Reykjavík Grapevine - 04.02.2011, Blaðsíða 6

6
The Reykjavík Grapevine
Issue 2 — 2011
Leaked | Cables Cables | Paul Fontaine-Nikolov
By now, probably many of our readers
have at least perused the diplomatic
cables made available on WikiLeaks.
We read with great interest the ones
that came from the US embassy here
in Reykjavík, and overall there are few
surprises. But that doesn't mean there
isn't some hilarious, heartbreaking,
and fascinating material to be found.
The following are some of the snippets
that made us drop our jaws, provoking
either laughter or sober pause.
The Good,
The Bad
And The Ugly
Iceland and America – BFFs 4 LYFE
“Iceland is reaching out with increasing
desperation to any available source of help
as it confronts one of the most trying cri-
ses in its history. Assistance from the U.S.
at this crucial time would be a prudent in-
vestment in our own national security and
economic well being. The Icelanders take
fierce pride in their flawless history of pay-
ing back their debt. Whatever the financial
turmoil and uncertainty of the moment, it's
a good bet that this economy of highly-
educated, imaginative, and sophisticated
people will take off again. And when it
does, and when the competition in the
High North really gets underway, it may be
more important than we can yet suppose
to have the Icelanders remember us as the
kind of friend who stands by in fair weather
and foul. ”
-September 2008
On Iceland coming to terms with the
base closing, the embassy offered this
metaphor
“If the universal stages of mourning are
denial, anger, bargaining, depression, and
acceptance, then some members of the
Icelandic intelligentsia have now entered
the anger stage. Arguably Reykjavik had
been in denial from 2003 (or even earlier)
until March 15. Post still anticipates eager
Icelandic entry into bargaining as soon as
a U.S. negotiating team can come to Reyk-
javik.”
-March 2006
Oh the irony
“There is no question that certain imbal-
ances have emerged in the Icelandic
economy, including a high current account
deficit, high inflation and high private sec-
tor debt levels. It remains an open ques-
tion, however, whether these imbalances
render Iceland particularly vulnerable to
an economic crisis. Financial analysts have
articulately argued both sides of the case.”
-April 2006
According to one of the Ameri-
can diplomatic cables released by
WikiLeaks, Mark Flanagan, chief of
the IMF team in Iceland, advised the
Icelandic government to encourage
the restructuring of private sector
debt outside of the legal system.
In a December 2009 cable entitled ‘ICE-
LAND NEEDS FINANCIAL AUSTER-
ITY’, Sam Watson, the former charge
d'affaires and current DCM at the US
Embassy in Reykjavík, reported to the
State Department that Flanagan im-
plored Iceland “to look at ways to facili-
tate debt restructuring outside of the
courts.” In Watson's words, Flanagan
offered the advice due to “the small size
of the court system,” in which 48 judges
preside over all cases.
When asked to specify what sort of
proceedings Flanagan was referring to
and why he believed them to be nec-
essary, an IMF spokesperson refused
to comment, saying that it was rare for
staff to comment on leaks.
Despite Flanagan's concerns over
the number of judges within the Ice-
landic judicial system, according to
nationmaster.com, Iceland has the 16th
highest number of judges per capita in
the world; the United States—the coun-
try with the largest prison population in
the world—is ranked 22nd on the same
list.
WHAT dOES IT MEAN?
With the majority of Icelanders equat-
ing the IMF to the institutional version
of a stranger with candy, it would come
as little surprise if Flanagan's advice
raised a few eyebrows. Already scep-
tical of the IMF’s priorities, Icelanders
are bound to wonder what Flanagan
intended by advocating “debt restruc-
turing outside of the courts,” especially
when considering that the protracted
legal battle over foreign currency in-
dexed loans was awaiting an important
judgment at the time the cable was
wired.
But for whatever reason Flanagan
dished the wisdom in question, the
government may have taken the ad-
vice to heart. Prior to the completion
of the IMF's most recent review—its
fourth since credit lines were opened
in 2008—the government announced
plans to allocate additional resources
to encourage debt-restructuring nego-
tiations between troubled debtors and
creditors. Typical debt restructuring
scenarios include “bondholder hair-
cuts”—when creditors agree to scale
back interest payments to ensure the
debtor's financial solvency—and debt-
for-equity trades, whereby creditors
downsize interest payments in return
for a share of profits if the house or
business is sold.
In a letter to the IMF, the govern-
ment detailed these plans, which are
aimed at bringing heavily indebted
households, small and medium enter-
prises and their respective creditors
to the bargaining table. To prod heav-
ily burdened households towards non-
litigious deliberations, the government
has expanded funding for the Debtors'
Ombudsman, and had the banks agree
to offer a write-down of mortgages to
110% of the mortgaged asset's value.
As far as troubled-but-viable small and
medium enterprises are concerned, the
government intends to incentivise debt
restructuring. While it did not detail
how it intended to enact such a plan
in its letter to the IMF, the government
stated that legislation concerning un-
paid taxes resulting from debt and tax
liabilities related to debt-write-down
was imminent. The government also
intends to offer a mortgage payment
subsidy to lower income households
in distress, which will be financed by a
levy on financial transactions.
