Wednesday, March 10, 2010

The referendum

This past weekend Icelandic voters entered the booths to decide whether or not to pass a law providing a state guarantee of payments to Holland and the UK, used to reimburse former Landsbanki account holders in these countries. The result was an overwhelming No – about 93% of voters rejected the guarantee while approximately 2% agreed, and 5% returned their ballots empty or invalid. Having been in New York and watched how this was misreported in the foreign media: Iceland voters reject paying foreign creditors – I feel myself compelled to explain the issue, albeit to the best of my limited knowledge of state finances.

If what I have picked up during the 1 ½ years since the Icelandic banks collapsed is correct, the issue boils down to the following: The public, government owned Icelandic banks were privatized 8 years ago and highly unfortunately for us and anyone and everyone lending them money, over time these establishments ended up in the wrong hands. At some point the owners came to think of these institutions as their private piggy banks, useful for dipping into whenever they needed cash for a new, usually crummy, business venture. Had the banks been properly managed this would not have been possible, but again unfortunately for everyone, the men chosen to man the bridge were at least one, if not all, of the following: inexperienced, greedy or simply stupid. They were led astray by ridiculous salaries and crazy share options that had not been seen in our country before. The assumption is that if the managers had dared step on the brakes, they would simply have been replaced. Hence they toed the line, on their watch money was squandered left, right and center and the key players became increasingly better off – personally.

Subsidiaries were set up abroad, and in the case of Landsbanki, when the foreign paperwork and operating licenses were too annoying a process, branch offices – such as the horrific Icesave accounts. Both forms of business offered accounts with much higher interest rates than traditional in mainland Europe and the money came pouring in. On top of this, operational loans were available in abundance on the world market and to keep these miserable ventures running the banks took on more and more (and more and more). Not only were new loans used to pay off old loans, they were also taken to keep the snowball effect alive.

Enter the credit crunch. No more foreign loans and the time of reckoning was upon the banks. What were they to do? Their share prices were falling and they were not able to pay off the loans that kept them ticking. Foreign account holders became uneasy and new accounts were few and far between and a rush on the banks was not far off. It was thus imperative for the banks to falsely appear stable and safe. This was not only to head off rush attempts, the owners had a lot riding on share values and the managers as well, their bonuses and stock options were in danger of achieving their true value = zip. But once cornered rats will bite, and the banks did just that: they bit, chewed and spit out the gnawed bones. Gross market manipulation ensued, and this took on many forms, some even ridiculous (involving an imaginary investing Sheik from Dubai). Also, being based in Iceland the bank’s accounting had to be done in Icelandic króna and to cook the books they attacked our currency, making their balance sheets look so much better, i.e. when their foreign assets ballooned in value (in ISK). Tough shit for their former countrymen who were hard hit by this occurrence. At this point it should be noted that most of what these banks owned had nothing to do with Iceland and only a small fraction of what they amassed in loans and accounts ever arrived here. The key players all live in London or Luxemburg you see and their business ventures focused on buying up fancy businesses and foreign companies – the Icelandic market being way too small for their lofty aspirations.

To cut a long story short, in October 2008 the house of cards that the Icelandic banks truly were, came falling down. One by one the three banks that had ventured abroad went bust, leaving in their wake horrible consequences for innocent people and various financial institutions that had been too trusting in their lending. In the latter’s defense, the ratings companies noted nothing amiss, for one Fitch Ratings amazingly repeatedly gave our banks great ratings – the last such “invest/buy” rating being dated less than a month before they collapsed. Makes you wonder what is in the Fitch water cooler.

So what did this mean to Iceland aside from having no more big banks in operation and a next to worthless currency? To explain this properly it must be noted that branch offices are different from subsidiaries as they are not legal, independent entities but operated under the liability of the head office – based in Iceland in the case of Icesave. It is worth remembering that despite this arrangement the money deposited was not shipped to Iceland for safekeeping or any such thing. However, this does not change the fact that when Landsbanki went bust the liability of reimbursing holders of such branch accounts was that of the Icelandic head office. In accordance to the appropriate EU directive for deposit guarantees, Iceland had in place a fund meant to pay back account holders in the case of a bank going bust – note: a bank, not banks. This emergency fund (banks were required to place at least 2% of their deposits into it) had by no means enough to pay back the full amount of what was lost and apparently the directive which Iceland dutifully followed was never meant to address a head-on banking system collapse. Such a fund is not really possible no matter how big the economy and the blame is not to be placed on the EU. What matters is that the insufficient fund bore no state guarantee, any more than other such funds elsewhere.

Finally I get to the point, namely the referendum. After the collapse the British and Dutch governments decided to pay the account holders what they lost, up to an amount approximately double the minimum required in Europe. This is obviously very generous and the right thing to do when it comes to the people involved but things got very complicated when these same governments turned round and requested Iceland pay the full amount back within 7 years – with 5,5% interest and that the Icelandic state guarantee payments. It was this guarantee that was voted upon – i.e. does the Icelandic taxpayer want to guarantee payments for a private bank? Not really. This is not to be misunderstood, we are willing to accept what can be stretched to be considered our responsibility and pay what is required to cover the minimum payment for the accounts in question. Our government was not asked when a much higher payment was made and it certainly would not have agreed – unless of course they had been sipping from the Fitch water cooler.

