to Iceland during the days of crisis, at which time Oddsson was himself the governor of the CBI, staunchly opposing an IMF involvement. Oddsson lost that battle.

Now, does that leave Guðmundsson as the best candidate from the point of view of not only merits but also interests? Remains to be seen and it would surely be ironic since it is thought that this whole saga of appointing a new governor did indeed start because the prime minister (and probably Oddsson) wanted to get rid of Guðmundsson.

Wheels within wheels

Another twist in the CBI saga is that home office minister Hanna Birna Kristjánsdóttir is fighting for her political life due to a leak from her ministry regarding the case of an asylum seeker. A case that has been brewing for ca. a year and gets ever more convoluted and difficult for the minister. There are voices that she should simply resign, at least not be in office while there is an ongoing investigation, now involving the state prosecutor and the Alþingi Ombudsman.

While Stefán Eiríksson the head of the Iceland police, was the chairman of the CBI selection committee and working on the selection process, he was also applying for a lower-level job with the Reykjavík council as head of its welfare department, which he got just some days ago. According to Icelandic media it now seems he wanted to leave his job because of alleged pressure the minister.

Some weeks ago Morgunblaðið suddenly and apparently out of the blue attacked the Alþingi Ombudsman Tryggvi Gunnarsson for views held in an email. It then turned out this infamous email was by the Ombudsman’s namesake. This was rather incomprehensible at the time but now that the Ombudsman is on Kristjánsdóttir’s case the paper’s attempt to discredit Gunnarsson can be seen to acquire another meaning.

Benediktsson has been unwilling to criticise Kristjánsdóttir but has now given her a half-hearted support in the media. She has been his most dangerous opponent in the party and widely seen as someone who is waiting to challenge him in a leadership contest. With her gone from the political scene there would be no one he needed to fear. And those who want to keep a tight rein on him or oppose him would have no leverage against him.

Side-shows and other shows

The leak saga is very much in the Icelandic media. Another news was thrown out just before the last weekend when travels of Icelanders in Iceland traditionally peak: the minister of foreign affairs Gunnar Bragi Sveinsson (Progressive) has appointed two new ambassadors – ex-prime minister Geir Haarde of the Independence party and Árni Þór Sigurðsson MP for the Left Green (here is Rúvs report on this new appointment with a photo of Haarde, as PM, giving his “god bless Iceland” speech at 4pm on October 6 2008 where he told Icelanders that the banking system was collapsing). Haarde was found guilty by a special court regarding his part in the collapse in 2008 but not sentenced (see here some Icelogs on the Haarde trial and its aftermath).

A clever move because the left/opposition now stays silent and not a word of criticism is heard. A politician has not been appointed an ambassador since 2008 and many had probably thought that this kind of political meddling might be a history of the past. Not quite.

In order to understand the coming appointment of the CBI governor it is necessary to keep all of this in mind because these are political side-shows. Many see the CBI appointment as a test for Benediktsson: whose interests is he serving, does he really decide or does Gunnlaugsson decide on everything he deems of interest to him and his party? The fact that it is taking so long to decide – a decision was expected end of last week – indicates that the appointment is a bone of contention.

This is an important test for Benediktsson. Also because the IMF has strongly warned the government not to the diminish the independence of the CBI, most recently in its last report: “Maintaining a financially sound, independent, and accountable central bank is important for policy credibility and anchoring inflation expectations, which in turn supports stability and growth.” (See my take on the IMF report here).

Why the fuss about the governor? Because he will not only be important in fighting inflation, supporting stability and growth. The governor will be instrumental in deciding on the fate of Glitnir and Kaupthing and now the new banks, Íslandsbanki and Arion will be sold. Will there be a political horse trading in distributing the goods, i.e. the two banks, involving a fight with foreign creditors and disorderly routes – or will there be an orderly lifting of the capital controls, as the IMF is in favour of? The new governor will very much set the tone in all these issues.

*Earlier today, August 6, the Ombudsman sent a letter to Kristjánsdóttir  to enquire further re the leak, i.e. what and how often she talked about the leak to Eiríksson, the police chief. In addition, the Ombudsman sent a letter to the prime minister inquiring if ethical rules for ministers, set by the last government and expiring as it left office, have been replaced by another set of ethical rules. (A link to the two letters, in Icelandic, is here). – Further, to the Morgunblaðið’s failed attack on the Ombudsman see the end of my earlier blog, here.

Update Aug. 7: the minister of finance was expected to announce today or tomorrow who would be appointed as the next governor of the CBI. It now seems likely that no decision is forthcoming until next week. The rumour is that different factions within the government can’t agree. There clearly are strong tensions, indicating that there is much at stake.

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Written by Sigrún Davídsdóttir

August 6th, 2014 at 10:25 am

Posted in Iceland

Reading entrails and how politics can magnify the problems in lifting the capital controls in Iceland

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Understanding constellations in Icelandic politics, not solely the economics, is the key in order to understand what could and might happen in Iceland regarding the capital controls. Although ex-prime minister Davíð Oddsson left office in 2004 he still seems to be the puppet master and king maker in Icelandic politics. Thus, Morgunblaðið, edited by Oddsson can be read like entrails in the olden times. Comparing the recent IMF report and what Morgunblaðið states provides some hints to what might come – and none of it is uplifting in view of general Icelandic interests.

On an Icelandic debate programme earlier this year one of the participants claimed that when it comes to the capital controls Icelanders are fighting to solve a problem of “hundreds of thousands of billions króna.” – None of the other participants corrected this. The Icelandic GDP 2013 was ISK1786bn, €11.5bn, which would make “hundreds of thousands of billions króna” a truly staggering, if not a hopeless problem to solve. Luckily, the problems are not quite that towering though in no way easy to deal with.

For control-watchers, reading Morgunblaðið like entrails, looking for hidden signs, is essential. A point in case is a recent article on Project Irminger.

Davíð Oddsson, its editor, used to run the country and his party, the Independence party in the 1990s, then switched over to run the CBI (needless to say a lawyer ex-prime minister turning governor of a central bank is unthinkable in all Western countries except Iceland) where he oversaw the collapse of the Icelandic economy and the CBI and from where he was ousted by public demonstrations in early 2009. As editor of Morgunblaðið he has overseen a steep fall in subscription but its owners – 50/50 a fishing-industry with Independence party ties and a Skagafjörður co-op traditionally linked to the Progressive party, thus miraculously mirroring the present coalition government – are more than happy to have him in charge, even after a recent gaff of staggering dimensions.*

The Morgunblaðið entrails and other signs could indicate that the lifting of the controls will be used to steer the two new banks – Arion and Íslandsbanki – into Icelandic ownership. And there needs to be something that looks like a victory for the Progressive-lead government. Prime minister Sigmundur Davíð Gunnlaugsson has time and again talked about the “inevitability” of the state profiting from lifting the controls.

While waiting for the next step towards lifting the capital controls appointing a new governor of the CBI will be a significant indication of the direction the government is heading into.

IMF: the orderly and the disorderly legal route

In its latest report on Iceland the IMF is worried about downward-tilted risks, i.a. in lifting or unwinding the capital controls: “A disorderly unwinding of capital controls could weaken the krona, lower reserves, and bring down market confidence and growth.” “An orderly lifting of capital controls, however, would prevent large capital outflows and disruptions to financial markets.” It is thus glaringly obvious what the IMF wants to avoid sternly warning the government of the dangers of actions leading to disruption and disorder. After all, Iceland very much needs continued access to financial markets.

Creditors cannot be paid out until the estates of the old banks are resolved, either by putting them up for bankruptcy or with a composition agreement. Here the IMF is also clear as to what constitutes an orderly route out of capital controls:

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.

And then there is the reputational risk to keep in mind:

“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.” (My take on the IMF report is here.)

Project Irminger

The above-mentioned article in Morgunblaðið stated that the government kept the IMF thoroughly informed on every step. Consequently, the IMF was now aware of the government’s estimate of the problems and the avenues it believes passable. Further, according to the article, the IMF agrees with the government it is important not to exclude any possibilities; this was necessary in order to create incentives for creditors to bring to the table a solution fitting the Icelandic balance of payment.

Although the article was published weeks after the IMF report on Iceland the report does not figure in the Morgunblaðið article. On the contrary, the article creates the feeling that the IMF was equally in favour of the two legal routes and broadly in favour of what the government had in mind.

As can be seen from the quotes from the IMF report the Fund is indeed not mincing its words as to the best and most viable routes. Knowing from Morgunblaðið that the IMF is well informed there can be no misunderstanding when it i.a. clearly warns against the bankruptcy route that both the prime minister and minister of finance mention as an option every time they discuss publicly the capital controls and the estates.

The Morgunblaðið article states that the government is now working on a project called Project Irminger (named after an ocean stream that brings warm water to the South West coast of Iceland). The Irminger project seems to give no scope for negotiations with the creditors in spite of their attempts in that direction, at least since end of 2012 when both Glitnir and Kaupthing presented a draft of a composition agreement to the CBI.

