Sigrún Davíðsdóttir's Icelog

Standard & Poor’s Ratings Services has announced it is reviewing Iceland for a possible downgrade, following the Icesave referendum this weekend.

“The prolonged dispute over the Icesave issue could weaken Iceland’s relationship with other European countries, increase its external financing risks, and hinder Iceland’s economic prospects as well as delay the lifting of capital controls and its return to international capital markets.”

S&P expects the dispute to return to the EFTA court and that it might take a year or more  for a ruling to come down. S&P has Iceland’s foreign currency credit rating at triple-B-minus, the brink of junk territory, and its local currency rating one step higher at triple B.

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Today, ESA has approved of Icelandic amendments to the rescue plans for small savings banks. Further, ESA has given temporary approval of plans to recapitalise Byr, another savings bank.

The Icelandic saving banks have been part of the Icelandic financial system for over hundred years. These small saving banks are regional banks, intertwined with the local economy. However, during the boom times, they played some seriously unwise games with the Icelandic tycoons and the banks, helping the banks to get money out of the Central Bank via repo deals. Their demise has given insight into ill advised investments and unsavoury connections to local fiefdoms. Althingi has been preparing a bill to investigate the saving banks but no one seems to be in a hurry to get the bill through and start digging.

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President Olafur Ragnar Grimsson has taken a lead in speaking on Iceland’s behalf as to what can be done now post-Icesave no. In an interview with Bloomberg he spoke of the assets of Landsbanki, their value, and that they could and would be used to pay out Icesave. He is propagating the idea that Iceland can just pay, whatever suits Iceland, no matter what.

Here is an interesting comment – posted on an earlier Icelog by Mike, a UK Nordic financial analyst – on the president’s stance:

I have heard the Bloomberg interview and the President doesn’t do as well as you think – he keeps referring to something that has very little to do with Icesave itself, namely the residual value of Landsbanki’s assets.

At the very beginning (in 2008) an offer was made to the British and Dutch authorities which amounted to Iceland saying “There you go, take over Landsbanki and take the Icesave money from that.” The reply from the British and Dutch was a polite “No”. They pointed out that there were other claimants against the Landsbanki assets and it wasn’t a simple matter to establish that a deposit guarantee fund could jump the queue of the other claimants.

Grimsson appears to be repeating this line in the interview. In effect he is saying that the British and Dutch governments can take the money from the Landsbanki estate – but he forgets that that money is actually owned by other people. In the interview he is giving away something which is not his to give away. He is conflating the Icelandic state with the Landsbanki Resolution Committee and as we keep being told: Iceland did NOT nationalise its banks, so the government can have no say in how the Landsbanki assets are assigned to the claimants. Thus the President sounds generous but actually he has nothing to give away.

The whole situation has been made worse by the Emergency Act of 2008 which reordered the priority of the claimants – this is a highly controversial move and strong arguments can be made that it breaks a host of other laws relating to property rights and discrimination. The fact that the act is essentially retrospective makes it even worse.

The various claims against the Landsbanki estate are currently going through the courts.”

De Jager, the Dutch minister of finance, yesterday presented a letter on Icesave to the Dutch Parliament:

Dear chairman,

On April 9, the Icelandic people rejected the agreement about Icesave, signed by negotiators of Iceland, the Netherlands and the United Kingdom in December 2010. This outcome is a real disappointment both to me and to the Icelandic government. After a process of negotiations lasting two years, there was an agreement that could count on a lot of support from the Icelandic government. The agreement would have made it possible for Iceland to put an end to this ongoing issue, under favorable conditions. Sadly, this opportunity was not seized.

The time of negotiations is now over. The lack of a solution forces us and Iceland to let the law take its course. Now that it is clear that the parties involved will not be able to come to a solution, the EFTA Surveillance Authority (ESA) will probably resume its infraction procedure against Iceland. On May 26 2010, the ESA ruled that Iceland is obliged by the EU guidelines regarding deposit insurance systems to compensate the Icesave account holders up to the sum of €20,887. From this it can be concluded that Iceland is obliged to repay the Netherlands and the United Kingdom, who have advanced this money.

When the Iceland government decides not to adhere to the ruling of the ESA, we will go to the EFTA Court. The Netherlands and the United Kingdom will support the ESA in this case, if so desired. The Netherlands itself does not have a legal position at the EFTA Court.

