On the Icelandic Way and Capital controls
In a recent book „Ísland ehf. auðmenn og áhrif eftir hrun“ – Iceland ltd., the Oligarchs and their Influence after the Crash – (Vaka/Helgafell, 2013) the authors, Magnús Halldórsson and Þórður Snær Júlíusson, both economic analysts in the media, give an overview of the „Icelandic way“ after the crash 2008. Specifically they try to estimate the ongoing transfer of wealth and the subsequent polarization of society. In the final chapter (p.205-292) they deal with the Icelandic experience of IMF-imposed capital controls. They were meant to be a short-term fix, but have now lasted almost five years. Here are some of the highlights of their coverage:
- Mostly foreign-owned claims on Icelandic assets are estimated at íkr. 2.750 billions (more that 160% of Iceland´s GDP). This is way beyond the Icelandic Central Bank´s foreign currency reserves and the Icelandic economy´s capacity to earn foreign currency. If foreign currency controls were to be abolished immediately, the Icelandic economy would dive into a new crash. The biggest foreign owned assets waiting to exit out of Iceland are the majority shares in two of Iceland´s major banks (Glitnir and Arion). Those assets are estimated at ca. 500 billion íkr. Those banks own outstanding loans in all major sectors of the Icelandic economy (financial services, telecoms, communications, transport (e.g. Icelandair), as well as the major fishing and oil-companies.
- Who are the owners of the banks and the major assets, waiting to be converted into dollars and euros? They are mostly American hedge funds, which have picked up those claims in the aftermarket at spot prices. They are based in Delaware, Luxemburg, Ireland, the Cayman Islands and other Caribbean tax havens.
- The assets of the bankrupted Icelandic banks, now in foreign ownership, have been steadily increasing in value, from having been virtually worthless immediately after the crash in October 2008. As an example we can mention Glitnir. Its assets are now evaluated at 30% of their pre-crash value. This means that the owners of cheap claims on the bankrupted banks are in for multiple profits. Their only problem is how to by-pass the IMF imposed capital controls.
- Since the April parliamentary elections, the parties that steered Iceland into the crash (1999-2008) are back in power. This time the junior partner, the Agrarian party, is in charge, with the Conservatives as junior partners. How come? The reason why is a draconian election promise given by the Agrarian leader and current prime-minister, Mr. Sigmundur Davíð Gunnlaugsson. He promised that he would force the hedge-fund buckaneers to write off their claims and use the proceeds of re-sold assets to reduce the capital stock of inflation-indexed household debt by 20% across the line. This promise brought him the premiership. Now his headache is how to keep it. (See p.260-61)
- Formally, the IMF has finalized its stewardship of the Icelandic economy. Due to the short-term fix of a massive devaluation, Icelandic export sectors (fishing, aluminium, tourism) have spurred some growth, due to enhanced competitive position. Massive write-offs of debt of companies, have kept businss going and helped to reduce unemployment. In this sense Iceland seems to be doing better than other crisis victims, such as Greece and Cyprus. But the long-term problems, lifting of capital controls, which is a prerequisite for FDI, access to a stable currency and formulation of an effective anti-inflationary monetary policy – are still unsolved. Premature lifting of capital controls will surely lead to a new crash. So, „the Icelandic way“ is far from straight ahead.
- What plans are there for lifting of controls? The Central Bank has been trying to attract foreign capital to invest in Iceland by offering special privileges. Owners of foreign capital can sell the euro at the rate of 230 Ikr., whereas the official one is 162 Ikr.. In many cases the owners of foreign currency bought it pre-crash at the rate of 90 Ikr. A handsome profit is therefore on offer. Many of the pre-crash oligarchs with money abroad, are utilizing those privileges. But they are mainly investing in real estate and thus pricing the average buyer out of the market. The authors of the book speak of two nations in the country. Those dependent upon the worthless domestic currency and the privileged ones, who are excempted from capital controls and enjoying a special exchange rate.
- The million dollar question is this one: Will the hedge funds (the predators, as they are called in the Icelandic press) agree to write off enough of their claims (as the price for their exit from Iceland) – to finance the prime-minister´s election promise?
- Does the new government have any plans for getting out of the vicious circle of devaluing a non-convertible and useless domestic currency in order to attract FDI? None, say the authors. On the contrary. The new government has postponed – de facto abandoned – EU-membership negotiations and has no plans whatsoever of joining the euro.
- The previous government, on the other hand, had made it clear that the hedge funds would not be allowed to own Icelandic banks. The government had devised three ways to solve the problem:
- The government would become majority owner of the banks
- The pension funds, in partnership with a few major companies, would become majority owners of the banks.
- Foreign banks would come in
As a matter of fact there were on-going discussions with representatives of the investment arm of the People´s Bank of China
. This was one further sign of the gradually emerging long-term interest of China to secure itself a stake in the promising developement in the High North. New major shipping lines and access to valuable resources, due to climate change and the melting of the ice-cap in the High North, are a powerful incentive for Chinese involvement up North. Previously, a CP-sponsored Chinese billionaire had proposed to buy 3% of Iceland, in the destitute interior, to develope golf-courses and luxury hotels. This plan has so far failed to come through. But what China obviously needs, in order to establish its presence in the High North, is a secure harbor and transportation hub. Iceland´s financial- and economic crisis maybe China´s opportunity in the region (see p. 267).
- If the Icelandic state becomes majority owner of all the domestic banks, it will become the creditor of 90% of all outstanding loans to individuals in the country. As owner of the banks, the House Mortgage Fund (Íbúðalánasjóður), the Students´ Loan Fund and the Developement Fund of the Country Side (Byggðasjóður) – the State would be responsible for approximately 70 % of all outstanding debt in Iceland. (See p. 282-83).
Was anyone saying that Socialism was dead?
This would be a remarkable result of the Neo-liberal experiment on Iceland during the crazy decade 1999-2008.
Jón Baldvin Hannibalsson The author was Minister of Finance and Minister for Foreign Affairs and External Trade of Iceland 1988-95
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