Instead, possibly in September (unlikely soon, to my mind; every step announced by the government tends to take much longer than planned) according to the article, creditors will be presented with an analysis of Iceland’s economy, balance of payment etc after which they can adopt their composition agreement to this analysis. It does not seem there will be any negotiation but some sort of a “take-it-or-leave-it” analysis (more or less as the government has been saying from its birth last year: the creditors should understand and appropriately adapt to the reality, as defined by the government). The government will wait for no longer than three months or so and if nothing is forthcoming from the creditors the bankruptcy route will be taken, the article states.

The article is not clear about in what order things will be done. The CBI and the IMF have stressed the importance of resolving Glitnir and Kaupthing’s ISK assets and the Landsbanki bonds. The pension funds and other Icelandic investors are also seeking to direct investments abroad. The order of “exiting parties,” i.e. those allowed to take/convert ISK into fx is important. Whatever the order, the IMF has clearly indicated that the “exits” can only happen over some years and it favours letting the creditors out first; an advise that is easily turned into something anti-Icelandic in the Icelandic debate (see here on the interests of the pension funds in lifting the controls).

As so often with Morgunblaðið articles on hot political topics the Irminger-article seems to be a carefully crafted leak, published to warn, threat and mis-inform.

Rumours and sentiments as to what is in the making

Key issue in solving the ISK problem of Glitnir and Kaupthing is the sales of Íslandsbanki and Arion (more here). Some control-watchers claim that the government plans to instigate a disorderly and messy winding-up process for Glitnir and Kaupthing to ensure a fire sale of two new banks enabling a sale to investors close to the government (two banks, one for each party).

As to possible actions the ideas flying around are i.a. legal measures to isolate the estates from the economy so pension funds and other Icelandic entities can convert ISK to fx, i.a. for investing abroad, i.e. would exit from the controls before the estates. Again, such measures would not be a solution, only another hammock.

There are also tentative ideas that Eignasafn Seðlabanka Íslands, ESÍ (the CBI holding company) and some pension funds could form a joint venture to buy out the new banks. The fear is that none of this is thought through or creditors’ reactions taken into account; in short that these and other rumoured measure will not at all be the orderly route the IMF recommends.

The feeling all along has been that the aim of the government has been to get hold of the banks – to secure Icelandic ownership in Icelandic interest or in Icelandic special interests, depending whom to believe. Iceland is apparently the only country in Western Europe where no foreign banks operate and where domestic investors own all banks (apart from the accidental ownership of Arion and Íslandsbanki and foreign investors in MP Bank).

It is difficult to argue why it would be the end of Icelandic businesses if Glitnir and Kaupthing were sold to foreign investors, paying in fx – thus solving the estates’ ISK problems. Foreign ownership might possibly end banking the Icelandic way that played a big role in bringing down the Icelandic financial system but those who profited from that system might certainly want to reinstate it.

Glitnir and Kaupthing – but what about selling new Landsbankinn? Incidentally, that bank is owned by the Icelandic state but the bank cannot be sold until the problems of the Landsbanki bonds is solved. There is now an agreement in place and although it seems to be close to what the CBI had advised (and after all, it can hardly have been done against the wishes of the bank’s owner, the state) the government seems unwilling to take the steps needed to ensure the agreement. Intriguingly, new bank is at the mercy of its bondholder, the Landsbanki estate where the creditors from the two other estates wield power.

The frustrating thing is that possible solutions, in the general interest of Iceland and not narrow interests, are not that difficult to map out – complicated but not complex. There are even some Icelandic civil servants who would like to negotiate with the creditors, believing that beneficial solutions could be found relatively easily and fast: it is after all in the interests of not only creditors but also Icelanders to lift the controls though Icelandic politicians tend to speak as if Iceland can wait but the creditors are in a hurry.

Interestingly, civil servants have mostly been kept away from the plans of the present government, which instead makes use of a few trusted lieutenants. The government keeps appointing Icelandic “individual experts/advisers” as it calls them in press releases though then calling them a “group” when their role is discussed. It is not clear why this systematic mis-presentation of their roles but one reason might be that formal working groups are expected to be made up of men and women whereas the two capital controls “groups” have been all-male.

The importance of a(n independent) central bank

Lastly there is the importance of CBI in what ever will happen in Iceland, soonest regarding the Landsbanki bonds agreement.

In general, IMF is adamant about the importance of independent central banks. For good reasons, the IMF has been worried about the CBI and states in its last report on Iceland: “Maintaining a financially sound, independent, and accountable central bank is important for policy credibility and anchoring inflation expectations, which in turn supports stability and growth.”

It is most likely only a matter of days until the name of the next governor will be announced. As I have written earlier the feeling is that professor Ragnar Árnason is the government’s favourite for the position though the third leading candidate, professor Friðrik Már Baldursson might be a possible compromise. It would be a stretch to see CBI’s independence strengthened with Árnason who most recently has i.a. been the government’s representative on the CBI board and the chairman of an advisory council for the minister of finance, in addition to earlier services to the Independence party for more than a decade.

In addition to the present governor Már Guðmundsson the selection committee , which was called “bizarre” in a recent article in Central Banking, deems that both Árnason and professor Friðrik Már Baldursson are equally fit to serve as a governor. To put the three side by side as equally fit is quite remarkable, to say the very least, considering Guðmundsson’s experience and standing.

The governor of the CBI will be a key person when it comes to lifting the capital controls – and in the asset sale of the century, the sales of Arion and Íslandsbanki. Hardly anything re the capital controls and the estates can be decided on without assistance of the CBI, most notably the governor of the CBI.

If Már Guðmundsson will not be reappointed as a governor it sets in jeopardy any orderly route towards lifting the capital controls. Ousting Guðmundsson might well indicate that there are interesting times ahead in Iceland but not necessarily the best of times for financial stability and the interests of Iceland as a whole.

*The Oddsson/Morgunblaðið gaff: recently, Morgunblaðið published, in quotation marks, what it claimed was part of an email written by the Althingi Ombudsman Tryggvi Gunnarsson who was on the Special Investigative Commission. The email was published July 12 in a weekly column, called “Letter from Reykjavík,” traditionally unsigned but known to be written by the editor, now Davíð Oddsson. Morgunblaðið claimed Gunnarsson had sent the mail to many news outlets in January late at night, a claim Icelanders take as a hint that the email-writer was drunk. In the email Gunnarsson sided with the Brits (highly dubious in the view of Morgunblaðið) in using the so-called terrorism legislation to freeze Icelandic assets in the UK. Further, Gunnarsson spoke badly of the president of Iceland, who Morgunblaðið holds in high esteem after he hindered an agreement in the Icesave dispute. On the day Morgunblaðið published the Tryggvason email the paper published a correction on its website, stating that the email was a forgery only to admit later in the day, with apologies to the Ombudsman, that the letter was indeed written by a certain Tryggvi Gunnarsson, namesake of the Ombudsman and not the Ombudsman. The namesake is apparently known among Icelandic media people as a prolific email writer whose opinions are never reported; his email is a Hotmail address. There was absolutely nothing in the email to indicate that the Ombudsman had written it. The second, and no less interesting part of the “Tryggvason email” story is that the editor’s atrocious mistake has had no consequence for the editor who continues in his job, unchallenged as before. The gaff was like a stone thrown into a lake producing no rings on the surface; an airy phenomenon. – Journalist Egill Helgason notes on his blog that Oddsson is driven by such hatred that in attacking his enemies scrutiny of sources is easily forgotten. – The last thing to draw attention to Oddsson’s view of the world is that Morgunblaðið’s Letter from Reykjavík July 26 talks about “Barack Hussein Obama II,” characterizing him as “indeed a mulatto,” a word that is generally no longer used in Icelandic and has the same connotations as in English.

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Written by Sigrún Davídsdóttir

July 28th, 2014 at 5:16 pm

Posted in Iceland

The IMF stresses the “orderly” and “cooperative” approach to lifting capital controls

with 3 comments

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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Written by Sigrún Davídsdóttir

July 10th, 2014 at 11:14 pm

Posted in Iceland

Iceland and the capital controls: to-ing, fro-ing and tortuous steps

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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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Written by Sigrún Davídsdóttir

July 9th, 2014 at 12:09 am

Posted in Iceland

Kaupthing challenges the prime minister

with 9 comments

Prime minister Sigmundur Davíð Gunnlaugsson has time and again said that the Winding up committees of Glitnir and Kaupthing have not yet presented any composition proposals to Icelandic authorities. Both estates have indeed done so long time ago, actually in 2012. Glitnir has earlier contested the prime minister’s words in the Icelandic media.

In a tv interview with Stöð 2 yesterday Gunnlaugsson yet again reiterated his earlier and by now oft repeated statements. Following the interview the Kaupthing Winding up committee sent out the following announcement:

In light of comments made by the Icelandic Prime Minister, in a news interview with Stöd 2, an Icelandic television station, released yesterday, where it was stated that Kaupthing’s composition proposal had not been presented to the Icelandic Authorities, Kaupthing wishes to reiterate the following:

On 24 October 2012, Kaupthing’s Winding-up Committee applied to the Central Bank of Iceland for an exemption from Iceland’s capital controls on the basis of provisions of the Icelandic Foreign Exchange Act. The application included a draft composition proposal. The purpose of the exemption application is to create the necessary basis for submitting a composition proposal to creditors and thereby concluding Kaupthing’s winding-up proceedings.

