Reykjavík Grapevine - 19.06.2015, Blaðsíða 10

The Reykjavík Grapevine
Politics | Bright?
depleting Iceland of all its currency. The
Icelandic capital controls are not com-
parable to the capital controls in Cyprus,
which were put in place to keep money in
the Cypriot banks and prevent them from
collapsing as funds flowed out due to wild
uncertainty.
Some 500 billion ISK of the 2,200
billion ISK in the three estates are in
ISK, the rest in FX. Now, why have the
creditors not been paid out the FX? The
answer is that nothing can be paid out of
estates to general creditors until the es-
tates either go into composition or bank-
ruptcy. The winding-up boards of Glitnir
and Kaupthing applied for a composi-
tion in 2012 and 2013, but little to noth-
ing came out of that, as the government
was unsure of how to proceed. Because
payouts would have followed a compo-
sition, the government could not agree
to a composition until it was clear what
would happen to the ISK paid to credi-
tors.
An outline of the new plan
to lift capital controls
First, some media trivia: since the gov-
ernment came to power it has been
promising a final plan to lift the controls.
Every now and then, what they seemed
to be working on ended up in the Ice-
landic media, always through the same
journalist, Hörður Ægisson, with Mor-
gunblaðið, until earlier this year when he
moved over to DV, as new owners, who
are close to the Progressive party hierar-
chy, took over that paper. Then the leaks
moved to DV, via Hörður. In March, the
Ministry of Finance announced that ev-
eryone working on the capital controls
had to sign a non-disclosure agreement
threatening fines, if not fire and brim-
stone, to everyone who abused their in-
sight. Then, the Friday before the plan
was announced, Hörður more or less
spilled the plan on the pages of DV. In
spite of the measures taken to prevent
leaks, nothing has been heard of any ac-
tion to clarify the leak.
The government has defined the
problem keeping the controls in place
as amounting to 1,200 billion ISK, ap-
proximately 60% of Icelandic GDP, di-
vided thusly: the old overhang is 300
billion ISK; the problem in the estates of
the three failed bank is 400 billion ISK,
i.e. debt that Icelandic entities (mostly
because they have FX income) repay in
FX; and lastly is 500 billion ISK, which
is purely ISK assets, the largest being
Glitnir’s holding in Íslandsbanki and
Kaupthing’s holding in Arion.
It can be argued that the 400 billion
ISK is not part of the problem at all since
these liabilities, paid in FX anyway, do
not need to be converted. But the govern-
ment, perhaps rather maximising than
minimising the problems looking for
resolution, sees these 400 billion ISK as
part of the problem.
The plan rests on one assumption:
in order to limit the outflow of FX, the
foreign-owned ISK needs to be reined
in before the controls are lifted. The old
overhang will be dealt with in autumn:
more CBI auction and offer of long-term
bonds, all simple and clear.
This then leaves the 900 billion ISK
(according to the government; others say
500 billion ISK, see above). In order to
prevent these sums from wrecking the
economy the government has told credi-
tors that any solution needs to meet what
it calls “stability conditions.” These con-
ditions are “non-negotiable,” according
to the government plan, but what exactly
this means in krónur, i.e. how short the
“haircut” needs to be, is not stated.
There are now two ways to meet
these “stability conditions”: the first
option is that the winding-up boards,
which run the failed estates, negotiate a
composition (which means that the es-
tates are in essence run like a company,
with assets sold off over time, to maxi-
mise return for the creditors, who are
then paid out when the funds are in cash;
there is already plenty of cash in both
estates) before the end of the year and
agree to pay voluntarily a so-called “sta-
bility contribution” to satisfy the “stabil-
ity conditions.” Again, this contribution,
paid to the state over two to three years,
is not a fixed sum but depends on the
value of assets and other variables over
the next two or three years. According to
Minister of Finance Bjarni Benediktsson
this could be as much as 500 billion ISK;
calculations I have seen range between
300 billion ISK to 420 billion ISK. The
reason for this difference is simply that
the there is an optimistic estimate and a
less optimistic one as to how the underly-
ing variables will develop over the time
the contribution is to be paid.
If a composition agreement is not
reached before the end of the year, the
estates go into bankruptcy. This is not
the desired course of events from the
point of view of creditors, mainly be-
cause bankruptcy im-
plies a limited time to
sell assets, which again
will most likely mean
lower prices and less
recovery. Also—and
most importantly—a
bankrupt estate will in-
cur a tax of 39%, or 850
billion ISK, reduced by
certain deductions to
680 ISK (or, more likely,
to 620 billion ISK), pay-
able by April 15 next
year. Here, bankruptcy
and the “stability tax” is
the stick because this is
not what the creditors
want, whereas a “stabil-
ity contribution” and composition is the
carrot the creditors are aiming for.
Now, you might ask why the govern-
ment agrees to “only” 300 billion ISK to
420 billion ISK or thereabouts if it could
possibly get 700 billion ISK or even more.
The reason is that there are all sorts of le-
gal uncertainties connected to the bank-
ruptcy tax: creditors might challenge
it in court and even though the govern-
ment might win (not necessarily likely,
but who knows), this will cause delays,
no controls lifted and Iceland stays in
limbo. Another gain for Iceland from a
successful implementation of the plan:
rating agencies, who decide the cost of
borrowing for countries and companies,
will pay attention. If they are unhappy
with how Iceland treats creditors, both
the Icelandic state and Icelandic compa-
nies get punished with high borrowing
costs, not an ideal situation.
