Sigrún Davíðsdóttir's Icelog

Admittedly, the Dutch have been fortunate with the €/ISK trend, which no doubt tempted them to waive good-bye to their LBI priority claim. For the UK deposit guarantee scheme the £/ISK trend has been the opposite, making a UK sale less likely (but not impossible especially if British authorities see no imminent sign of LBI payout and only a rising political risk). Though the Dutch exit is logical it also hints at what some other creditors might be thinking: that the Icelandic government seems to be tackling the capital controls sub specie aeternitatis.

For quite a while it’s been rumoured that De Nederlandsche Bank, the Dutch Central Bank, DNB, intended to sell its priority claims in LBI, the estate of the old/failed Landsbanki. Dutch authorities were from the beginning adamant to recover the whole amount and there has been political pressure to bring the Dutch Icesave saga to an end. As the €/ISK trend has been favourable to the Dutch it is no wonder that Dutch authorities decided not to tempt their luck any longer and instead rid their books all Icelandic risk.

With the Dutch sale and the fact that summer is over it is appropriate to ponder on the prospects of Iceland lifting the capital controls. More than one coalition insider has told me recently that “decisive steps towards lifting the capitals controls will be taken this winter.” I certainly do not doubt the will – in addition to strong pressure from the business community.

However, the government’s grip on major issues so far and the tension within the government on the core problems related to the capital controls (see earlier on Icelog, i.a. here) raise the question if the government has enough political strength and stamina to proceed. If nothing tangible will be done this winter, it seems safe to conclude that decisive steps towards lifting the controls will not be taken by the present government.

The Dutch numbers

As pointed out in the DNB press release earlier this week the Dutch State paid out 1.428bn and Dutch banks 208m to Icesave depositors. DNB held these claim on Landsbanki and has over the years recovered 932m; it had expected to collect further 623m and that is the batch the DNB has now sold.

It seems that DNB sold at just over 0.93. The reason it can claim it has made a full recovery stems from the €/ISK trend since April 22 2009. That day, the €/ISK rate stood at I69ISK against the euro; August 27 it was 154ISK. Given that the Dutch sold at 0.93 their price based on the €/ISK is 1.02.

Based on this simple calculation it made a lot of sense for the Dutch to sell. Instead of waiting until 2018 – or longer if the maturity on the Landsbanki bonds is extended (further here re the LÍ bonds) – the funds are in hand or, more likely, in the DNB.

With this calculation in mind the British case is just the opposite. On April 22 2009 the pound stood at ISK190.6 but was on August 27 ISK193.2 against the pound. If the British were offered 0.93 for their claim their real price would be 0.917, i.e. a loss and not a gain. (The Dutch and the British authorities are still trying to recover their cost from Iceland as seen from a claim filed in Iceland earlier this year against TIF, the Icelandic deposit guarantee fund).

Who bought the Dutch claim?

I don’t know, is the short answer. Deutsche Bank was an intermediary in the sale. There was more than one buyer. No doubt, the buyers already hold claim in the LBI. If the króna is strengthened recovery by priority claim holders increases and general creditors get less; vice versa if the króna moves the other way. With this in mind it makes sense for any general creditor in LBI to buy the priority claim as a hedge.

In addition, it makes even more sense for general creditors in LBI to buy the Dutch claim in order to strengthen their influence in LBI. Put bluntly, the LBI has something akin to a stronghold on the government given that the state-owned Landsbankinn is short of fx funds to pay on the Landsbankinn bonds next year. – For some reason, this stronghold is hardly ever mentioned in the Icelandic debate.

Interestingly, many of LBI major creditors are creditors to Glitnir and Kaupthing. With greater weight in the LBI they could try to influence course of events in Glitnir and Kaupthing through the LBI.