The exemption application is still under consideration at the Central Bank of Iceland.

It is not clear why the prime minister keeps on repeating something that is so obviously not correct. Glitnir has challenged him more than once on this. Now Kaupthing has done the same. It remains to be seen if the prime minister will stick to his version.

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Written by Sigrún Davídsdóttir

May 20th, 2014 at 8:22 am

Posted in Iceland

Lifting capital controls: half-solutions will be worse than none

with 3 comments

In recent weeks Icelandic business leaders have voiced concern on the isolation of Icelandic businesses behind capital controls and by breaking off EU access negotiation. In order to lift the controls – or rather, start the process towards that goal – it is necessary to negotiate the payment schedule of the Landsbanki bond and the ISK assets of Glitnir and Kaupthing. Possible solutions are in sight but it is ultimately a political question and not about economics. So far, it is unclear if the government is seeking to lift the controls or if it also seeking to fatten the state coffers. Another – and in the long run possibly a more serious problem – is a short-term plan with no perspective on the future. As the CBI points out in its latest Financial Stability Report the solution has to be holistic, safeguard financial stability and pave the way for Icelandic public and private entities to international credit markets.

The word among those involved in the winding-up of the estates of Glitnir and Kaupthing is that these are by no means difficult cases but the weirdest process they have been involved in. The “weirdness” stems from the fact that although the minister of finance has the last word on the winding-up of the two estates, there is no one to negotiate with. One of those involved complained that they keep coming to Iceland, for meetings and presentation, but there is no one with a mandate to make any decisions.

The process has been rambling, with a committee that then was not really a committee and had no chairman. The prevailing assumption in Iceland seems to be that Iceland has all the good cards on its hand and can afford to wait as long as it pleases, “to make the creditors sweat” as some have been whispering. But that may be a slight misconception.

What should focus the mind of the government is first of all the growing and vocal irritation within the Icelandic business community on lack of credible plan to lift the controls. Also, 2016 is a crunch year when the new Landsbanki cannot pay (not for lack of liquidity but of foreign currency). Uncertainty on repayment is particularly unfortunate since the new bank is owned by the state. The third issue are legal risks. The fourth issue, somewhat hypothetical in terms of time but absolutely real in terms of effect, is the relative cohesion of the creditors, contrary to what it could later.

The process

The process of abolishing the capital controls has been rambling. Under the previous government the Central Bank was working on the payment-of-balance analysis and prognosis and published a report, only in Icelandic,* in March last year as well as reports on abolition plans. In early 2013 an ad hoc working group with members from the Icelandic government, EU Commission, the European Central Bank and the IMF was set up to work on an interim report. However, when the present government announced it was putting EU accession talks on hold the EU Commission notified the government it would withdraw from the group, which then met its demise.

During the election campaign last year the Progressive party announced time and again that “unavoidably” the state would make money on the winding up the banks’ estate and these funds should be used for debt relief. When announced in November it came as a surprise that the debt relief was to be funded with a banking tax, also on the estates, not from money from the winding-up process. Much less has been heard of this fountain of funds, the winding up process, lately.

The new government announced it would appoint a “capital controls abolition director,” due to be appointed soon after the government took over. However, this position was never filled. End of November the government set up an “advisory group” with the task of making proposals on steps and overall plan of abolishing the capital controls. It was unclear if this was a committee or not (said by adversaries not to be a committee because a committee would be bound by law on gender equality) and it was too informal to have a chairman.

However, in a recent report on the abolition progress (after an Althing resolution last year a report on the abolition progress is published twice a year) Sigurbjörn Þorkelsson, a banker in London, is said to be its chairman. Other members were Eiríkur Svavarsson, Jón Helgi Egilsson, Jón Birgir Jónsson, Ragnar Árnason and Reimar Pétursson. Benedikt Árnason and Benedikt Gíslason, both from the Ministry of finance, assisted the group.

Its proposals have not been made public and the group seems to have come up with a smorgasbord of proposals but no overall plan, as far as is known. Also, there are rumours of differing opinions within the group. Recently, Benedikt Gíslason gave a presentation at Independence party’s head quarters but the scanty reporting did not indicate any firm view on the process and the immediate future. According to the rumour mill the members have been giving power-point presentation at various meetings; always the same slides but the interpretation varies according to who presents the slides.

This group has now been disbanded. It now seems it will be substituted with a new group. Also, it is rumours that international advisers of all types have been visiting the ministry of finance strutting their feathers. So far no names have been confirmed nor is it clear what the mandate will be.

The numbers

The capital controls stem from the fact that Iceland does not generate enough foreign currency, fx, to meet demand on converting ISK into fx. There are three main hurdles: pre-2008 foreign-owned ISK, mostly so-called “glacier bonds,” ISK327bn, €2.1bn – ISK assets in the estates of LBI (the Landsbanki estate), Glitnir and Kaupthing – and liabilities by Icelandic entities, such as Landsvirkjun and the state itself, in fx, directly and indirectly state-guaranteed. In a way, it makes sense to group the Landsbanki bond in this last group since new Landsbanki, shouldering these liabilities, is state-owned.

The combined assets of the three estates amount to ISK2,552bn, or 143% of Icelandic GDP. The ISK assets of the estates in Glitnir are ISK302, €1.94bn, in Kaupthing ISK148bn, €950m and in LBI ISK47bn, €300m, in total ISK497, €3.19bn. The largest part of the Glitnir and Kaupthing ISK assets are the new banks, respectively Íslandsbanki, valued at ISK132bn, €850m and Arion at ISK116bn, €750m (on latest numbers and stats see the CBI latest Financial Stability Report)

Contrary to the creditors of the three estates the foreign-owned ISK, the glacier bond-holders, are not an organised group. Some have estimated that a third, perhaps as much as half of them are indeed Icelanders. Whether this group will leave rapidly or not is difficult to say but there are indications that at least part of this money is happy to stay in the high-interest Icelandic economy.

The liabilities of indirectly/directly state-guaranteed liabilities are manageable, according to the CBI, for next year, partly because fx has been put aside against rainy days. The problem becomes insurmountable in 2016-2018 unless the new Landsbanki refinances/extends, in total ISK177bn, €1.14bn for these three years.

Composition or bankruptcy?

The major question, facing the government is whether to find a solution for winding up of the estates of Glitnir and Kaupthing, i.e. composition as creditors want – or opt for filing a petition for bankruptcy straight away. Bankruptcy gives less leeway to manage assets whereas composition gives creditors much better control over the assets, which might in the long run improve their recovery. Needless to say, the creditors favour composition.

For some reason, those who speak for the bankruptcy route, have added to it the so-called “ISK-isation” of all the assets, meaning that the fx assets, mostly held abroad, must be converted into ISK, paid out and then those foreigners with bucket-loads of króna would have to negotiate an exit, participate in auctions etc. I fail to see how this route could solve anything at all or be in the interest of Icelanders. To my mind, it is chaos and risk and no solution at all. In addition to lawsuits and other legal devilry it makes the process unpredictable, possibly prolonging unnecessarily the capital controls.

Both prime minister Sigmundur Davíð Gunnlaugsson and minister of finance Bjarni Benediktsson have repeatedly hinted at this possibility. Benediktsson has argued that the winding-up process is taking unduly long though not mentioning that both Glitnir and Kaupthing put forth a draft for a composition bill in late 2012. So far, Kaupthing has received no answer. Glitnir has been answered after which they put forth another draft, as yet without an answer.

The ministers have no doubt mentioned bankruptcy to scare the creditors who perceive they will lose a lot through bankruptcy with assets unavoidably going on fire sale with the usual consequences. However, that is only money, so to speak and losses for some financial institutions. The losses for Iceland is, from my point of view, much more serious: longer time under capital controls with ensuing direct and indirect cost, uncertainty and what could be seen from abroad as increased political risk, rising from instigating a process fraught with unforeseen consequences.

The legal risks

Most of the debate in Iceland regarding the capital controls and the two estates has focused on the evident balance-of-payment problem and the need to find a solution that does not put the country’s financial stability in jeopardy. The legal risks are hardly ever mentioned.

Some of those I have spoken to, advocating the bankruptcy route, claim there is no inherent legal risk in it. As a proof they refer to an ECJ ruling regarding a case against LBI in France in which Icelandic bankruptcy laws and the procedures was found to comply with EU regulations. However, this case only shows that so far Icelandic laws are in compliance. With a different route or deviation from this course the situation might be different.

So far, none of the fx assets have been paid out to creditors – it can only happen after priority claims have been paid out, as in Glitnir and Kaupthing (LBI will only finish that earliest in 2018) and either bankruptcy or composition chosen. Paying the fx would not harm Icelandic financial stability. One reason for postponing decision is rumoured to be that preventing the fx payout makes the creditors more amenable to leaving a large chunk of ISK assets to the government. From the legal point of view this might be questionable, to say the very least. By preventing payment the state can easily risk legal action.