“MORAL HAzARd”
While such an agenda seems innocu-
ous and forthright, it may not allay con-
cerns that the deck will be stacked in
favour of the banks when considering
the legal challenges that may arise in
the coming months. What might debt-
ors lose by rushing into a quick settle-
ment? If judges find that fraudulent
acts perpetrated by bankers affect the
status of certain loans, will squeezed
households and businesses rue a hast-
ily mediated settlement? And what if
there are further rulings, which broad-
en the number of unlawfully issued for-
eign currency loans? Will households
and small businesses regret dashing to
restructure interest payments then?
In the view of the IMF (and the gov-
ernment), expedited voluntary settle-
ments are crucial to Iceland's recovery
because the situation is complicated
by the fact that certain individuals and
businesses are in arrears with a multi-
tude of institutions. Moreover, Flanagan
warned against the “moral hazard” of
aiding “nonviable borrowers.” But while
it can't be doubted that certain house-
holds acted irresponsibly and don't
deserve any assistance, couldn't the
same be said for the old banks and their
foreign creditors who have succeeded
them? Is there not moral hazard in
forcing heavily-indebted households
to pony up cash when banking execu-
tives' significant obligations vanish into
thin air? And what ever happened to
due diligence? Is a bondholder haircut
the best way forward when bondholder
chemotherapy isn't even on the table?
“VOLUNTARY” AGREEMENTS
The government and IMF believe that
“across-the-board write-down of debt,
case-by-case restructuring, reduc-
tions in loan-to-value ratios across-
the-board restructuring” would be “too
costly and ineffective”. Yet they are
also bent on recapitalising the banks,
despite the fact that many MPs believe
that the financial sector is still too large.
Unsurprisingly, the government, intent
on “fully restoring the health of the
banking sector,” consulted the “cor-
porate and banking sectors” when for-
mulating its plans. Expect an Icelander
with ties to the Social Democrats to
own West Ham United by 2014.
Whether IMF officials stir in their
beds at night worrying about the wel-
fare of Icelanders and the stability of
Iceland, or whether they actually intend
for the government to corral debtors
into “voluntary” agreements when the
law may have otherwise reduced their
hardship, the Icelandic people could be
forgiven for suspecting that the latter
scenario is closer to the truth. With a
litany of legal complaints surrounding
matters related to debt and a public
weary of close ties between the state
and big business, it wouldn't be a
stretch to predict that many households
will take their chances with further liti-
gation. Certainly this leak does nothing
to improve the IMF's reputation as an
opaque debt collector for multinational
financiers, despite the best efforts of
the IMF external relations department.
It’s only natural for institutions to
tiptoe around their skeletons; the man-
ual for standard operating procedure at
Guantanamo, for one, instructed guards
to deceive the Red Cross. However, if
dirty secrets exist, combing through re-
cords might reveal more than expected.
Like Julian Assange said in a recent in-
terview with The Guardian: “Any form
of large-scale abuse must be system-
ised."
IMF Urged “debt Restructuring Outside Courts”
“Whether IMF officials
stir in their beds at
night worrying about
the welfare of Icelanders
and the stability of
Iceland, or whether they
actually intend for the
government to corral
debtors into “voluntary”
agreements when the
law may have otherwise
reduced their hardship,
the Icelandic people
could be forgiven for
suspecting that the latter
scenario is closer to the
truth.”
Words
Sam Knight
Photography
Hörður Sveinsson
How to win friends and influence Ice-
landers: get them drunk and talk about
sports, apparently
“Cultural programming is a key element
of Embassy Reykjavik's public outreach,
which aims to foster a positive image of
the U.S. among Icelandic citizens and,
especially, elites. ... Even sophisticated,
worldly Icelanders act immensely flattered
by an invitation to be the Chief of Mission's
guests, and by all appearances they leave
such events in a haze of warm feelings
about transatlantic relations. [...] What
we tend to end up doing most often is in
effect to stretch our budget by providing
duty-free alcohol for receptions at exhibit
openings and art festivals. Because alco-
hol is highly taxed in Iceland, our gifts of
wine for receptions strike Icelanders as far
more generous than they actually are. In
return for these gifts we get thanked on in-
vitations and publicity materials prepared
by the event sponsors, and we get invita-
tions for our staff to attend events along
with high society. Then we use the events
to hobnob, make connections, and talk up
U.S. policy. [...] We spend a lot of time try-
ing to explain U.S. policies, for example, in
the war on terror. But with many audienc-
es—especially an Icelandic audience that
has no personal experience of terrorism or
war—these days, no amount of explaining
is going to win support or even sympathy
for these policies. Sometimes it seems like
the best we can do is distract people from
policies they find repugnant with marvel-
lous cultural and sports programming that
focuses them on America's ongoing spec-
tacular contribution to world heritage.”
-December 2005.
More online!ICELANd dIPLOMATIC CABLES EXPLOREd
Some of you might remember Sam Knight from last year's
'TUSSUGATE' controversy on our website.
Note: not actual 'diplomatic cables'.
You should head to WikiLeaks.is, explore those cables and
send us any interesting finds to letters@grapevine.is