The Icelandic authorities the Dutch sale is not necessarily happy tidings as it fractures the creditor group. For other LBI creditors losing the Dutch might be bad tidings because both the Dutch and the British authorities can be assumed to have greater pondus than other creditors. Whether the outcome of the Landsbankinn bond agreement might have been different without them is another matter but the Dutch sale will hardly simplify matters in the LBI.

The Dutch view on the Iceland risk

The favourable €/ISK trend made sale an attractive option, in addition to political pressure for the Dutch government to exit the Icesave affair with positive numbers and not a loss. I cannot claim having an insider view on what risks the DNB feels it now has sold off but it is easy to make some inferred guesses.

Both the Dutch and the British authorities have understandably been focused on the political risk. Since last year the LBI has not been allowed to pay out to creditors (i.e. priority creditors who are paid first; having already paid priority claims Glitnir and Kaupthing are waiting impatiently for the government to make up its mind on the legal paths towards resolution in order to start paying general claims). The CBI is vested with the power to issue exemptions for a payout but needs the blessing of the minister of finance which has not been forthcoming since last year.

It is hardly a coincidence that the LBI hasn’t been allowed to pay creditors. The Dutch might well have come to the conclusion that no LBI funds would be flowing their way any time soon; better to act than to wait. In addition, there is the agreement on the Landsbankinn bonds, which the government needs to agree to. It was supposed to answer in early August but its deadline has now been extended to end of September.

Again, this deadlock regarding the Landsbankinn bond agreement could be seen as a negative factor since it seems fairly obvious that the CBI, which followed the negotiations, must favour the agreement. One might also surmise that Landsbankinn’s (the new bank) owner, the state, would have been in favour of it though the minister of finance claimed at the time he was not familiar with the agreement.

In addition, the Dutch must have evaluated the general political situation: is it likely that this government is going to solve the issues related to the capital controls in the foreseeable future? Although the Dutch might have valued the positive numbers above the political outlook the Dutch sale is never the less food for thought.

A CBI governor half-hired, a minister half-fired

On the same day the ministry of finance announced that Már Guðmundsson had been re-appointed as a governor of the CBI, it was announced that part of the portfolio of home office minister Hanna Birna Kristjánsdóttir would be moved to another minister/ministry. Guðmundsson was told that the position of governor might change which might change his situation, meaning that he was in a sense only half-hired on the day he was re-appointed. And Kristjánsdóttir, having the major part of her portfolio removed was indeed half-fired.

As I have pointed out earlier, Guðmundsson’s half-hearted re-appointment might leave the CBI in a limbo. However, the bank has worked with full energy on issues related to the capital controls and will no doubt continue. Guðmundsson and most of the CBI staff will no doubt pay great attention to IMF’s advise on reputational risk and an orderly exit for the estates. And Guðmundsson is no doubt adamant to proceed in order to make capital controls progress a part of his legacy at the bank – a legacy, which so far is looking promising.

The spin school of staunch denial

Kristjánsdóttir’s case involved a leaked document on an asylum seeker, discrediting him, as it seems to justify that he was being sent out of the country. Later she denied any part in it or any knowledge of the case, also that she knew anything about the Reykjavík Police investigation, which ensued. It now turns out that not only did she know about the investigation but she tried to influence the chief of the Reykjavík Police during his investigation.

This has surfaced in an enquiry by the Althing Ombudsman. Despite this evidence Kristjánsdóttir staunchly denies any interference in the matter. She now has until September 10 to answer the Ombudsman.

On Facebook the minister has criticised both the Ombudsman and the police. Bjarni Benediktsson leader of the Independence party and minister of finance has supported Kristjánsdóttir thereby indirectly taken a stance against the authorities investigating the matter. All of this is rather remarkable seen from the outside but could, in an Icelandic context, be seen as yet another example of the rather lackadaisical approach to structure and form of Icelandic authorities.

Political infirmity

In other countries, a minister in the quagmire Kristjánsdóttir finds herself in, would most likely have resigned. Most ministers resign when they are told they have lost the trust of the prime minister: the only choice is then between walking the plank or being pushed.