Frustrated creditors could use Icelandic law to seek their rights. The notorious cases of creditors vs Argentina demonstrate the ample recourse creditors have internationally to seek justice. In addition to direct legal risks there is the risk that legal wrangling tends to take a long time, possibly adding years to capital controls in Iceland – again, a costly delay for Iceland.

Legal risks are well known from similar cases in other countries and it is a well-trodden path for creditors. If the creditors feel forced to take that route the consequences might be unpleasant for Icelanders and come as a surprise. However, in an international perspective there will most likely be few novelties.

The political risk

One risk assessment regarding countries is political risk. If the government keeps dithering, postponing a solution, the political risk increases. The priority claim-holders to LBI, the British and the Dutch government, no doubt have an eye on the political risk in weighing up possible actions.

For some reason media reports in Iceland on the Landsbanki bond ignore the fact that behind Landsbanki is its owner, the state. One source said to me that the state would not do whatever it takes to save the new bank. – Needless to say, letting Landsbanki fail would create quite some turmoil, to say the very least.

The Progressive party, the winner of the last elections, is now much weakened. Both the party and its leader muster little popularity and trust according to polls. A weakened party will either try to be more reasonable and responsible, in order to get re-elected. Or it can go all-out on demagogy and populism, knowing it will only get one term in power anyway so there is nothing to lose. It is still too early to tell what route the progressives will choose. So far, the prime minister has been very absent in the Althing debate, causing much speculation as to what makes him stay away.

Partly due to the prime minister’s absence Bjarni Benediktsson leader of the Independence party has at times appeared as both the minister of finance, as he is, and an acting prime minister. Within his party there is brewing discontent that the party has gone out on a limb to make the Progressives’ promises of debt relief come true. The two Althing bills needed to carry out the debt relief plan have not yet been through Althing and it is still unclear when it will happen. Icelanders have been promised that they can apply for the relief from mid-May.

The EU issue – to break off negotiation, as the Progressives insist on – has turned into a poisonous topic for the Independence party. Its leaders point at polls showing that its voters are in favour but the fact is that many of the more EU-friendly voters have already left the party. The party has now a much smaller following than ever in the past when it hovered around 40% while now hovering around and well under 30%. A new conservative EU-friendly party is still in the making but not yet born.

The feeling is that the cause of inaction regarding the estates of Glitnir and Kaupthing is due to differing views within the government. As long as the course is unclear political tension and the ensuing risk of inaction is in sight.

Ultimately, as pointed out on Icelog earlier, the controls will be decided in a political wrangling. Understanding that politics is a key issue here.

Possible solutions

The worst problem for Iceland is the Landsbanki bond since the liabilities are on Iceland, indirectly a sovereign problem since the new Landsbanki is state-owned. Theoretically, the solution is simple: extending the payment schedule, with adjusted interest rates. Although simple in theory, it is clearly not that simple in reality. Here, contrary to what seems to be generally understood in Iceland, the creditors have the upper hand. Nothing is really clear until the solution here is clear.

In addition, it is clear to everyone, including the creditors, that Iceland does not create enough fx to pay out, in the near future, ISK assets held by foreigners. With focus on the estates of Glitnir and Kaupthing the question is what to do about it.

There are of course the usual. One is extending payment etc but that is not very satisfactory for various reasons, i.a. risk rising from unforeseen circumstances etc. Haircut is another way. The CBI has been in favour of 75%; Arion bank analysts recently mentioned 55% as the necessary number.

However, the CBI has lately been advocating solving the problem within the framework of the estates, i.a. using domestic held fx, asset swaps etc. – 5.7% of the claims are owned by Icelanders, in total just over ISK100bn, mostly held by the Eignasafn Seðlabankans (the CBI asset-holding company).

The creditors have pointed out that selling the two banks, Arion and Íslandsbanki, to foreigners/for fx might be the solution. As pointed out in the 2014 report on capital controls: “Sale of the holdings for foreign currency to non- residents who intend to hold these assets for a longer term would avoid such negative effects, although there might be pressure over a longer period when the banks paid dividends to their foreign owners.” – However, also regarding dividend there are possible solutions.

As it is, everyone is losing out on inaction. Creditors lose around ISK100bn, €640m, a year because of lost interest. Icelandic businesses and ultimately the country are losing, as always happens when capital controls stay longer than necessary Icelandic businesses and ultimately the country are losing both money and opportunities.

Analysts at Arion Bank have done some calculations, pointing out that the only real problem is the Landsbanki bond. Here is their interesting overview.

The risky silence on long-term perspectives

The latest CBI financial stability report states: “The next stages of the winding-up proceed- ings must safeguards financial stability and ensures access of domestic entities to foreign credit markets. Finding a comprehensive solution to the estates’ affairs is a prerequisite for lifting of the capital controls.”

In addition to a missing comprehensive view and a holistic solution is missing a vision of the future after lifting the controls is nowhere in sight. How will Iceland cope on its own after the controls have been lifted? Can Iceland survive with no controls, will controls on inflows or outflows be needed, should the króna be pegged or not, another currency found? And is the EEA agreement enough for Iceland in the long run?

In September 2012, the CBI produced an extensive and informative report, Iceland’s currency and exchange rate policy options (only small part of it in English), inducing realism in an often lofty so as not to say wholly misleading debate, on the currency options. Instead of instigating a debate it more or less ended all debate without any ensuing policy.

As far as is known the government is not working on any comprehensive analysis of future options. Some say that politician are avoiding to discuss these wider issues and the government, or rather the Progressives, is hell-bent only on finding some clever way of fleecing foreigners. Yet, if there is only that policy once they are fleeced, what next?

The solution to lifting the capital controls needs to be coherent and comprehensive – but to back it up there also needs to be a clear plan for the future after the capital controls. That is what politics should be about. The EU debate shows that there is an ongoing battle for the soul of Iceland going on – whether to dare to engage with the outer world or to withdraw and isolate, letting the forces that have ruled Iceland for the last decades rule on.

*Sorry, this is of course wrong. Here is the report in English.

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Written by Sigrún Davídsdóttir

May 4th, 2014 at 9:34 am

Posted in Iceland

A week is a long time in (Icelandic) politics

with 10 comments

Last week started with a TV interview where prime minister Sigmundur Davíð Gunnlaugsson spent the best of half an hour arguing with the journalist, much to the dismay of many TV watchers. Then there was a report on Iceland and the EU, which led to the government deciding to break off EU membership negotiations, in spite of earlier promises to vote on continued negotiations; a decision ex prime minister Þorsteinn Pálsson called the greatest political betrayal in Icelandic history. And lastly, it was also last week that the government, at the 12th hour, announced it was going to take time to set up a committee to ponder on changes, or not, at the Central Bank. This which means that the CBI will clearly not be taking any major decisions until new governor(s) are in place, which again must set some creditors thinking – and perhaps also some Icelanders.

For two days protesters have gathered outside the Icelandic Alþingi, parliament. It is not an angry mob, more like a crowd during an interval at a theatre waiting patiently for the second half. What started out as an awkward election promise is now a millstone around the neck of prime minister Sigmundur Davíð Gunnlaugsson but more seriously minister of finance and leader of Independence Bjarni Benediktsson. At the time, Benediktsson himself now against Icelandic membership of the European Union (but pro EU some years ago) but trying to avoid alienating pro-EU voters, eased out of anything final on the matter by promising a referendum on continuing the negotiations or not.

A history of broken promises

Both parties promised in no uncertain terms that they would not break off negotiations without a referendum but instead hold a referendum on whether to continue the membership negotiations. What the two parties had not foreseen was that there would be a clear majority for continuing.

Many voters now seem to feel that this promise has been broken in spite of the coalition parties offering various different version of actually-not-broken-promise. The government had said it would make up its mind on EU after a report it had promised already last autumn. Now that the report is out, a balanced overview of the negotiations and options, the government intends to skip earlier promise and instead break off the negotiations without any further ado. It even seemed to want to rush the matter through parliament last week, holding a parliamentary debate only a day after the 1000 pages report had been published thus giving MPs no time to study the report but it was forced to change its tempo and give more time.

This awkward promise of a referendum on continued negotiations now haunts the government. Benediktsson tries to spin it as being impossible to continue though he struggles to explain what should have changed since the promise was given. He did however say in a TV debate last night that he could “not completely” keep his promise.

This issue is particularly difficult for Benediktsson, less for Gunnlaugsson whose party is firmly against EU membership. Although opinion polls indicate that majority of Independence party voters are against EU membership the business elite, except for those with interests in the fishing industry, is for membership. This is turning into a major problem for the government. One Independence party member, Vilhjálmur Bjarnason, has said he will reflect the opinion of many party members and vote against breaking off the negotiation. The government’s majority is however still secure.

One who voices dismay in no uncertain terms is Benediktsson’s fellow party member ex prime minister Þorsteinn Pálsson who calls the change of course “the greatest political betrayal ever” in Icelandic politics. Pálsson is a respected commentator and many well-known Independence party members from the business community who side with him.