The Dutch and British claims amount to approximately 4 billion Euros or 5.5 billion USD, perhaps not seeming like a great deal until put in conjunction with the Icelandic population: 320,000 people (presently decreasing for the first time in a century). This is a crazy burden for each family here to bear, about 70,000 USD per family of four, especially considering the horrible state of everything else. The banks dragged almost everything down with them, our currency collapsed for one, and the pillaging for “investing” that has come to light reached further than our banks: our insurance company’s trust funds and almost every single pension fund in the country – scorched earth.

Finally – the lesson to be learned is hard for us. We will do the honorable thing, i.e. pay what is left of the minimum payment once the Landsbanki assets have been sold. What we don’t want to have to do, and can’t really, is pay a high interest rate until everything is sold off and accounted for (estimated to be finalized in 7 years). This will most likely be the result of new, ongoing negotiations with Holland and the UK as all parties are intent on solving the matter and moving forward. There are no real good guys or bad guys in the clean-up operations required by the whole mess, such categories easily chage according to the viewpoint assumed. I guess one thing everyone can agree on: Iceland must promise not to undertake international banking, ever again. A heads up: if this promise is broken in future, steer away from banks ending with -banki.

There are various other aspects that I don’t have space for but can’t completely leave out, namely: our poor politicians (both in power and the opposition) that must tackle this horror and try to run the country for free (no funds available) as well as our president – all of whom have my full sympathy, the fact that Landsbanki accounts within Iceland were paid out in full to avoid an uprising, the IMF refusing to pay out agreed loans until we have accepted the Icesave agreement and as such acting as some sort of collector instead of the helping hand it is supposed to be, in addition to what hurts the most: the refusal of our neighboring Scandinavian countries to lend prior to our signing as well as the cold shoulder Obama has turned towards us, the USA’s allies. When push comes to shove politics fall under no known equations – the important thing is not to mix such dealings with the citizens themselves and hope that they too will accept us here at face value, despite Iceland having bred amongst us the worst banker/investor combos know to man. If accepted, I truly apologize on behalf of my country for the financial wreckage left in their wake.

Finally, I can’t leave the subject without sending my praises to the Faroe Islands and Poland – these two countries provided help not based on us signing any agreements. My sincerest and heartfelt thanks to them, plus what counts: my Eurovision vote.

Yrsa - Wednesday


  1. Wow, Yrsa.
    This is the most cogent and clear summary on the situation I've read so far. You should write for THE ECONOMIST.
    I was discussing this issue just the other day with a friend who lives in Holland.
    I'm going to forward this link to him.

  2. Yrsa - I second Leighton's comment. You make more sense of the situation than anyone I have heard on the Sunday morning "serious" discussion shows. You have presented a clear, unambiguous statement of fact.

  3. Yrsa

    Thank you. I had no idea when I asked Leighton if you might write about this, exactly what it might entail. So first of all I appreciate the effort this took. When I read a small blurb about the referendum in our newspaper, it really piqued my interest. And, guess what, I know who to ask for an explanation!

    Perhaps I missed this but I will ask the stupid question. Is Iceland part of the EU and if it is why don't you use the Euro as currency?

    The end of it all is that if you give greedy people an inch they will take a mile. It doesn't matter where you live.

    Yrsa, I suggest you and your friends sneak in and put some of that stuff you drink at holidays into that water cooler - or perhaps something like arsenic would be more appropriate.

  4. Hi Leighton: Everyone in Iceland would be able to write for the Economist these days. After a year and a half of constant reports regarding financial dealings gone bad we are all now experts in shortselling, dividends, mergers, takeovers, tax havens, disecting and much, much more horrible stuff that I for one never wanted to know. Hope your frined in Holland understands the issue better.

    Beth: I would have loved to provide the dramatized version which would have contained the story of how the Landsbanki ended on a terrorist list between Al Quaeda and Hamas but it would have been too one sided. It is always better to aim for impartial, even though it never fully works out that way.

    To Jacquie: Thanks for asking for this post, it is really helpful to know what people want to read about. I am not always sure if what I like to write about is enjoyable for those who visit so feel free to suggest subjects (applies to one and all reading this).

    Regarding the EU we are not members, although we are now in a process of seeing what membership would entail, in particular regarding fishing and farming which is believed to be badly compatible with the current EU policies. What happens is anyone's guess but were we to vote now the referendum would have the same outcome as for the Icesave bill, i.e. no. However, this might change if the membership agreement contains changes to some of the policies, i.e. control over our fishing, protection of our farmers and I also believe we would not agree to having our young people being offered for an EU army which I am not sure if really is the plan or not as the reports of this military venture come from the anti-EU camp.

    I have to log off now as I need to go refill a certain water cooler.

    bye Yrsa