This sorry affair has now been in the media for close to a year. When finally, late in the day, it was decided that she should be relieved of that part of her portfolio related to the police it took the best part of two weeks until new arrangement was decided (the prime minister takes on what she isn’t allow to have, leaving her with not very much).

Another example of a long-winding and inconclusive process: last year, the government announced a review of law on foreclosure, making it more difficult to foreclose on individuals in order to hinder that people were driven out of their homes. This is connected to the government’s debt relief programme, which is coming into force in November. With an on-going review foreclosures were suspended until September 1 this year. It now turns out the review is not ready, incidentally part of Kristjánsdóttir portfolio, which means that foreclosures will now be suspended until March 1 2015.

The whole CBI matter, both a new organisation for the bank and the appointment of a new governor, sadly shows the same lack of firm grip. Things seem to happen only as ministers stumble along to meet deadlines. Governmental procedures under the present government tend to look ungraceful and not terrible elegant.

Though unrelated, none of these cases bode well for the tough decisions regarding the capital controls. Nothing can be done without deciding on the Landsbankinn bonds agreement and the legal path for the resolution of Glitnir and Kaupthing. So far, there is little to inspire confidence.

“No foreign banks do yet dare to lend to Iceland”

All in all, Iceland is doing well, indeed phenomenally well compared to many European countries. With Iceland now being a major tourist attraction foreign currency is flowing into the country. Talking to an Icelandic business leader recently, he pointed this out, adding that yes, things were going well in Iceland and also for his business. All was well… except this problem with the capital controls.

The fx inflows have enabled the CBI to buy fx as never before: last year, it bought ISK1bn, this year the bank has so far bought ISK70bn. CBI is clearly bolstering its coffers for a future of lifting capital controls. With relative (though precarious) stability in the euro zone and booming tourism these are incredibly favourable times to take the necessary steps towards easing the capital controls.

Coalition ministers hardly ever mention the detrimental effects of the capital controls for Iceland. The coalition message is that the controls are much worse for the creditors than for Icelanders. The government seems to think it has all the time in the world to solve this problem; and as if there was for example nothing more natural in the world than money piling up in the estates and the creditors just waiting patiently for a solution… if and when.

Many Icelandic business leaders beg to differ that there is no hurry. United Silicon is a company building production facilities in Iceland. At an event to mark the occasion United’s CEO Magnús Garðarsson said that the equity came from abroad but the funding was entirely Icelandic. “No foreign banks do yet dare to lend to Iceland.” – His words attracted remarkably little attention in Iceland.

Steps towards lifting the capital controls will define the term of this government. After strong words on action at the beginning of its term this government will be seen as having failed miserably and catastrophically if nothing is done. The question is what will be more painful: forming the necessary policies – or – being judged as a failure.

Judging from the government’s grip on things so far nothing less than a miracle is needed for action regarding the capital controls. In politics, miracles are rare –solutions are normally born of political pressure and political necessity rather than divine intervention. Given the modern rarity of the divine the question is if there are the right political conditions for finding solutions. The problems related to the economy can all be solved – it’s the political problems, the tension in the government, which seem to hinder the steps needed.

*Earlier Icelogs, in addition to those cited above: the numbers and the tension; what needs to be done; the IMF view; further on politics and the capital controls.

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Last December, Landsbankinn announced it would need to extend its two bonds of December 2009 with maturity 2018. On May 8, Landsbankinn and the LBI, the estate of old Landsbanki, reached an agreement to extend the final maturity from 2018 to 2026. In return, creditors want a pay-out of fx cash funds with the LBI, only possible with an exemption from the Central Bank of Iceland, CBI, with the blessing of the minister of finance. – With a time clause in the new agreement there is now pressure on the government to find the holistic solution to the estates both the CBI and ministers have talked. At stake is saving the state-owned Landsbankinn or the cataclysm of a failed state-owned bank. Judging from the debate in Iceland it seems that there are those who would either favour some turmoil or do not realise the risks involved in some special Icelandic solution.