In addition, Iceland also now has its very own version of Sarah Palin. Last week, Progressive MP and chairman of the budgetary committee Vigdís Hauksdóttir stated during a radio debate: “There is famine in Europe now” and later said that Malta is “a self-governing zone within a larger country. It is not a country.” Before these remarkable statements her most memorable statement had been (during a TV interview on earlier promised action on the health service “at once” her party were in power) that the phrase “at once” was an “elastic concept” – a novel and highly creative interpretation that has now turned into a saying in Iceland.

CBI in limbo

By stepping in to make changes at the CBI the government has effectively kicked the CBI off the field of any major decisions regarding the estates of the collapsed banks and ultimately of the capital controls for some time, probably most of this year. This is seen a cause for worry in the business community tired of non-action on the capital controls. The bigger companies, often with foreign operations that ease the pain of the controls, find their way within the controls but smaller and medium sized companies are complaining loudly.

The first step towards changes is to set up a working group (no names yet) apparently to come up with suggestions as to what the changes should be. As pointed out earlier, it seems that the government was going to set all of this in motion at a later date but then realised, at the last moment, that by waiting it might have to pay the present governor Már Guðmundsson salary of the rest of his 5 year term, which would have been renewed automatically February 20 unless he had been notified. Which he then duly was, on that day. *

The situation now is of completely opacity as to the procedure. Also there is a complete lack of policy as to where the government is heading with the CBI. It is unclear who will come up with proposals, unclear what the government policy is (some indication that the FME, financial supervisory authority, might be put under the CBI as it was until 1998) and it is also unclear as to what the criteria will be for hiring a new governor and if there will be more than one governor. And obviously it is completely unclear as to how long all this will take and when new governor(s) might be in place.

Will the past replace the future?

Generally, countries where the government meddles in matters of the central bank do not fare well. Right now, it is not only the Icelandic government that is creating such headlines but also the governments in Hungary and Nigeria. Not exactly countries that Iceland has been comparing itself to over the years.

One of the more interesting remarks made by the prime minister in the TV interview a week ago was when he stated on CBI independence that “it would be good to have an independent central bank if we had a different government.”

The fact that the CBI had criticised the “correction” – debt write-down for borrowers who could afford their loans and consequently had not profited from earlier write-downs by the previous government – was obviously a matter of great irritation to the prime minister.

This ill-prepared intervention against the CBI has instigated a feeling in Iceland that the country is about to be steered back to the past where all public institutions and state-owned companies were carved up between the political powers. People were chosen to leading offices of power not according to merits but according to party affiliation. It came as a great surprise when Benediktsson recently appointed a young ex banker, Halla Sigrún Hjartardóttir. She has no previous experience of bank supervision but is an investor with rumoured connections to wheeling and dealing connected to the oil company Skeljungur. Not exactly a career similar to her opposite numbers in the neighbouring countries. The question is if this was only the first of similar nominations.

The question is if old politicians will now be put into power as once was the rule rather than the exception. Might ex prime minister Davíð Oddsson become the chairman of the board of Landsvirkjun? And will his successor as party leader and later prime minister Geir Haarde. So far, the rumours are utter speculations but they indicate a state of mind prepared to see the past turn into the future.

The past practices of the old banks live on (in hidden assets)

It remains to be seen if the strong feeling of the political past being projected into the future materialises. What clearly lives on from pre-collapse Iceland is the effect of the old banks’ operations, both its earlier practices and that most of the big borrowers still have access to considerable assets.

Post-crisis bankrupt companies with humongous debt and hardly any assets (left) shows how assets did migrate out of these companies to somewhere mostly out of sight and reach of administrators. Most of the well-known holding companies, supporting the ownership of the major shareholders of the banks have followed this pattern, i.a. Novator, Baugur, Exista, Fons etc. This alleged migration of wealth out of sight was facilitated by the banks’ lenient lending practices: the banks took all the risk, the favoured borrowers got covenant-light loans.

The clearest shift of risk took place during the winter of 2007 and 2008 when foreign banks, reacting to falling share price in the Icelandic banks, initiated margin calls affecting almost all of the big Icelandic bank shareholders who had placed their Icelandic bank shares as collaterals with foreign banks. The Icelandic banks, rather than seeing their shares flood the market evidently precipitating further falls in share price if not a total meltdown, stepped in and increased their lending to these shareholders. By Easter 2008, this shifting of risk and rapidly increased exposures was over and done with.

In only a few months these moves, well documented in the SIC report, hugely increased the Icelandic banks’ already considerable exposures to their largest shareholders and their business partners, in some cases going over legal limits (though in some cases the banks’ lending hovered under the legal limits by abstruse definition of “related parties”: i.a. Glitnir did not consider Jón Ásgeir Jóhannesson and his wife as related parties nor did Landsbanki classify Björgólfur Guðmundsson and his son Björgólfur Thor Björgólfsson as related parties).

Coming soon: transfer of wealth of historic magnitude

What is at stake in the coming months and years? The banks have amassed a great amount of assets that will be sold. Already, there is anecdotal evidence that the practice from the old banks, of issuing loans to favoured clients against shares with non-too punishing haircut, is abounding. After all, the banks do want to lend money and inside capital controls bad practices can fester.

The most prized assets, already for sale, are the two new banks, Íslandsbanki and Arion, owned by foreign creditors. Most likely these assets are highly coveted by certain forces in Iceland where banks have always bastions of political power and centres of handing out assets to favoured clients.

How the foreign-owned ISK assets of the estates – not only if Glitnir and Kaupthing but also of Straumur and Icebank – will be dealt with decides to a certain degree the price tag on Íslandsbanki and Arion. Any government action, affecting the price, such as converting all foreign assets into ISK/paying foreign cash out in ISK will be of huge interest to Icelanders with money and ambition to buy into Íslandsbanki and Arion.

It is no understatement that the sale of Arion and Íslandsbanki will greatly affect the business climate in Iceland in the coming years and possibly decades. If these assets could be sold on the cheap, aided by pension funds willing to act as silent owners by the side of active investors, the past might indeed be the future, not only in politics but also in the business community.

And now, over to creditors and mobile and educated Icelanders

By the end of 2012 both Glitnir and Kaupthing had presented the CBI with drafts of composition. The matter is still unsolved. Most of last year was lost to election and then a run-in time for the new government. That year went by without any bringing any clarity as to the abolition of the capital controls and the steps needed to solve the problem of the foreign-owned ISK assets.

Now the CBI is in limbo. What will creditors do when faced with an uncertain future of the CBI and an uncertain effect on how to resolve the problem of the ISK assets in Iceland? The creditors have various possibilities. Do they deem the government to be hindering access to the estates’ fx assets? If so, they could try to sue the Icelandic state abroad, i.a. in London. Argentina is the scare example of a country that for years has been kept under pressure from creditors. Not necessarily the Icelandic saga any time soon.

Some drama might come later. Then, on the other hand there will not necessarily be any big drama: some of the creditors might just silently choose to sell their claims. In troubled times the buyers are investors looking to recover their claims by litigating every penny, or in this case, every króna.

Ireland is now back in the market though the country is by no means on a safe ground yet. When will Iceland be in the market to refinance its debt? Judging from the government’s tendency to prolong problems instead of solving them it might take a while. Even a long while.

For Icelanders locked inside capital controls there is yet another “if”: if Iceland will be further isolated from other countries the effect of the growing income difference of the mobile and well educated classes compared to the neighbouring countries might take its toll. As counts for much in Iceland the changes are very gradual. Lost opportunities or loss of work force who does not return to Iceland after studies abroad is difficult to calculate.

* In his letter to CBI employees, Guðmundsson noted that he should have been alerted before midnight February 19. However, he was apparently not notified until evening of February 20. It remains to be seen if this will pose a problem for the government: if Guðmundsson will/cannot reapply, i.e. he could possibly claim that he should be paid for the rest of his term. Judging from his previous dealings regarding his salary, where Guðmundsson maintained earlier promises had been broken – he lost a court case on this issue – Guðmundsson will no doubt explore his position were he to lose his job.

See below for recent three blogs on power and politics in Iceland. The latest blog on capital controls is here

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Written by Sigrún Davídsdóttir

February 26th, 2014 at 6:19 am

Posted in Iceland

Iceland and capital controls: check the politics not just the economics

with 4 comments

Those who understood the Eurozone correctly were those who understood that politics mattered more than economics. It might very well be the same in Iceland: in order to understand the course of events regarding capital controls, foreign-owned ISK assets and the estates of the failed banks, politics might weigh more than the economics. And as in Europe the political weight might bode messy course.

To continue with the Eurozone analogy: the (at first hidden, later more overt) agenda of all action taken by the EU was to prevent any bank in the Eurozone failing. It was deemed to be bad for the reputation of the young currency area and in the Realpolitik it counted that the strong German and French governments were adamant in sheltering their own banks from unwise lending to the debt-ridden periphery. Both these agendas were politically driven and those who understood the political dominance over sound economic thinking got their predictions right: no euro-exit, good public money thrown in to reward bad lending.