This week there will be a meeting between my Ministry and representatives of the ESA. In this meeting, we will also call attention to the complaint filed at the ESA by the 100,000+ group, about which there has been no reaction from the ESA so far.

The Netherlands will remain in close contact with the United Kingdom about steps to be taken regarding Icesave.

Together with the UK we are also studying the procedure for an out of court settlement made possible by article 111 of the Treaty. In this procedure, the Commission will play a key role.

The outcome of the referendum has no influence on the payment of funds from the assets from Landsbanki to priority creditors (among them the United Kingdom, the Netherlands, public authorities and the 100.000+ group). The Icelandic government expects that a first payment can be made later this year, that would cover 30% of the amount owed to priority creditors. The curators estimate that they will eventually be able to pay 90% of the nominal claims of priority creditors from the assets. 
Apart from the financial implications for the United Kingdom and the Netherlands, the Icesave file can also have grave consequences for the functioning of the internal market for financial services. Therefore I have faith that both the ESA and the European Commission will do all they can to find a good solution for this issue.

Sincerely,

Mr. drs. J. C. de Jager 
Minister of Finance

Yesterday, Prime Minister Johanna Sigurdardottir presented an Icesave report in Althingi, concluding:

“The Icesave dispute will be solved in the end, whether in one, two or three years. And when the possible responsibility of Iceland is clear, Icelanders will do everything possible to honour their obligation.”

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This morning, Danske Bank’s chief economist Lars Christensen introduced the bank’s latest report on Iceland, Iceland: Recovery in Uncertain Times. The key points are:

* The Icelandic economy is now recovering after the collapse of the Icelandic banking sector in October 2008. We believe that the recovery could prove sustainable, as macroeconomic imbalances have been reduced significantly.

*We expect Icelandic GDP growth of around 3-4% y/y in the coming two to three years, but growth could surprise on the upside if certainty about the Icelandic funding situation increases.

*While the recent “no” vote in the second Icesave referendum adds to the uncertainty surrounding the Icelandic recovery, we think it is unlikely to derail the recovery.  *Inflation is likely to continue to ease and should stay below the Icelandic central bank’s inflation target of 2.5% through 2011-13.

*PPP estimates indicate the ISK is around 25% undervalued versus the euro on an onshore basis. The offshore ISK rate is much more undervalued.

In his address this morning, Christensen made fun of president Olafur Ragnar Grimsson who has been on a roll on Bloomberg e.a., berating the rating agencies. It doesn’t improve the situation to scold the rating agencies and say to foreign investors that they aren’t needed. Christensen said it was important for Icelandic officials to step forward and say they will respect the ruling of the EFTA Court.

Christensen became infamous in Iceland when Danske Bank published its report on Iceland where many of the shortcomings in the economy were underlined. That analysis turned out to be all too true. Now his message was: “Spring is in the air. Be positive.”

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UK Chief Secretary to the Treasury Danny Alexander said on the Andrew Marr show* this morning that he was disappointed the the Icesave agreement had been rejected in the referendum. Now, the UK Government would have to find other means of getting the money back and would discuss the matter with the Dutch Government.

Dutch Finance Minister Jan Kees De Jager is equally disappointed with the results of the Icesave referendum. De Jager remains confident that the money will be paid and that Iceland will have to honour its international obligations. “I am very disappointed that the Icesave agreement did not get through. This is not good for Iceland, nor for the Netherlands. The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide.”

It is clear that EFTA Surveillance Authority, ESA, already in the process of inquiring into Iceland and the deposit guarantee scheme, will now continue its inquiry into Iceland’s position on the deposit guarantee scheme. As pointed out in an ESA press release in May last year, “the Dutch and British authorities stepped in to compensate most deposit holders in Icesave’s Dutch and UK branches, the Directive designates Iceland as being under the obligation to provide the minimum compensation of  EUR 20.000 per depositor. The Icelandic Government has in a letter to the Authority argued that it considers setting up a guarantee scheme to be enough to fulfill its obligations under the Directive. It has also argued that that the Directive may not be applicable if deposits are unavailable because of a major and general banking crisis. The Authority disagrees on both points.”

In much of the foreign coverage the message from the referendum is that Iceland isn’t going to pay. On Ruv, Minister of Finance Steingrimur J Sigfusson underlined that this is the wrong message. The referendum was about a top-up by the Icelandic State, where the bulk of the money comes from Landsbanki assets. Sigfusson underlines that paying out from the assets will be on track.

