Iceland Must Renegotiate

The big debate in Iceland these days is whether the legislature should approve an agreement with Great Britain and the Netherlands requiring the Icelandic government to repay losses incurred by the citizens of those countries resulting from the failure of Landsbanki's IceSave accounts. The stakes are high, and various commentators speculate that the ruling coalition will fall if the agreement is not ratified.

It is, however, time to step back and look at matters in a rational manner.

As matters stand, we're damned if we do, and damned if we don't. If we ratify the agreements, we'll be looking at a very strong possibility of a sovereign bankruptcy. If we don't, the strong implication is that Great Britain and the Netherlands will block further IMF assistance and Icelandic entry into the European Union, and do whatever else is within their power to send us back to the Stone Age.

Imagine that Iceland was a private corporation that had guaranteed the debts of one of its subsidiaries. Under American law, if the subsidiary had obtained funds through fraudulent means, then declared bankruptcy, the parent corporation's guaranty would be called in. If the parent was also in financial distress, it would likely file for bankruptcy itself.

The subsidiary's fraud would preclude it from discharging its debt, but the parent would likely be entitled to a discharge, absent a showing that it was aware of and participated in the fraud. The subsidiary's assets would be liquidated, and distributed among creditors, but the parent would likely submit a plan of reorganization that would permit it to cram down the guaranty obligation, paying only a portion of the remaining debt to the creditors.

"No problem boys, I'll take care of the bill." The Icelandic nation pays the bill, but Landsbanki owners and directors enjoy the feast: Icelandic cartoonist Halldór Baldursson's take on H.C. Andersen's fairy tale "Little Match-Seller Girl." www.mbl.is./halldor/

The bankruptcy filing would impair the parent's credit rating, but would not require replacement of the parent's management or otherwise damage its ability to function as a going concern.

British and Dutch authorities have already seized all of Landsbanki's assets in their countries, and are proceeding with plans to liquidate them to satisfy the IceSave obligations. As with any liquidation, the successful those efforts will be will depend in large part on matters outside any of the governments' control, such as the stabilization of property values, the market for the bank's assets, and the speed with which liquidity is required.

In Iceland, Landsbanki's collapse is attributed, at least in part, to Great Britain's decision on October 8, 2008, to invoke anti-terror legislation to freeze the bank's assets. Landsbanki appeared to be well-situated to survive as a going concern after another Icelandic bank--Glitnir--went into receivership on September 29, but the British regulators' action led to a run on Landsbanki, and forced it into receivership.

There are, to be sure, any legal and factual issues that can be debated: Did Great Britain's action cause Landsbanki's insolvency? Did Icelandic regulatory officials have enough facts at their disposal to foresee Landsbanki's imminent collapse? What legal obligation did the Icelandic authorities have to warn of Landsbanki's purported instability? Is the interest rate called for by the IceSave agreements punitive?

Although Iceland's Finance Minister, Steingrímur J. Sigfússon, insists that ratification of the agreements is essential to the government's recovery plan, and implies that a North Korea-like pariah status is the only alternative, Professor Jón Daníelsson of the London School of Economics suggests that rejection of the agreements would simply imply that Iceland is not shirking from its responsibilities, but wishes to restart negotiations to achieve a fairer result for Iceland. Since the collapse of the entire EU banking system is no longer imminent, there is no gun to anyone's head.

Negotiations between sovereign states take time, and the stakes are so high for Iceland that we must be sure that we're getting a fair shake. No neutral third party has found the Icelandic government solely responsible for the IceSave deposits, so why is our government conceding the point? If this were a dispute among equals, I suspect the terms would not be so one-sided.

Iceland should reopen discussions, and request the assistance of a neutral third party (such as the United States or the Scandinavian countries) in negotiating a more equitable agreement. It cannot be in the long-term interests of any of the parties to these agreements to reduce the entire Icelandic nation to utter destitution. The terms of the current agreements would require severe cuts in health care, education, and infrastructure spending in Iceland, which would only serve to weaken our value as a trading partner and military ally.

