Jón Dan í FT: Lausn á Icesave?

Icesave: A potential solution?

By Jon Danielsson

Icelands president refused last month to sign a parliamentary bill authorising settlement of the Icesave dispute with the UK and the Netherlands. This does not mean a rejection of his countrys obligations. On the contrary, Icelanders have already agreed to compensate the UK and Netherlands. The decision by President Grímsson stems instead from the fact that over 70 per cent of Icelanders find the terms of the current deal unreasonable.

The original deal

The original agreement between the three countries in June was too good to be true for the UK and the Netherlands. They employed a professional negotiating team achieving almost all of their demands against a politicised and inexperienced negotiating team from Iceland. It is as if a local football team in Iceland was playing Manchester United. It was, however, a pyrrhic victory.

The Icelandic government then attempted to ram this agreement through its parliament last year, apparently on the basis of a 20 line press release, without disclosing the actual agreement, citing confidentiality. When the government was forced to provide more information, the flaws in the agreement became clear, with legal and financial specialists identifying fundamental failings. Opposition to the agreement has been significant and growing since then.

Responding to this, the Icelandic parliament in August attached preconditions to the deal, such as limiting repayments to 6 per cent of gross domestic product and reserving the right to challenge its obligations in a court of law. These preconditions were accepted by a majority of the Icelandic parliament, but rejected by the UK and Dutch governments who instead amended the previous agreement to include a diluted version of some of the preconditions.

Icesave 2

Eventually, a much watered-down bill in line with the amended agreement was hotly disputed and only narrowly passed parliament in December, but the president did not sign it. Unless Iceland manages to reach a new agreement with the UK and the Netherlands in the very near future, this Icesave bill is heading for a near certain defeat in an Icelandic referendum next month.

Future settlements

At that point the future of the current Icelandic Government will be uncertain and with parliamentary elections looming in the UK and local elections in the Netherlands shortly afterwards, it is unlikely that any settlement will be reached for the foreseeable future.

The UK and Netherlands are reluctant to reopen negotiations because after several unsuccessful attempts they feel there is no negotiating partner in Iceland. The Icelandic government, which has staked its survivalal on passing Icesave, is unable to get the deal accepted, and any negotiations would need to include the opposition parties and the support of InDefence, an influential lobby group for a fair resolution of Icesave, as well as President Grímsson.

The basis of the Icelandic opposition

Besides the terms of the deal, other factors have also influenced the negative attitude in Iceland. It is widely felt that the UK and the Netherlands have used their influence to hold up approval of International Monetary Fund loans while Icelands recent application to join the EU appears also to be conditional on settlement. However, since the majority of Icelandic voters have consistently opposed EU membership, and IMF loans may not really be needed, Icelanders have not responded well to this pressure.

Yet another matter still sensitive in Icelandic is the use of the UK of Anti-Terrorism legislation to against Iceland. This recently lead President Grímsson to state that the UK “put the Government of Iceland and our entire economic system formally on the publish list on the Treasury website together with al-Qaeda and the Taliban… For centuries Gordon Brown will be remembered in Iceland long after he is forgotten in Britain”.

The terms of the deal

The overall amount involved here might not seem excessive – around £3.5bn – but only 318,000 people live in Iceland, so that equates to more than £40,000 per family. The annual interest alone, if adjusted for population size, would be the equivalent of the UK paying over £40bn a year, almost half the yearly cost of running the UKs National Health Service.

I suspect neither the UK nor the Netherlands would be inclined to agree to such an agreement if their private banks had incurred similar obligations abroad.

The recovery rate for deposit claims in Landsbanki is expected to be 88.2 per cent, but payout will not start until next year at the earliest, and probably last beyond 2020. Meanwhile Iceland pays interest on the entire amount during this period. I calculated the debt profile here. At current exchange rates, Iceland can be expected to pay £2.5bn, of which £1.9bn is accumulated interest. This is just under total Icelandic government expenditures in 2010.

The high recovery rate implies that wholesale depositors, such as local councils, universities and charities will eventually be reimbursed most of their deposits. These parties have already been granted priority status at Landsbanki by an emergency legislation, which was passed to salvage the entire Icelandic banking system. This significantly reduces the potential loss to the UK and the Netherlands, but bondholders and lenders are classified as non-priority claims and have no expected recovery.

Conclusion

Iceland is already just about the most indebted country in the world as a consequence of the crisis. The economy is in dire straits, but stabilising. If the Icesave repayments become too burdensome it may trigger a sovereign default of Iceland.

Therefore, it is in the best interests of all three governments to come to a reasonable agreement, enabling Iceland to make good on its obligations, without tipping the economy into the abyss.

A reasonable agreement would be for Iceland to compensate the UK and the Netherlands for any shortfall in recovery from the estate of Landsbanki when it is eventually wound up.

(Þessi grein eftir Jón Daníelsson, kennara við LSE, birtist á vef Financial Times í dag.)