In Iceland, there might also be an agenda, other than just abolishing the capital controls without jeopardising financial stability: the Progressive Party and its leader, prime minister Sigmundur Davíð Gunnlaugsson has time and again, since the election campaign early last year and after it came to power, stated that there will unavoidably be money for the state coffers when the bank estates will be dealt with in order to abolish the controls (see more on facts and figures in an earlier Icelog).

The Independence Party, led by minister of finance Bjarni Benediktsson, has appeared to be less focused on abolition as a way to enrich Iceland. Recently though he has faintly echoed Gunnlaugsson’s view that doing it quickly, via bankruptcy rather than the more long-term composition the creditors are keen on, might be a sensible way. It is not clear though if he really believes it or is just putting pressure on the creditors.

It seems increasingly clear that the abolition of the capital controls, which needs an action plan on dealing with the foreign-owned ISK assets of the estates, might well be more dependant on political solutions than purely finding a way to secure financial stability. Both parties will want as much of the credit for a plan to abolish the controls – but the Progressive party seems also keen to create a situation where it will be seen as having won over the foreign creditors. The Progressive narrative is that it secured an Icelandic victory in the Icesave case (though the Icesave problems are alive and kicking in the unsolved Landsbanki bonds) – and now it is going to secure a victory over other foreigners, the creditors.

The necessary solutions will be conjured up in the tense political sphere between the two parties.

What, when and how?

There is probably no one in Iceland who is as yet able to answer the question what exactly is needed to resolve issues preventing the abolition of the capital controls, when action will be taken and how it will all be brought about.

Because of the Progressive’s earlier promises the government’s agenda might not be only to abolish the controls and to secure financial stability but to make sure the state profits from it. Compared to other countries fighting to abolish controls, such as Cyprus, this is a novel situation and makes it a whole lot more difficult.

How much does the government want from the process of abolition? It clearly wants at least ISK120bn since that is what it is claiming in tax from the estates of Landsbanki, Glitnir and Kaupthing, albeit over the next four years. But judging from sources close to the government it seems that a whole lot more is desired – probably all the ISK assets of the two estates (Landsbanki is in a different place due to its creditors and the bonds between old and new Landsbanki) and a slice, let’s say 10-15% of the fx assets.

If this really is the goal then this is the “what” needed to solve the controls conundrum, from the point of view of the government.

When action will be taken is unclear. On a Rúv TV talk show (in Icelandic) February 9 Benediktsson once again said that the abolition could start this year, it would not happen over night but over some years and it all depended on if there could be some harmonisation of expectations. Recently he also said it might be seen as unfair to Icelanders that the creditors were the first ones to get out with their money.

There is now a working group at work on behalf of the government on issues related to the capital controls. It first seemed it would finish its taks in February but now March or April seems more realistic. The group consists of both bankers and lawyers (led by much respected banker, Sigurbjörn Þorkelsson living in London). The group is not expected to come up with one solution but various scenarios. If their indirect remit is to show that the only viable way out of the controls is that the creditors hand over both all ISK assets and a slice of the fx then that will surely be part of their solution.

Then there is the CBI working on current account forecast, which ideally should underpin a payment forecast – how much fx will there be for paying out creditors in the coming years? The next CBI Monetary Bulletin will be out now on February 12, clearly an important event. The last CBI currency auction was deemed to have gone well for the bank and the bank has been unexpectedly active in the currency market (see here a short overview from Íslandsbanki).

It will be interesting to see if the CBI stats appeal to the government and the working group or if they will seek other ways to underpin their own plan, whenever it emerges.

The goal will determinate the road to the goal. The thing to look for is if it will be a neat solution, nested within present rules and regulations or will it be an all-Icelandic messy solution, depending on special legislation.

Difficult decisions in tense political climate

Icelandic political pundits have noticed, from early on in the life of the coalition that the two party leaders rarely are in tandem on important issues. The first great big test of the government was the execution of the Progressives’ promise on extensive debt relief. That promise was defused by the Independence Party, which cut it down from vaguely promised ISK300bn to ISK80bn – and instead of funds coming from the resolution of the estates it will be financed by banking tax, albeit partly from the estates.

However, the promise could be said to have been kept. Thus the Progressives strengthened their reputation as a party to be trusted and the leadership of the Independence Party could feel quietly satisfied that it had delivered the promise in a way it deemed viable.

The second test was another Progressive promise, abolishing indexed loans. A committee delivered a split report – majority came up with several solutions to change loans but in no way supporting the Progressive view it should be chucked out fast; a minority report suggested the loans should and could be abolished right away. (The Icelandic debate on indexed loans is truly weird from a foreign point of view: the problem rather seems the chronic inflation rather than the loans per se but that is not reflected in the debate.) Again the Progressives could say this promise was now all on track though what exactly is the track is not clear whereas the Independence Party said little other than there was now material to study.

The outcome so far is that the Progressives have kept their promises. Although it has been done with cutting off a toe here and a heal there to make it all fit the party seems to have managed to stay its course. The Independence leadership can be quietly content that it has indeed managed to steer the toe- and heel-cutting to suit its own policies. So far so good for Benediktsson.

Some Independence supporters are feeling uneasy that the party has staked its own existence on carrying out Progressive promises that were far from the Independence line. The point of view of the Independence leadership might well be that the promises better be gotten out of the way as soon as possible in order to avoid distraction in focusing on other matters. Such as the capital controls.

In spite of smooth executions so far there seems to be quite some tension between the two parties, also regarding the capital controls. No matter the rhetoric the course so far it has been decided by the Independence party. This might indicate that Benediktsson really decides on the important issues regarding the economy. But the future is not always like the past.

Both coalition parties need to get the most out of their time in government. The Independence party because it is used to be in government; a leader who does not again firmly position the party for another term is politically dead. The Progressives need to turn their tide tangibly in order to escape what seemed to be their imminent future up until the Icesave ruling: that they would keep on hovering around 12% of votes.

Young politicians in an atmosphere of former times

The Left government put effort into breaking out of the old political mould i.a. by nominating people on merit more than for party allegiance. It seemed for a while that this was an answer to the call of the time. However, although the two coalition leaders are young their attitude seems to hark back to the olden times.

The biggest test when it comes to nominating people for leading positions is the governorship of the CBI; it expires in autumn. The position needs to be advertised six months in advance, i.e. by February 20. One rumour was that it would look bad to do it at the last moment so had nothing been done by end of January it was a sign that Már Guðmundsson would be reappointed.

Now the rumour mill is in overdrive. The Progressives are said to be hell-bent on getting rid of Guðmundsson. Allegedly they cannot forgive him for wanting to negotiate on Icesave and in addition the party would like to be able to influence the bank’s position on major matters, such as the capital controls. So much for the independence of the central bank.

However, the problem for the Progressives is that Guðmundsson is widely respected, not only in Iceland but even more importantly abroad. He has the high standing and trust that a governor of a central bank needs in order to be taken seriously and in order for a country to be taken seriously in terms of monetary policy. It seems highly unlikely, if not impossible, that the Progressives can come up with anyone anywhere near Guðmundsson’s format.

The Independence leadership has been said to be more bent towards keeping Guðmundsson, also in order to encourage trust and stability. One version has it that the government might keep Guðmundsson but make some other changes, i.a. add a vice-governor, favourable to the Progressives or change the present one, Arnór Sighvatsson, also well respected.

The new magazine Kjarninn wrote last week that the Progressives wanted to appoint a banker at MP bank, Sigurður Hannesson, for the CBI job. Hannesson is head of private wealth management and has, to say the very least, a CV that differs radically from the CV of central bankers in the neighbouring countries. But he is very close to Gunnlaugsson.

Kjarning also wrote that Benediktsson was in charge of this appointment and his idea was to appoint Ólöf Nordal, a lawyer who has just left parliament to follow her husband to Switzerland. Kjarninn pointed out that her credentials were that she practically grew up in the CBI where her father was a governor. It is not clear from the context if Kjarninn was serious about her merits but yes, yet an altogether different CV from central bankers in the Western world.

Should Guðmundsson not get reappointed the whole capital control conundrum will get postponed… until late this year. Should Guðmundsson get ousted for someone of much more inferior professional standing it bodes a return to the Icelandic past of clientilismo and political patronage. And that bodes ill for everything – also the abolition of capital controls – and everyone in Iceland, except of course those with the right connections.

The paradox of political (non-)intervention

It is not altogether a uniquely Icelandic situation that the government refuses to negotiate with creditors claiming it has nothing to do with winding up of failed private banks. This is often the case with semi-sovereign debt situations. However, the situation in Iceland is tricky because with the approval of all MPs parliament voted last year that the government should indeed be part of the estate equation.

This was what happened when parliament approved a change of the currency law stipulating that the CBI can only give exemption to the law, above certain sums (which firmly includes the estates) with the blessing of the minister of finance, after he has presented it to the parliament (which does not need to approve it but well, a minister is unlikely to go against the parliament on this issue.)