I understand the depositors' anger towards the bankers who took their money and promised high returns. I sympathize with the newly-impoverished pensioners whose futures have suddenly been thrown into doubt. I appreciate the strong stand their governments have taken on their behalf. I despise the arrogance of the "New Viking" raiders who still cavort in London like princes with the money they stole from honest hard-working depositors.

The pain and loss they feel is exactly the pain and loss the vast majority of Icelanders feel. We, too, were bamboozled by their promises of easy cash. What we need now is for our government to stand up for us the way the British and Dutch governments have stood up for their citizens, and to reach an arrangement that is equitable for all.

Follow Iris Erlingsdottir on Twitter: www.twitter.com/elluskott

Comments

[darrensays]

I have been reading up on Iceland on various other websites, and your articles are by far the best of anything that is being written in the English language on the subject. Is Icelandic your first language? Your command of English is very impressive, and your knowledge and insight extraordinary. I have been teaching journalism to American students for over a decade, and in my work I have certainly never seen anything that comes even close to the quality of your work. Why are you not writing these articles for say, the New York Times or the Washington Post? Your writing far surpasses most of what can be read on their editorial and opinion pages.

[animalis]

Thank you for your informative and very interesting posts Iris - I have been looking at websites with information on the situation in Iceland and your articles are by far the best of anything that is being written in English on the subject.

I have been teaching journalism to American students for over a decade, and I must compliment you on your command of the English language, which is astounding - is Icelandic your first language or English? Why are you not writing these articles (or columns, I hesitate to call them "posts", you obviously put a lot of work into your writing) for the New York Times or the Post?

Keep up the good work.

[Elwiss]

The link below has been moved to here:;
http://icelandtalks.net/

[Elwiss]

Hi Nicholas
Here is a good website that covers some of the news and issues taking place in Iceland today.
The Huff post is cool, and this site adds abit more to the whole picture:
http://icelandtalks.wordpress.com/

[Bromley86]

@WestNebraskan

Regarding the UK and Dutch authorities, the Dutch example best illistrates how powerless they were:
http://newsfrettir.com/economy-a-finance/general/919-commentary-were-unable-to-stop-icesave

Likewise, Landsbanki kicked up a huge fuss when the UK FSCS said that it might take longer to get money back from the Icelandic guarantee fund.

As to the rates, they were good but there were other banks offering the same or similar. The guarantee was taken at face value by everyone, including the media. Few mentioned or even knew that Iceland was a micro-state, population-wise (like me for instance :) ) and that its banking sector was so large compared to the rest of the economy.

True believers in the correctness of the market hate guarantees for this reason - it shifts responsibility from the individual to the state, at least for the masses who have less than £50k in savings. But that position requires one to ignore the effect on the system of a herd of sheeple taking their money out and stuffing mattresses. Certainly, it seems to me more reasonable to expect the government of Iceland to regulate its banks than to expect the average person to be an expert on the economy of Iceland.

[WestNebraskan]

I fully concur that the shifting of moral hazard from the individual to the government is a bad thing, as we see here in America with the bailouts of the investment banks. The whole idea that high returns necessarily implies high risk seems foreign to most investors.

The IceSave fiasco has shown some of the fundamental flaws in the EU regulatory system, and dumping everything on the Icelandic people is just a way for the Dutch and Brits to avoid accepting responsibilty for their failure to protect their citizens from the "Viking " predators. Iceland should regulate its banks (which it obviously failed to do), but GB and the Netherlands are obligated to protect their people. If they pass laws that preclude them from doing so, they should accept some blame, too.

[Bromley86]

>If they pass laws that preclude them from doing so, they should accept some blame, too.

But they have. In the UK it's involved everything above the 20,887 euros (at least for retail depositors) and in the Netherlands the extra 79,113 euros to top up to their guarantee of 100k euros (not sure if that for retail only or all depositors).

