The Icesave Paradox: How can Iceland be against the current Icesave agreement, and still be absolutely committed to fulfill all its obligations?

When the Icelandic President decided January 5th to send the current Icesave agreement to a national referendum, the response in the European press came in fast and furious.  How could Iceland go back on its word and refuse to pay for Icesave?  In the past few days though, the opinions have been slowly changing, as people are now starting to realize, that Iceland is NOT refusing to pay and it still fully intends to fulfill all its obligations.  To understand this seeming paradox, it is necessary to look at what is really going on behind the scenes.

1. The old Landsbanki (Icesave) bankruptcy proceedings. 

The old Landsbanki (LBI) winding-up board publishes regular reports on the status regarding recovery of assets and its liabilities:

http://lbi.is/creditorinformation/creditormeetings/

According to the most recent reports the key figures are:
(all amounts are converted to Euros using the current exchange rate ISK/EUR of 180.5)

Total assets of old Landsbanki: 819B ISK (4.5B Euros)
Bond from new Landsbanki (NBI): 345B ISK (1.9B Euros)
Total LBI assets available: 1164B ISK (6.4B Euros)

Total deposits (Icesave): 1319B ISK (7.3B Euros)

According to Icelandic laws, the depositors will have priority to all LBI assets during the winding-up process.  If we compare the total assets available with total deposits, it is clear that there are enough assets available to cover nearly all the deposits (1164/1319 = 88%).

As nearly all the Icesave depositors have already been paid out, it is actually the deposit insurance funds in each respective country that have taken over the original claims.  These are TIF in Iceland, FSCS in UK and DNB in Netherlands.  Furthermore, all payments to TIF will automatically be forwarded to FSCS/DNB, to cover the Icesave loans from those two funds.  So effectively ALL bankruptcy payments from the LBI will always go to FSCS/DNB in the end.  This obligation has already been fully accepted by Iceland without any dispute, irrespective of the Icesave agreement, as this is in accordance with the existing Icelandic bankruptcy laws and conventions.

2. So what then is the real problem with Icesave?

The problem is the actual agreement that was negotiated between Icelandic government and UK/Netherlands.  According the 94/19/EC directive (which itself has a lot of problems we will not go into here), each deposit guarantee fund is required to pay minimum of 20000 Euros per depositor.  For the Icelandic deposit insurance fund (TIF) this amount is actually a little bit higher or 20887 Euros, while UK and Netherlands unilaterally decided to pay considerably more.  When all the depositor claims are added up, the total liability for TIF in Iceland ends up being 2.35B GBP for UK and 1.329B Euros for the Netherlands.  To simplify, we will add these two amounts together and assume the total liability is instead 4.0B Euros.

If you compare the total liability of 4.0B Euros by TIF, with the total assets available 6.4B Euros by LBI, it is clear that it is more than enough to cover its obligations.  Now we come to the crux of the problem.  According to the current Icesave agreement, Iceland will only receive half of the recovery payments from old Landsbanki, and is therefore forced to pay MORE than just for the Icesave deposits!

3. Distribution of old Landsbanki (LBI) assets (the Ragnar Hall issue)

As demonstrated here above, there are more than enough assets in LBI, to cover all the Icesave liabilities of TIF.  The real problem lies in HOW the assets of LBI are being distributed, according to the current Icesave agreement. 

Here in Iceland, a prominent part of the Icesave discussion has been about something, which most of the time is called the "Ragnar Hall" issue, named after the supreme court lawyer that first pointed it out last summer.  Outside Iceland, this particular issue has received almost no publicity, but as it is one of the critical reasons behind the opposition to the current Icesave agreement in Iceland, explaining it further might be helpful for other people.

Basically, the Ragnar Hall issue involves whether each individual depositor claim should be treated as a single claim or not.  Without going to into too much legal detail, according to Icelandic bankruptcy laws, each claim should ALWAYS be treated as a single claim.  This has the effect, that when it comes to distributing assets recovered by the LBI, TIF should get paid first the 20K Euros, and then FSCS/DNB the rest, as they guaranteed Icesave deposits for more than the minimum of 20K Euros.

Although this issue is very clear, according to Icelandic bankruptcy laws (and most other countries also), apparently due to heavy pressure by the UK/Dutch negotiators, the Icelandic negotiation committee agreed with the demand, that each claim would be divided into two separate claims (TIF vs. FSCS/DNB), each with equal priority towards payments from LBI.  Even if TIF ends up getting paid the full amount, in accordance to Icelandic bankruptcy laws, the Icesave agreement requires TIF to pay money BACK  to FSCS/DNB, to ensure each fund gets equal percentage. For reference, see article 4.2(b) in the original settlement agreement:

http://www.island.is/media/eydublod/settlement-agreement.pdf

This has the unfortunate consequence, that TIF will only receive partial payment towards its original 20K claim, even if there are more than enough funds recovered by LBI to cover the full 20K.  At the moment the estimate is anywhere between 75% and 90%, with the most recent report by LBI winding-up board putting it currently at 88%.