Sigfusson also posed the question why Icesave has captured the debate the way it has, when much weightier issues and much higher sums in other issues have been much less debated. This is an intriguing question. There is no clear answer but it’s obvious that both the former opposition and the present one have tried to profit as much from the issue as possible to score political victory.

The International Monetary Fund, IMF, is due to publish its next assessment of Iceland now on April 15. An improved outlook would help the Government against the claims by the opposition that nothing or not enough is being done regarding the economy.

The ‘yes’ side has claimed that the legal uncertainties facing Iceland will both make the situation precarious in terms of the outcome but also from the simple fact that the legal process will stretch over a long period, freezing Iceland in an Icesave limbo.

There will clearly be a financial fallout, i.a. quite clear that the rating agencies will lower Iceland’s rating but the political fallout will be no less interesting and possibly long lasting. The Government is weakened, making it difficult to tackle the major problems Iceland faces. The old power base in the Independence Party, centred on former party leader David Oddsson has fought against the Icesave agreement, thereby fighting the present party leadership. It remains to be seen how the party will deal with this rogue element at the core of the party.

Oddsson, who was Governor of the Central Bank of Iceland was driven from his post by the present Government. There is no love lost between him and leading ministers who were instrumental in this action. An interesting development is that the Government is now contemplating a serious review of the role of the Central Bank in the bank collapse. The SIC throws a very unfavourable light on the CBI. A report could further deepen that understanding. Out of many questionable CBI action is a €500m loan to Kaupthing on Oct. 6 2008 when it whould have been amply clear that the bank had already defaulted.

The referendum now can also bee seen as a dress rehearsal for a future EU membership. The ‘no’ might easily stall the membership process because the Dutch and the UK will want to see their money back before assisting Iceland in the membership negotiations. But the Icesave referendum also broadly outlines the course the debate might take, where the ‘no’ to EU will hammer in that Iceland knows what it has but not what it could get being inside the EU. As the referendum showed, there is a wide scope for all hues of national pride against reason.

*Alexander’s view on Icesave is 42 mins. into the programme.

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Steingrimur J Sigfusson minister of finance said on tv tonight that the result of the referendum tonight puts an end to further attempts to negotiate on Icesave. Although both the Government of the conservatives and social democrats, in power when the banks collapsed in October 2008, and the present coalition of social democrats and left green, have said that their aim was to resolve Icesave by negotiation the results tonight put an end to that aim.

Plan B is then to go into the Efta Surveillance Authority process where Iceland has absolutely no control over neither the course or events nor the time it takes.

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Now that the president of Iceland has sent the Icesave bill for a referendum, Icesave is again being debated in Iceland though I sense that it’s not the same burning issue as earlier. Here are some of the aspects that attract the greatest attention.

First of all, was the president within his legal rights to send the bill off to a referendum instead of signing it? Seventy percent of MPs, from all parties, voted for the bill, meaning that here, according to some, president Olafur Ragnar Grimsson is going against the lawful rule of parliament. However, Grimsson points at another vote in Althingi, alongside the bill: the Althingi also voted on a referendum.

Here the vote was narrower. I.a. the Independence Party, in opposition, voted for a referendum. But in an interview following Grimsson’s decision the IP leader Bjarni Benediktsson said that although he had been for a referendum he thought that it had been up to Althingi to decide on a referendum, not the president. He accepted that Althingi vote went against his wish but wasn’t happy with the president’s decision.

When the president presented his decision he spoke of two legislators, Althingi and the people. Legal experts contest this definition: Althingi is the legislator, voted in by the people. The president also pointed out that it’s the same Althingi that voted for the bill now as a year ago, as if that weakened the vote. But this is just his feeling, not supported by the constitution.

The general feeling among Icelandic legal experts is that by his decision the president has redefined his power. The president has, according the constitution, the right to send bills to a referendum. No president had done it until Grimsson, in 2004, sent a hotly debated bill on media ownership (that many saw as The Independence Party going against Baugur’s grip of the Icelandic media) to a referendum. The media bill was then consequently withdrawn. Then it was the Icesave bill last year – and now again. The move now is widely questioned since this time the Icesave bill had a wide support in Althingi.