The nature of the estates of the three biggest Icelandic banks, which all failed in October 2008, is not the same. This is also reflected in the ownership of the three new banks. On one hand there is Landsbanki, on the other Glitnir and Kaupthing.

Due to Icesave, priority-claim holders, i.e. deposit guarantee schemes of the UK and the Netherlands, will get ca. 90% of the Landsbanki estate, LBI. Not until December 2009 was the ownership of Landsbankinn, the new bank, in place: the state brought equity in addition to a loan from LBI, which due to imbalance between domestic and foreign assets, mostly had to be paid in fx.

The state now owns 98% of Landsbankinn with employees holding the rest. Instead, in Glitnir and Kaupthing creditors holding general claims, i.e. myriad of banks and other financial institutions, get the lion share of the estates. After the collapse in October 2008 creditors of these two estates agreed to fund the two new banks, now Íslandsbanki and Arion, taking a stake in them. The state owns 13% of Arion and 5% of Íslandsbanki.

It was clear from early on that Landsbankinn would not be able to meet the bonds’ payment schedule; the bank is not generating enough fx funds. At the time it seemed a solvable problem for another day, certainly the bank would gain market access before crunch time and be able to refinance. Now, with capital controls still in place etc., this is not about to happen meaning there was no other way but to negotiate with LBI.

Negotiations have been ongoing, on and off, for a year, at times in a rather frosty atmosphere. Already a year ago, the rumour was that an agreement would be reached before the end of the year; 2013 passed, no agreement – until now.

Agreement on extending the Landsbankinn bonds

Those two who negotiated were Landsbankinn, the payer of the two bonds and LBI, i.e. its Winding up Board as well as representatives of both the priority and general creditors.

According to the Landsbankinn press release “Interest rates will remain unchanged at 2.9% margin until October 2018. Thereafter, the margin steps up to 3.5% for the 2020 maturity, increasing up to 4.05% for the 2026 maturity. Each of the maturities between 2020 and 2026 will be equivalent to approximately 30 billion ISK.” – This is more or less what the other banks get offered. Improved conditions will help Landsbanki refinance.

The intriguing bit is this part of the press release: “The agreement is conditional upon the Winding up Board of LBI obtaining certain exemptions from the capital controls.”

The story here is that creditors know full well that saving a state-owned bank may be worth something. This “something” is not spelled out in the press release but it refers to the fact that LBI creditors want to make sure they will actually be paid out their assets in LBI. As it is now, they do not: LBI has i.a. not paid out ISK50bn, paid by Landsbankinn on the bond because the CBI has to grant exemptions to currency law and it has not.

In order to secure their interests, the new agreement states that conditions precedent to closing are that the CBI:

– grants existing exemption requests from the capital controls for Partial Payments to creditors,

– grants a permanent exemption to the capital controls for payments received on the Bonds, and

– grants exemption requests for future payments LBI receives on FX assets of LBI or to the extent such exemptions cannot be granted, a confirmation by the Central Bank that it will consider future exemption requests in good faith

In short, the relevant facts regarding the agreement are:

Outstanding part of the bonds is ISK226bn; eight years extension, from 2018 to 2026; tranches will be paid out every two years instead of every year; the bonds can be paid at a faster rate without any penalties; until current final maturity 2018 the interest rates are the same as earlier agreed, i.e. 290 basic points on Euribor/Libor, the 350bp 2020 ending in 406bp 2026; the agreement is made on condition that CBI grants exemptions.

From positive to negative

The first reception of the agreement was largely positive. After all, extended maturity of the Landsbankinn bonds seems broadly in accordance with CBI’s views in its financial stability reports: Landsbankinn has funds to pay the 2014 and 2015 instalments but the main burden on Icelandic balance of payment in 2016 stems from the two Landsbanki bonds. Once they are extended things will brighten up – which is just what has now been done in the new agreement, or rather the head of terms reached.