For more detailed legal reasoning on this particular issue, see for example the Mischon de Reya report, which can be found here (pages 15-24 and 78-79):

http://www.althingi.is/pdf/umsogn.php4?lthing=138&malnr=76&dbnr=835&nefnd=fl

The Ragnar Hall issue was actually mostly resolved in the so called "amendments" that the Icelandic parliament Althingi passed into laws August 2009, but they were later watered down again to almost nothing during the subsequent negotiations this fall/winter with FSCS/DNB for the second agreement.

4. Interest payments from TIF to FSCS/DNB

The second important issue behind the opposition of the current agreement in Iceland, is the interest that is being charged while everyone waits for the winding-up boards to finish recovering the assets of LBI.  According to the current agreement, Iceland is required to pay 5.55% interest on the whole 4.0B Euro guarantee, until the recovery payments start coming in from LBI.  These payments can easily end up being delayed due to potential lawsuits by other creditors of LBI, that currently are estimated to receive nothing towards their own claims (as the deposits have priority).

This agreement is considered fundamentally unfair by people in Iceland, as typically in bankruptcy proceedings, no one can legally make additional claims on interest payments.  This means, that any interest payments to FSCS/DNB, will always have to be paid directly by Iceland, as they cannot be recovered from the bankruptcy proceedings.

The interest payments on the Icesave guarantee, amounts alone to around 200M Euros per year.  This will be accrued and added to the debt for the first 7 years and then paid down in the subsequent 8 years (2016-2024).  The total interest payments are estimated to end up being somewhere between 1.5B and 2.0B Euros, which is MUCH MORE than the estimated Icesave guarantee payments by Iceland (0.5B-1.0B Euros).  If these amounts are compared against the total population of Iceland (320K), we can easily compute that this equals close to 10K Euros per person in Iceland, or 40K Euros for each 4-person family.

5. What is Iceland then committed to pay for Icesave?

The people in Iceland are fully committed to pay their fair share for Icesave.  As has been shown here, the question is not about whether to pay for Icesave, but rather how much more than is actually required, it should pay.  The current Icesave agreement is likely to be voted down in the national referendum, now scheduled for March 2010.  This is due to the fierce opposition it faces in Iceland, as the current agreement is considered to be fundamentally unfair.  The question then comes up how to resolve the issue in a fair and equitable manner.  There are at least three solutions available that would be relatively easy to implement. 

A) The first solution would be to hand over the whole LBI bankruptcy estate over to FSCS/DNB and let them recover their claims directly.  It is already clear that they will always receive everything from the bankruptcy anyway and its assets are more than enough to cover all the obligations by Iceland.

B) The second solution is to remove from the current agreement, all references related to the Ragnar Hall issue, so all payments from LBI will be done according to the existing bankruptcy laws in Iceland.  This will still require Iceland to pay interest on the 4.0B Euro debt, but the interest payments would be much lower, since it would now receive recovery payments from the LBI much faster, as it would not have to share them first equally with FSCS/DNB.

C) The third solution would be to somehow lower the interest payments/rate that Iceland is required to pay on the 4.0B Euro debt.  This is basically a fairness issue, as it is already very clear that Iceland is not the only one that is to blame for this mess, and it therefore it should not be the only one that pays for it.  This option could be implemented in different ways, such as:

i) Lower the 5.55% interest rate itself down to a more manageable 2-4% level
ii) Not charge interest for the first 7 years while waiting for the LBI payments
iii) Only charge interest on the actual amount that Iceland guarantees and not the LBI payments.
 

All of the above solutions would help lower the guarantee payments by Iceland down to much more manageable level and still be fair to everyone involved.  Iceland is still always absolutely committed to pay in full for the Icesave obligation.  The only question is whether Iceland should be forced to pay so much more than is actually required, that it faces an insurmountable debt for decades to come.

Lipietz: Veikur málstaður

Athugasemdir

[Marinó G. Njálsson, 10.1.2010 kl. 20:00]

The solution, Bjarni, lies in the priority of the repayments from Landsbanki.  Yes, we can if each individual claim is treated as a single claim, but not two as the Dutch and British governmetn insist.  That is the key to the solution.

[Ari (IP-tala skráð) 10.1.2010 kl. 21:32]

væ ar ví tokíng inn ínglísh kairú landsmenn?

[Bjarni Kristjánsson, 10.1.2010 kl. 23:10]

Sælir Ari,

Ég var búinn að skrifa langa færslu hérna á íslensku þar sem stakk upp á raunverulegum lausn á Icesave deilunni:

http://bjarnimax.blog.is/blog/bjarnimax/entry/1003113/

Ég ákvað síðan að bæta við annari færslu sem stingur upp á sambærilegum lausnum út frá hinni hliðinni og skýrir út okkar málstað gagnvart erlendum aðilum á ensku.  Icesave deilan verður ekki bara leyst á Íslandi þannig þetta virkar ekki nema báðir aðilar taka þátt og samþykkja.