It’s clear that the EFTA Surveillance Authority keeps an eye on the situation. The EFTA court will not rule on the Icesave agreement itself, that’s beyond its remit. Its focus of interest is the decision by the Icelandic government from Oct. 2008 to differentiate between depositors in Iceland and abroad (this decision is often referred to as being part of the Emergency Act, passed on Oct. 6 2008 but this differentiation is actually not part of the Act).

Icesave keeps on attracting attention abroad. Yesterday, WSJ wrote on the ‘Icelandic Freeze-Out’, pointing out that this time polls indicate, as pointed out earlier on Icelog, that Icelanders might vote for the agreement. WSJ then goes on:

“A yes vote in a referendum likely to be held in early April would leave Iceland in hock to London and The Hague for as long as 35 years—and this because the British and Dutch governments decided, of their own volition, to bail out their own citizens. (My underlining.)”

It’s highly questionable how long the payments will stretch out, 35 years is the maximum but it seems that the Landsbanki assets will go a long way to cover the Icesave debt though there is some exchange risk involved. It’s however completely wrong that the British and Dutch governments decided, on their own, to pay their respective Icesave depositors.

The Icelandic government kept saying that the deposits were completely save and guaranteed by the state, as did the governor of the Central Bank David Oddsson, earlier PM and now editor of Morgunbladid, an Icelandic newspaper, in early February 2008. After the collapse of the banks, Icelandic ministers met with their opposite numbers in Brussels early November 2008 and reiterated their intentions to pay. At the time, the IP and the social democrats were in government. The IT changed tone only when they landed in opposition in March 2009. The present government is led by the social democrats, with the Left Green at their side.

Many Icelanders feel that the president’s decision is highly motivated by his past: he was an energetic cheerleader for the Icelandic banking ‘Wunder,’ travelled to open bank branches and mixed with the bankers and businessmen now tainted by alleged fraud. By putting himself so firmly against the big nations who are squeezing the little one he might well be positioning himself to run for his fifth term next year, an unprecedented length of time. There is no legal limit to an Icelandic president’s time in office.

The president has pointed at the benefits that his decision had last time: a much more favourable agreement. However, it’s come at a cost to businesses but it’s a cost that’s not easy to calculate. Right now, the CDS has again shot up. There might be some Icelanders who shrug their shoulders, refusing to pay. Others might be worried about the consequences of an international isolation and the cost of being seen as a people who flip flop and doesn’t honour its words.

As to the political consequences, it’s difficult to say. If the referendum rejects the bill the government really has run out of options since the UK and the Dutch government will not try negotiating a fourth time. Could the government resign? Though nothing is impossible, it’s not terribly likely since the opposition wouldn’t be keen to wade into the Icesave mess.

For the time being, the most exciting part of the political scene is the Independence Party. Some feel that Benediktsson showed great courage to support the agreement (though admittedly the party had a hand in it, having supported Lee Buchheit to lead the negotiations). Die-hard followers of David Oddsson (now fewer than earlier from his own party but with some unexpected support from the far-left Icesave-opposition) will support his attempts to drive Benediktsson, who has stood up to Oddsson, out of office though there is no apparent leader-in-waiting. Oddsson, earlier no fan of Grimsson, is now writing laudatory editorials about him, underlined by the messianic photo of Grimsson on Morgunbladid’s front page on Monday.

The intense, and incredible, attention on Icesave has detracted attention from other issues that should have been discussed more, such as the state aid to the banks and later to other financial institutions. If lucky, the Icelandic state might have to fork out ISK50bn, to foreign Icesave deposit holders (but more if less lucky and the exchange rate falls). So far, the government has put ca ISK26bn, €162m, into VBS, a bank that survived Landsbanki by 8 months because Landsbanki had financed it far too lavishly (another story). Eight months later, VBS was bust. ISK12bn went into the insurance company Sjova (any national harm that an insurance company would go bust?) and now enough billions into collapsed building societies, bringing these numbers close to a possible Icesave payment. I leave it to the readers to contemplate whether paying foreign deposit holders is more of an issue than saving Icelandic financial fiefdoms.

Icesave isn’t formally linked to Iceland’s EU application but EU can’t disregard the issue. Most people I’ve spoken to do think that EU will want to see an end to the dispute before the application is processed further. At a press conference yesterday morning, Denmark’s foreign minister Lene Espersen aired her concern if the referendum would put an end to an agreement. Iceland would have to settle the dispute with the Dutch and the UK.