Major news regarding the estates and other matters close to the CBI has recently often been leaked to Morgunblaðið. The news of the agreement came fresh from Landsbankinn. Since the CBI position on the importance of extending the maturities was known this was reflected in the first news – a problem that needed to be solved and had been seeking a solution for a long time had indeed found a solution. Without taking a stand, Már Guðmundsson governor of the CBI said the bank would now analyse the agreement.

But after the first surprise of an agreement dissident voices were heard. Prime minister Sigmundur Davíð Gunnlaugsson has said that creditors must not be favoured over ordinary people and the new agreement must not be allowed to impair standard of living in Iceland. Other Progressive voices sounded the same warning. As often, minister of finance Bjarni Benediktsson was more cautious and Delphic.

The strongest and much noted criticism came from Heiðar Már Guðjónsson. In an article in Morgunblaðið Guðjónsson wrote that the new agreement smacks of Icesave, meaning it was too onerous for Iceland. He claims the problem is not solved with extending maturities since the interest rates are too high and that foreigners should not get an exemption from the currency laws until a holistic solution is found; in the end the Icelandic people will only pay the price for this.

Guðjónsson, introduced as an economist (he graduated from University of Iceland) in Morgunblaðið, is better known in Iceland as an investor. His family lives in Iceland but he himself is domiciled in Switzerland where he moved from London after working at Novator. Novator is the investment company owned by Björgólfur Thor Björgólfsson who with his father was Landsbanki’s largest shareholder from when they bought the bank in 2003 until the bank failed only five years later.

In 2010 Guðjónsson led a group of investors who wanted to buy the insurance company Sjóvá. He has later claimed that governor Guðmundsson personally intervened to prevent his offer being accepted. On the other side there are rumours that the CBI did not want to accept the offer because it was conditional on using offshore króna. Last year, Guðjónsson published a book about Iceland and the Artic and he has various investments in Iceland.

Interestingly, those who have sought financial power in Iceland have always sought to own/control a bank, an insurance company and a media – preferably all three. This was true in earlier decades and was still true after the privatisation of the banks.

Precedents and the glaring risk on Landsbankinn

For some reason, none of those who have opposed the new agreement mention the glaring risk that Landsbankinn – and its owner, the state – is facing by not being able to pay off the bonds in 2016. Also, the CBI has time and again called for a holistic solution.

The agreement has been said to constitute a dangerous precedent. The fact is that the LBI is still paying out to priority creditors whereas these have already been paid out in Glitnir and Kaupthing – in fx. In total, the priority creditors in the three banks have been paid out close to ISK1000bn (ca ISK700bn to LBI creditors, the rest to creditors of Glitnir and Kaupthing), amounting to more than half of 2013 Icelandic GDP. Obviously without upsetting the Icelandic economy since this has been paid from fx assets in the estates.

In total, LBI priority claims – mostly rising from Icesave – amount to ca. ISK1330bn. With extended maturity this will not have been paid out until towards the end of the extension. General creditors will most likely get ca. ISK200bn – but not until close to 2026.

Consequently, a pay-out from LBI does not set any precedent regarding pay-out to priority creditors since Glitnir and Kaupthing have already paid their priority creditors. Some people worry about the precedent it sets to give exemptions to pay-out in fx. The interesting thing here is again that this has already happened: as mentioned above the equivalent of ISK1000bn in fx has already left the country/or more likely, been paid out of accounts abroad since most of the fx is actually kept abroad.

A new and unexpected time limit for the government

What the government now faces is that the new agreement has a time limit: LBI and Landsbankinn commit to finalise documentation before June 12 and completion within three months from that time. This means that the government has a thing or two on its plate now.