Therefore, there is this paradox that the government – or the minister in charge – denies to negotiate an agreement that cannot pass through the CBI without his political blessing.

This situation greatly frustrates creditors. They feel they are trying to do everything right, talking to the CBI, trying to figure out what write down is needed (obviously, from their point of view as small as possible) by studying the current account, studying what assets can be used to negotiate on (such as assets owned by the CBI holding company, ESÍ etc), stretching out payments and in general trying to figure out all variables that can be used in negotiations.

But so far, this is just a monologue – there is no one who wants to sit down on the other side of the table. And yet the government clearly indicates it does want certain things from the creditors – it is just not going to tell them what it wants and no, not negotiate with them. The creditors have to figure it out themselves and reach a conclusion that satisfies the government.

This is seemingly an impossible way to go about things. And it is even more impossible if the government wants not only to find a solution that safeguards financial stability and takes into account the current account balance over the coming years but, in addition, wants to secure money for the treasury.

But one day the government will, in some way, make its position clear. Until then, when, how and what are only things to be guessed. And as we know from the Eurozone crisis: figuring out the economics is easy – guessing the politics is a lot more difficult.

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Written by Sigrún Davídsdóttir

February 11th, 2014 at 4:10 pm

Posted in Iceland

Capital controls and the on-going blame game on who is blocking their abolition

with 9 comments

So far, there is no solution in sight in matters that need to be solved in order to abolish capital controls in Iceland. The government blames creditor of the estates of Glitnir and Kaupthing but unresolved dispute in Landsbanki matters as well though hardly ever mentioned. The government seems to play a waiting game, perhaps to make creditors more forthcoming. Ministers maintain the government cannot interfere in a process of private companies and yet they seem to be contemplating interfering via laws, which would directly expose the government to being sued by creditors. The creditors mostly remain silent but might have more cards up their sleeves than the government seems to believe.

“It seems they’ve (creditors) been waiting to see whether the government would somehow step into the process. But this is not a project for the government. The only role of the government here is to assess whether they come up with a solution which allows for the lifting of the controls,” prime minister Sigmundur Davíð Gunnlaugsson recently said to Bloomberg. He has also stated that “I’m unaware of them having found any solution” which would allow the banks to complete creditor settlements. In September Gunnlaugsson said the controls could be lifted “in foreseeable future” if the creditors were “willing to assist us.”

And here is the creditors’ view, as expressed by Steinunn Guðbjartsdóttir head of Glitnir’s winding-up board: “It’s definitely not Glitnir that’s delaying the process when it comes to completing creditor settlements. Our proposals have simply not been answered, making it impossible for us to move forward.”*

In problem keeping the capital controls in place is the fact that foreigners own more ISK assets than can possibly be converted into foreign currency in the foreseeable future – a problem contained by the capital controls. Hence, the problem of foreign-owned ISK has to be resolved before the controls can be abolished. It will not happen over night, will no doubt take some years to abolish them in stages. However, it will be a decisive step when the ISK assets of the old banks – Kaupthing, Glitnir and Landsbanki – have been resolved

Who is waiting for whom – and what is everyone waiting for? How should these seemingly conflicting statements be interpreted? Here is an attempt at interpretation, as well as sizing up the problem and the possible solutions.

1 By late 2012 both Glitnir and Kaupthing had presented their drafts for composition of the two estates. The Central Bank, CBI, which needs to accept a composition agreement due to the capital controls, rebutted the Glitnir draft but has not replied to a new draft from Glitnir sent a new in November. Kaupthing has had no answer.

2 The CBI can only give its permission if the minister of finance, Bjarni Benediktsson, accepts the proposal, after presenting it to the parliament economy and trade committee.

3 When Gunnlaugsson claims he is unaware of any solution he is of course aware of the drafts ­– but his words need to be understood in the right context: he doesn’t recognise the solutions put forth by the estates as acceptable.

4 By saying that controls can be lifted when creditors “are willing to assist us” the prime minister seems to mean that when creditors have accepted what the government wants them to accept the government will accept their proposal.

5 The government has clearly indicated that it cannot enter into negotiations with creditors of private companies so how this “assisting” by the creditors should come about is not clear. Nor is it clear how the creditor should be informed as to what exactly is needed to solve issues now blocking a CBI agreement to composition.

6 There are those who warn that by engaging with the creditors the government might make itself liable to being sued, thus creating an unforeseen risk. At the same time, the government seems to be contemplating a legal intervention, which would clearly make it an actor in the game.

7 Further, it is not possible to prevent risk by not engaging since creditors could – and most likely will – at some point lose patience and seek ways to litigate abroad. The worst scenario would be a version of the Argentinian situation where every sum in foreign currency that Iceland pays to fulfil foreign obligation will be litigated.

Below are some points of importance in order to understand the issues at stake.

Two ways to resolve the Glitnir and Kaupthing estates: negotiate – or not

In principle, there are two ways to solve the dilemma of the two estates, i.e. how to proceed with the winding up and eventually pay out what is due to the creditors:

A) Agreement with the creditors, based on composition.

B) Bankruptcy proceedings, meaning i.a. that assets have to be sold within a fairly short time span with less creditor control than with the abovementioned route.

By presenting drafts for composition for both Kaupthing and Glitnir the creditors of these two banks (to a large extent the same creditors, ca. half are institutional bondholders owning bonds of the two banks before the collapse and then hedge funds and others dealing in distressed assets who bought the bonds after the collapse). Composition means that the estates are run as holding companies, owned by creditors, who by selling assets when circumstances are favourable recover over time what there is to recover from the estates.

Recovery from bankruptcy proceedings will most likely be less, which is one reason why the creditors oppose it. Also it means they have less control over the course of events.

Under normal circumstances a government doesn’t engage with bankrupt private companies. In Iceland, the capital controls and laws passed last spring, just before the dissolution of parliament up to the election, changed all of that. At stake are first and foremost the ISK assets of Glitnir and Kaupthing – and the majority is tied up in the new banks, Íslandsbanki and Arion, respectively owned by the estates.

The amount of ISK assets of the two estates totals ISK417bn but differs greatly. Kaupthing’s ISK assets are ISK141bn, whereof Arion’s valuation amounts to ISK116bn. Glitnir owns a good deal more of ISK or ISK276bn, whereof Íslandsbanki is valued at ISK132. Kaupthing owns 87% of Arion; Glitnir owns 95% of Íslandsbanki. The rest of both banks is owned by the Icelandic state.

If the two banks could be sold for foreign currency the Kaupthing ISK problem would be more or less solved. Glitnir has a tougher task. The creditors seem to have some faith in this being possible; others find that hard to believe but it will ultimately all depend on the price.

Who will buy Iceland or rather, the two banks Íslandsbanki and Arion?

Those who buy these two banks will wield great power in the Icelandic business community and in Iceland in general. First, when the idea was floated in the late 1990s that Landsbanki would be privatised the intention of the Davíð Oddsson government (conservative) was spread ownership.

That policy evaporated when the bank was sold to father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson. Eventually, the three big banks – Landsbanki, Kaupthing and Íslandsbanki (later named Glitnir; the new bank has reverted to the old name) were owned and dominated by large shareholders who incidentally were not only the respective bank’s largest shareholders but their largest borrower. No wonder that ownership of the two banks, now for sale, awakes disturbing thoughts.

Who will buy the banks? Foreign investors with no previous ties to Iceland, Icelanders with money abroad, clients (Icelandic or foreign) who got mountains of loans on favourable terms from the Icelandic banks before the collapse? Or the Icelandic pension funds? There is no lack of guesses.

One thing that will clearly affect the price is how the estates will be resolved. With bankruptcy the assets would have to be sold quickly, most likely knocking the price down should two banks be sold simultaneously in Lilliputian Iceland. Conspiracy theorists might feel that if the government eventually acts in a way that lowers the price of the banks – and some investors with intriguing ties to the past banks or with the government parties (or both) – it will be no coincidence.

The official “abolition manager” that never was – and the working group without a chairman

In August, it was announced that “next week” the prime minister would appoint “an abolition manager” to oversee the process of abolishing the capital controls. But nothing happened. According to rumours the two party leaders could not agree on who should be appointed. And no one was ever appointed.

In November, a working group of four was mentioned but by the beginning of the New Year it had grown to six. There is to be no chairman (too difficult to decide on?) but a former banker, Sigurbjörn Þorkelsson is in charge though without the title. He was thought to be the one favoured by Benediktsson as an “abolition manger.” The others are two engineers, Jón Birgir Jónsson (a banker in London) and Jón Helgi Egilsson, lawyers Eiríkur Svavarsson and Reimar Pétursson as well as Ragnar Árnasson professor of economics. This group is now said to be working fast and furiously on mapping out various scenarios for the government.

In principle, no one knows what the government’s policy is in the matters of the two estates; the two party leaders have not specified how they would like to see the bank estates dissolved. Benediktsson has however said that bankruptcy law do not stipulate that composition can be negotiated forever, hinting at some change in the bankruptcy law and possibly that he would prefer rout B).