The IMF seems to be indicating that the currency restrictions can’t stay in place forever and should be lifted as soon as possible. With Icesave in limbo it won’t happen. It can be argued that the Icelandic currency (or the non-currency as a friend of mine says) is now artificially high, making the Icelandic business environment a Wonderland, cut off from reality. The currency restrictions were seen as a temporary necessity for Iceland to adjust after the crash. At some point, Iceland will need to adjust to the real world.

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According to Icelandic law, a referendum has to be called within two months of the president sending a bill for a referendum. Prime minister Johanna Sigurdardottir said today that the aim is to hold a referendum on Icesave in a month’s time. There is some discussion going on to hold another vote for the constitutional assembly at the same time but so far that’s only an idea.

At the referendum last year both the Dutch and the British government said that a referendum was a domestic issue for Iceland. Most likely, that’s still their position. This time however, it’s not in sight to renegotiate. Sigurdardottir said today that the Dutch have made it quite clear that there will be no new negotiation. The latest agreement is also a final offer. She hopes that the two nations will not retract the last agreement.

The president’s decision gives rise to quite an exceptional situation. It’s clear that, contrary to the constitution which stipulates a representational democracy through parliament, the president now holds the power and can simply on his own stifle decisions by a democratically elected parliament. This unprecedented situation will no doubt cause a hefty debate, yet again, on the powers of the president vs the parliament. Today, there were already many who voiced concern that the president went against a parliamentary vote where 70% of the MPs, from all parties, had supported the Icesave bill – a decision that the president has now overturned.

If the Icesave agreement will be overthrown in a referendum it’s completely unclear what will happen. The question is whether the government would survive though the opposition would most likely not be too keen to come to power to solve the Icesave dilemma. With Icesave unsolved and not yet settled, it seems rather obvious that the Icelandic membership of EU will stall. Neither the Dutch nor the Brits will accept that a country they feel doesn’t honour its words should become a EU member. ESA might also have a say on a new situation, after its two recent moves regarding Iceland. The dispute might possibly end up in the EFTA court, a move that Lee Buchheit, who led the last Icesave negotiation, has warned might turn against Iceland.

There certainly are those in Iceland who will feel fine about having Icesave an unsolved issue since it distracts the attention from other things. The conservative old power elite connected to Morgunbladid and its editor, former PM and governor of the Central Bank David Oddsson, who earlier saw the president as an arch enemy has now discovered a new ally in him. This power elite will keep on bashing the leader of the Conservative party Bjarni Benediktsson as they have been doing so mercilessly in the last few weeks. Their aim seems to be to drive Benediktsson out of office. It remains to be seen if Benediktsson will actively campaign for a yes in the coming referendum but he will most surely be fighting for his political life.

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EFTA Surveillance Authority has now published its summaries of the decisions to initiate a formal investigation into the state aid granted ‘in 2008 and 2009 to rescue domestic operations of the three main Icelandic banks; Glitnir, Kaupthing and Landsbanki; and to establish and capitalise new successor banks, now called Islandsbanki, Arion Bank and NBI (Landsbankinn).’ The investigation was made public on December 15 2010.

The summaries of the three banks – Glitnir, Landsbanki and Kaupthing – offer an insight into the conclusions of the SIC report from April last year. The three summaries are an interesting read for those unfamiliar with the Icelandic report. The summaries provide a wealth of basic information and facts on the Icelandic banks and the Icelandic economy though there is a certain overlap in the summaries regarding general information.

Stakeholders and other interested parties are now invited to submit comments and observations to ESA by March 11 2011.

The original press release on the decision in December can be found here. ESA opened the investigation because Iceland has, according to ESA, not gone correctly about the state aid, i.a. not informed ESA though it has had ample time to do so.

An earlier log on the ESA decision is here.

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Today, the EFTA Surveillance Authority, ESA, has published two major decisions regarding Iceland. Firt of all, it closes seven cases regarding the Icelandic Emergency Act, passed in October 2008, that “granted depositors priority ranking in insolvency proceedings over that of other unsecured creditors. The Act also enabled the Icelandic Financial Supervisor to transfer assets and liabilities from the collapsed banks to new banks.” ESA now concludes that the Emergency Act is not in breech with the EEA agreement.

The second decision regards the question of state aid as the operations of three banks, Glitnir, Kaupthing and Landsbanki, were rescued in October 2008. ESA is already investigating state aid in the insurance company Sjova, one of the many companies wrecked by the Viking raiders, in this case the Milestone Group.

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