The CBI grants exemptions but the minister of finance has to agree to exemptions of this magnitude. After seemingly having eternity to make up its mind as to how the estates should be wound up it now has… until September 12 (I have heard there might be a month or even three in grace period but according to a copy of the presentation of the head of terms the date is September 12).

At first glance, Landsbankinn and the LBI have no doubt had in mind to extend in line with the CBI balance of payment forecast. It is difficult to see that the agreement might threaten standard of life in Iceland as prime minister Gunnlaugsson has stated. What is however threatening Iceland are the capital controls.

The nature of capital controls is to give shelter from an imminent danger that cannot be solved imminently – in Iceland it was the situation after the collapse when more króna was seeking to be converted into fx than could be serviced without causing the króna to collapse. However, the danger is that with time the controls turn into a cosy shelter substituting the reforms and changes that need to be made to solve the original problem/danger. Exactly when this happens is difficult to estimate. With Iceland now well into the sixth year, business leaders in Iceland are smarting, complaining loudly about the lack of a credible plan to lift the controls without threatening financial stability.

The asset sale of the century

There are interesting times in Iceland. It is clear that two – and possibly three – banks will be for sale in Iceland in the foreseeable future. Ironically, an agreement on the Landsbanki bonds removes the largest obstacle for the state selling the bank, recovering its funds now tied in that bank.

The sale of two – Arion and Íslandsbanki – or even three banks will clearly be the largest asset sale in the history of Iceland. There might be foreign buyers and that is what the Winding up Boards of Kaupthing and Íslandsbanki are actively looking into, helped by creditors. Selling one or two of the banks would resolve the problem of converting the ISK assets of the Glitnir and Kaupthing into fx.

Some say that foreigners should not own any Icelandic banks, which in the light of the experience of home-run and –owned banks is a remarkably forgiving opinion.  And yes, there might also be Icelandic buyers.

There are the pension funds, which might very well be tempted/lured into (depending on the point of view) to buy a bank or two with their foreign assets. Interestingly, most major Icelandic investors, who got rich by being actively involved with the three banks in the five to eight years up to the collapse and who still have the urge to invest in Iceland, are all living abroad.

The political choice: negotiations or turmoil

The government has to make up its mind as to how to deal with the estates. It will now feel emboldened by having paved the way to debt relief – the two necessary Bills have been passed in Althing and the website for applications is up and running. The coming local elections in Iceland May 31 will most likely be bad news for the government though the successful introduction of the debt relief might pull some votes for the Progressive party in the election’s final spurt.

The debt relief, though carried out by the Ministry of finance, is the Progressive’s big project. Its realisation will greatly strengthen the party’s credibility in the eyes of the voters. It will also strengthen the party in government, which again might strengthen the party’s view on the estates. Its former views on money accruing to the state from the estates have not been heard much lately. It is however clear that some of the government’s local advisers are of the same view though it is safe to say that if this were an easy route it would already have been taken.

Anyone bringing fx to Iceland in order to buy assets now gets ca. 20% discount, compared to those with investors holding króna in Iceland. The rumours in Iceland are that if the government chooses some unconventional way in resolving the problems related to the bank estates, releasing legal action and other unforeseen consequences, the resulting turmoil might drive down prices in Iceland. Turmoil might benefit those intending to buy assets in Iceland but it will certainly not benefit the average Icelander who would yet again see the economy in jeopardy.

The CBI has preached the importance of keeping an eye on financial stability. The IMF still keeps an eye on Iceland and certainly has all the expertise needed to deal with the situation. Lately, some international advisors, specialised in sovereign debt issues have been visiting Iceland. If the government hires such advisors it might make it more likely that the route of negotiations will be chosen. By following the example of how other countries have escaped capital controls and how big financial estates are dealt with, the CBI goal of financial stability and market access might be within reach. Or as the CBI writes in its last financial stability report:

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.