The sensible people advising the gov-
ernment and most of those working on
capital controls issues in the CBI and the
Ministry of Finance support dangling
the “carrot.” With the plan agreed to,
this is the likely way. The only thing that
could scupper the plan is “panic poli-
tics”—politics that arise when politicians
are in panic about losing power. The next
election is in 2017, and already next year
politicians will be planning for it. Over
decades, many foreigners have com-
plained that the old Roman saying “Pacta
sunt servanda” (“an agreement stands”)
has never reached Iceland, that Iceland-
ers only feel that an agreement stands as
long as they do not think of a new one. So
there are some caveats as to what could
happen—though for the time being, com-
position and stability contribution are
the likely outcome.
So when will those yearning for a
flat in the sun or foreign shares or pen-
sion funds with billions to invest get out
of the controls? Although the rhetoric
when the plan was presented was that
this was all done with the interests of the
“real economy” at heart, i.e. Icelanders,
businesses and pension funds, there was
no date for lifting the controls for them.
That plan will come in autumn or next
winter, according to sources close to the
government. This will take some years to
carry out.
How can Iceland allow creditors who
will make zillions on their claims to walk
away with their huge profits? Well, be-
fore profits, there have been huge losses,
but not necessarily for the same credi-
tors. There are essentially two types of
creditors. One type is the foreign banks
that originally lent the Icelandic banks
and who have lost what amounts to
five or six GDPs. The three estates now
own assets worth approximately 2200
billion ISK, approximately 110% of Ice-
landic GDP. No need to weep over their
losses, as some of those original lenders
still hold onto their claims, hoping they
will get something in the end; they can
now hope for around 10% of what they
lent Landsbanki, 20% of what they lent
to Kaupthing and approximately 30%
of what they lent to Glitnir. The second
type is those creditors who have bought
claims (to begin with from the original
lenders, type one; later also from each
other) on the so-called “secondary mar-
ket,” after the banks
had failed. Bank-
ruptcy assets are
called “distressed
assets,” and make
up a small but lucra-
tive part of the fi-
nancial sector. It is a
myth that those who
bought the claims
after the collapse all
did so at two cents
to the dollar and
stand to make thirty
or forty. There was
very little trade to
begin with and the
price soon rose but
yes, some of those
who bought on the secondary market
will make a lot and that is the way it goes.
It is however important to keep in mind
that their profit comes from the estates of
failed banks, not from the Icelandic state
and Icelandic taxpayers.
If Iceland treats the creditors harsh-
ly, it may scare away foreign investors,
sorely needed at the moment. Although
that being said, the finance market tends
to forget quickly. Shortly after the last
election, in a discussion about capital
controls at an open meeting in Reykja-
vík, one businessman advocated for the
harsh treatment: the estates should just
be boxed in and the controls lifted on
everyone and everything Icelandic—
people, companies and pension funds.
Már Guðmundsson, the governor of the
CBI, was present and in his calm and
measured central banker tone, he said
that this was certainly possible. Then, in
a few years time, foreign investors will
come to Iceland, see the cage, and ask
who is in it. “Well, those are the foreign
investors who were here last time…”
Economy | Capital controls NEWS
IN
BRIEF
the purchase of the newspaper DV,
MPs from both the ruling coalition
and opposition have called for a closer
examination into the matter. The PM
has denied any wrongdoing.
In other news, Russian sailboat
STS Kruzenshtern, which had been
docked for several days in the
Reykjavík Harbour, accidentally
rammed into not one, but two of
Iceland’s Coast Guard vessels.
Although the Coast Guard is prob-
ably furious that the ships have been
made unseaworthy, our money is
on them also being impressed with
an unarmed sailboat doing so much
damage to two armoured ships.
The Coast Guard also made headlines
when they announced that they will
return the cache of guns they
got from Norway. The 250 MP5 sub-
machine guns have been stuck in cus-
toms since October, after a disagree-
ment about whether the guns were
being purchased or if they were gifts.
Despite numerous attempts from the
Coast Guard and police to convince
the general public that they needed
such a vast number of firearms, the
populace remained firmly opposed to
the idea, and now the guns are going
home before the end of June. At last, a
farewell to arms.
And in other good news, arthouse
cinema Bíó Paradís successfully
crowd-sourced 30,000 EUR to
make the venue fully accessible
to wheelchair users, hitting their
target at the eleventh hour. The plans
include installing multiple ramps,
building a new toilet, and making
numerous other smaller changes
throughout the cinema.
To end things on a high note,
Reykjavík’s petting zoo has seen
an increase in its number of in-
habitants, with a new foal, baby seal,
and for the first time in seven years, a
purebred reindeer calf. Although all
three can be seen at the petting zoo,
the staff has asked visitors to be re-
spectful of its denizens, in particular
its youngest members.
“Over decades, many
foreigners have com-
plained that the old
Roman saying “Pacta
sunt servanda” (“an
agreement stands”)
has never reached
Iceland, that Iceland-
ers only feel that an
agreement stands as
long as they do not
think of a new one.”