The various guarantees did, in my personal experience, help calm the nerves of myself and people that I know over banks that had nothing to do with Iceland, so in that respect they worked well. Plainly the rules were written (1) with no thought of total collapse, largely because (2) they didn't really consider the possibility of a micro state with a massive banking sector. So in that respect you are correct. Still, under them, the buck stops at the single sovereign state level.

Would my opinion be the same if I was Icelandic? Probably not. Would it be the same if I was not British? Probably. But then I would say that :) .

[WestNebraskan]

I have a hard time believing that the British and Dutch regulators were completely clueless and powerless to put the brakes on IceSave, or that the depositors believed that there was no risk involved in these accounts, despite the high rates of return. Sure, the Icelandic bankers were crooks, but I don't see a lot of clean hands.

There should definitely be more vigorous prosecutions in Iceland, but I don't see why Jon Asgeir and the rest couldn't be prosecuted in the other countries in which they ran their scams.

Bromley86 is right about the timing, but the Icelander's don't seem to care about such trivialities. They feel bullied by the Brits, and cheated by this agreement.

[Iris Erlingsdottir - Huffpost Blogger]

Thank you, thank you! At least one former bank owner has a London address; I wonder if the Brits are aware of that...

[Bromley86]

>"British and Dutch authorities have already seized all of Landsbanki's assets in their countries, and are proceeding with plans to liquidate them to satisfy the IceSave obligations."

Not sure that this is the case, as if the risk of the assets not meeting the guarantee liability falls on Iceland (as it does in the Agreements), then surely the British and Dutch governments cannot be the ones that manage the asset sale.

>"In Iceland, Landsbanki's collapse is attributed, at least in part, to Great Britain's decision on October 8, 2008, to invoke anti-terror legislation to freeze the bank's assets. Landsbanki appeared to be well-situated to survive as a going concern after another Icelandic bank--Glitnir--went into receivership on September 29, but the British regulators' action led to a run on Landsbanki, and forced it into receivership."

This is simply wrong. Landsbanki was insolvent as it could not meet the demands of its depositors in the UK and the Netherlands as there was no lender of last resort to back it up (or not one with sufficient funds).

In fact, Landsbanki was placed into receivership on October 7th and the freezing order only came into effect on the 8th. So Landsbanki was dead before the ATCSA was invoked.
http://www.landsbanki.is/english/aboutlandsbanki/pressreleases/?GroupID=720&NewsID=13284&y=0&p=1

[Peterreeves]

The situation was caused by massive overleveraging by the banks and companies like Baugur.
Glitnir was nationalised first, and it was only a question of months before the others fell; thats why so much money was being siphoned out by the principals.
How about nationalising Hagar, which was conveniently demerged from Baugur, and sold back to the family of the principals wife. How about the banks not forgiving loans to the elite?
There are so many domestic solutions, rather than whinging on about the Anti Terrorism saga.
The British have got enough problems to deal with!
The real villains are the small group of businessmen living in London, Boston & New York with their stolen goods. Just recently the fallen principal of Baugur was looking to buy a NY fashion house.
Iceland needs to firmly deal with its criminal elite, who are poised to ransack the nation again!

[Iris Erlingsdottir - Huffpost Blogger]

I agree with you, and the average Icelander is angry over the lack of action at the prosecutor's office. It is scandalous that the Icelandic authorities have not prosecuted a single individual in connection with what European investigators are calling the "largest financial swindle in Europe since WWII."

[Nicholas Brittain Shaber]

Íris,

My wife is Icelandic (I'm American) and we are currently living in NY until I can find a way to work while living in Iceland. I'm learning Icelandic but still am not fluent and can't keep up with with all the latest news so I really enjoy reading your posts.

Are there any online groups that I can join or is there an organization that I can donate my time/money to that are trying to raise the awareness of or are fighting against this situation? It really scares me to think of Iceland signing to an agreement with such terrible terms and pisses me off that the government will not prosecute the thieves that stole so much from there own families and neighbors

Best Wishes from New York,
Nicholas Brittain Shaber