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‘How far are you in reading the report?’ is a question that everyone asks in Iceland these days. The report in question is of course the report of the Investigative Commission, published April 12. The 2600 pages offer a lot of information to mull over regarding the banks and the public sector, including the Financial Services Authority, FME and the Central Bank.

One of the most important findings is that the banks didn’t fail because of evil foreigners – hedge funds, the UK Treasury or the FSA or any other foreign force. The banks collapsed because they were allowed to grow too quickly. In addition, there were some serious anomalies within the banks: the main shareholders used ‘their’ banks as their personal ‘piggy-banks’, the same small clique borrowed from all the banks and the banks made use of cross-financing to finance their own shares and shares of the other banks.

The report shows clearly that the banks’ principal shareholders were also the banks’ largest borrowers. At Kaupthing, the second largest debtor was Exista, a listed company ruled by Agust and Lydur Gudmundsson. Robert Tchenguiz had been on the board of Exista since early 2007 and was, as the bank collapsed, the bank’s largest debtor, with a debt of ISK200bn, ca €1,7bn, which also makes him the largest single debtor in Iceland. – In Iceland, foreigners with strong ties to Iceland are called ‘Íslandsvinir,’ ‘friends of Iceland. Tchenguiz’ strong ties to Iceland add a new meaning to the word ‘Íslandsvinur.’ – Another large debtor in Kauphing and a large shareholder is Olafur Olafsson who still owns the shipping company Samskip.

Bjorgolfur Thor Bjorgolfsson and his father, Bjorgolfur Gudmundsson, were the main shareholders at Landsbanki. Bjorgolfsson was also the main shareholder in the investmentbank Straumur. In total, father and son owe Landsbanki over ISK200bn which is more than Landbanki’s entire equity. At Straumur father and son are also the bank’s largest debtors.

At Glitnir, the largest borrower was Baugur and related companies/investors. Jon Asgeir Johannesson, his wife Ingibjorg Palmadottir (who miraculously still owns the 101 Hotel in Reykjavik), his father Johannes Jonsson as well as his mother in total owed ISK250bn to the banks. Related to Johannesson is his business partner for many years Palmi Haraldsson. From 1998 Johannesson had been trying to become a principal shareholder in an Icelandic bank but it wasn’t until mid-year 2007 that he and Haraldsson finally got hold of a bank, Glitnir. Their borrowing, already high, accelerated. As the bank collapsed Baugur and related companies owed more than ISK250bn, equal to 70% of the bank’s equity base.

In addition to using the banks as their personal piggy-banks, the largest shareholders seem to have swayed the investments of the banks’ money market funds towards their own companies and the banks themselves. Consequently, the funds lost heavily. The Icelandic money market funds never operated as normal MMFs, were i.a. not independently rated. In addition, the funds were marketed as ‘as save as current accounts, only with better interests.’

The management of the banks’ MMFs is a chapter in itself in this sad story. In a Glitnir fund a politician from the Independence Party was on the board. Whether it mattered in the end is an open question but the state did put money into the funds in order to minimize the losses – an action that still raises questions as to political influence in the collapse and why these funds were helped thereby helping many individuals, typically middle class professionals.

There is no doubt that quite a number of court cases will arise from the collapse of the Icelandic banks. The other day, I was walking towards the pond, ‘Tjornin,’ in the heart of Reykjavik when I saw a firework exploding over the hill beyond the pond. It reminded me that when I was in Naples in the summer of 2007 there were bursts of fireworks almost every day. A Neapolitan friend explained that it was customary to celebrate the release of a prisoner with fireworks – and that was happening all the time because of an amnesty to diminish the prison population. Since no one has yet been put in prison because of the banks this single firework can’t have had anything to do with a prison sentence. Perhaps Icelanders, who are the most firework-happy population on earth on New-years eve, will one day learn to use fireworks to express relief when those responsible for the banks’ collapse will be convicted.

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