His comment could also be understood to indicate that the government was prepared to or preparing to intervene in the bankruptcy process with a bill aimed at the estates. That will be a tricky undertaking because, like in most Western countries, assets of estates are protected by laws on property rights. Creditors will obviously challenge anything that smacks of infringement on such rights.

A legal intervention – or any government intervention – will be a u-turn from the government’s present stance on declared and staunch non-engagement. It might well open up a Pandora’s box of possible legal action against the government, not only in Iceland but also abroad.

Neither A) nor B): the “krona-path”

In addition to A) and B) there is another path, which is often mentioned in the debate in Iceland but apparently not always well understood.

According to Icelandic bankruptcy law, the value of a failed company is calculated in ISK, which means that whatever fx it owns is converted into ISK, as well as all claims. This does not mean that that the assets themselves are converted; the conversion is for auditing purposes only.

The assets of the three banks are as follows (in ISK)

ISK                             Fx                                Domestic fx assets

Glitnir             276bn                        614bn                        35bn

Kaupthing      141bn                        570bn                        62bn

Landsbanki     51bn                         405bn                        385bn

There are those who argue – and both Gunnlaugsson and Benediktsson have touched upon this – that the estates should be considered as pure ISK assets meaning that they should also pay creditors only in ISK. This would then create an almighty ISK overhang the moment this was paid out, increasing the already far too big a reserve of ISK owned by foreigners (which after all is what the capital controls are reining in).

How could the creation of a humungous overhang, in addition to the already insurmountably large one, be a solution? Because this would be a way for the state to get a slice of the fx assets, which should then be converted back into fx, but at a much less favourable rate; another possible execution is some sort of exit levy.

A recent ruling of the Icelandic Supreme Court has been mentioned as an argument for the “krona-path”: on September 24 2013 the Court ruled in a case (in Icelandic) linked to the Landsbanki estate. The thrust of the case was that when Landsbanki paid preferred creditors, on December 2 2011 and May 24 2012, the bank used the currency rate on April 22 2009, the day the bank entered into bankruptcy proceedings.** The creditors challenged Landsbanki’s decision, lost in Reykjavík District Court but won in the Supreme Court. Consequently, it is now clear that the currency rate on the day of payment counts.

Those who adhere to the “krona-route” have interpreted this court decision to mean that an estate should pay out in ISK – whereas the decision, according to many lawyers, only says that an estate can pay out in ISK but, most importantly, does not need to. One Icelandic lawyer (not working for creditors) mentioned to me that converting fx assets into ISK in order to pay the creditors could well be seen as expropriation, again exposing the government to being sued by creditors. Since most of the fx assets are outside of Iceland, creditors claiming to be an offer for expropriation could sue the Icelandic state abroad, most likely in London.

Another cause for legal action on behalf of the creditors against the government might be if at some point they feel that by inaction the government is preventing them from accessing their undisputed assets: the fx assets. After all, the fx assets are the property of failed private companies, unrelated to the government as repeatedly emphasised by the government.

The action taken in autumn 2008 with the “Emergency Act” and capital controls was taken under exceptional circumstances. Although the lack of foreign currency poses problems there is no emergency, comparable to October 2008, to justify any exceptional measures. On the contrary, there is time to negotiate terms and conditions.

What the capital controls contain

Ultimately, the government seems to favour not so much a route as a goal: a goal that brings as much to the public coffers as possible.

During the election campaign last spring prime minister Gunnlaugsson repeatedly claimed it was “unavoidable” that in dissolving the estates money would be due for the Icelandic state. As with so many other things, he never specified how exactly this should/would happen but seemed to indicate the “krona-route”: that converting fx assets should/would/needed to be converted into ISK thereby securing great wealth to the state coffers.

An aside here is that most Icelandic economists heartily agree that channelling mountains of ISK into the economy would be an almighty economic disaster. Ideally, any such windfall should be taken aside, if not actually burned. But for some reason, this argument is hardly ever uttered aloud in Iceland.

Before guessing how much is enough for the government, let us revise on how much ISK assets the capital controls contain. As mentioned above, the ISK assets of Glitnir and Kaupthing amount to ISK417 bn. The “glacier bonds” – essentially invested in carry trades in the years before the collapse – now amount to ISK340bn. Since this is money owned by a diverse group there is no one to negotiate with.

Further, these assets might partly be “patient” money, not waiting to run out of Iceland where interest rates are still attractive. There is also intriguing evidence that ca. half of the “glacier bonds” is owned by… Icelanders who bought it at a knock-down price after the collapse (which might be why this is not much talked about any longer as a problem, all the focus being on the “vulture” hedge funds” as they are often referred to in the Icelandic public debate). The last batch of foreign-owned ISK is the Landsbanki bond, debt of new Landsbanki to the old Landsbanki, now ISK247bn.

In total, the ISK assets contained by the capital controls are close to ISK1000bn. However, dividend in the new banks, which is not paid out, piles up so the problem is not diminishing but increasing. And then there are the classic collateral damages of controls such as less investment and corruption.

How much is enough – and the narrative to support it

Then there is the question: how much is enough for the government? How much, measured in krona, is the value of the “willingness to assist,” from the point of view of the government? Ultimately, it depends on how the government views the estates: as a problem to solve – or a rich fishing ground.

Consequently, there are two possible answers:

1 Enough to run a sustainable economy where a balance of payment will ultimately decide the course of payment of ISK assets. This is a calculation the CBI is working on. Leaving aside the “glacier bonds,” the problem is the Glitnir and Kaupthing assets as well as the Landsbanki bond, in total ISK665bn. This is not an insurmountable sum, the creditors know they will not get the whole amount, are willing to negotiate (if they can find anyone to talk to) and there are state-owned assets (in the CBI holding company, ESI), which could be part of the solution. – If this procedure is followed there is however nothing for the government to lay its hands on because ultimately this is not a process, where the government is involved except to secure financial stability as spelled out by the CBI.

2 Considering how prime minister Gunnlaugsson has spoken – and indeed promised Icelanders – he and his party clearly do indeed see the estates as a fishing ground, ready to be exploited. Finance minister Benediktsson has never uttered anything in this direction and there are indications, i.a. from the appointment of an abolition director that the two party leaders do not see eye to eye in this matter. It is by now a well-established pattern in the political debate that the prime minister says X and then a few days later the finance minister says Y on the same matter. From sources close to the two coalition parties, I hear that the ultimate goal should be all of the ISK assets of the two estates and a slice of the fx assets – otherwise, the financial stability of Iceland is threatened. I am not claiming this is what the two party leaders have in mind, only that this is consistently heard from sources close to the two leaders. – The path would probably be some version of the “krona-path” and a legal intervention.

Both ministers have consistently said that the new banking levy, also on the estates (quite unorthodox to tax debt; will most likely be challenged by the estates; another saga for another day) is only natural because of the cost the banking collapse caused the Icelandic society (though how the new banks, founded after the collapse, could have caused harm is a bit of a mystery). This narrative might also well be used to argue for a “catch” from the estates (though again, this spreading of the original sin could be debated).

The tax, calculated to cost the three estates ISK120bn over four years, is an interesting sum because it indicates to the creditors that this is at least the sum wanted by the government. This sum could then be the starting point in a negotiation though, if the rumours I keep hearing, this would be very far from what the government has in mind.

The fact that Iceland won the case that the EFTA Surveillance Authority, ESA, brought against Iceland because of Icesave, emboldened the leadership of the Progressive Party. The fact that Icesave was not resolved with the British and the Dutch had two drastic consequences: it moved the ownership of Landsbanki over to the state meaning that the state, at least indirectly, guarantees a bank – and in addition burdens the state through the Landbanki bond. This is not part of the “Iceland won Icesave-saga,” as commonly told in Iceland.

In the Icelandic debate on the estates and the creditors it can at times sound as if it is decidedly un-Icelandic not to seek a “windfall” from the creditors. To be on the side of the rule of law in this matter does not seem enough. No doubt, the tone will become harsher at the hour of decision.

Contrary to natural catastrophes such as earthquakes and eruptions, the catastrophes stemming from wrong political decisions unfold over a long time. The consequences will be felt long after the term of this government comes to an end.

* Glitnir Winding-up Board has today made an unexpected move: it has hired MP Bank’s Corporate Finance Division as a financial advisor in finalising a composition agreement, to “independently review and evaluate solutions to that end.” Especially ALMC (former Straumur Bank, already through composition, now operationg under a new name, ALMC), which seemed to be sure it was going to act as Glitnir’s advisor. The intriguing part of this assignment is that a close friend and advisor to prime minister Gunnlaugsson, Sigurður Hannesson is head of private banking at MP and the CEO of MP, Sigurður Atli Jónsson, is the prime minister’s brother in law. Whether this intimacy will simplify Glitnir’s task in guessing what is enough to negotiate composition remains to be seen.

**The legal procedures are described here, p. 6, for Kaupthing; the same counts for Landsbanki and Glitnir.

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Written by Sigrún Davídsdóttir

January 30th, 2014 at 12:45 am

Posted in Iceland