Ingibjorg Solrun Gisladottir, Icelandic Foreign Minister, says she is hopeful the negotiations currently underway in Brussels to work out a satisfactory settlement with the British and Dutch governments over Icesave compensation can be completed tonight or tomorrow, MBL.is reports.
Stod 2 television news reported this evening that the Icelandic delegation has adjourned the meeting until midnight, when their conclusions may be delivered. According to sources, the British government is reported to be demanding the equivalent of ISK 600 billion (USD 4.7 billion) to pay British Icesave customers up to the EUR 20,000 state guarantee. If an agreement is reached, it is thought Iceland will be free to take control of Landsbanki’s UK assets and sell them – generating crucial revenue. The burden on the Icelandic tax payer will likely be less than feared.
The Foreign Minister said in an interview with the Icelandic state broadcaster RÚV, that the government has received a very clear message on just how important it is to resolve the Icesave issue with the Dutch and British. It is important for the entire European economy. A lot is at stake if the issue is not successfully resolved very soon, she said.
In case anyone else thinks that this has been a bit of a drama over a mere $437m, they probably meant $4,437m.
That’s 3.5b euros. Less than I thought they needed, but maybe the average savings level was ~10k euros.
I think the Icelandic government has become a headless chicken running around to get some sympathy for all the foolishness they they have committed. Icelandic should replace their leaders with somebody like Obama the savior of the world. Kick your leaders out while you still have a chance for change. Cahnge you can believe in.
I’d love to know which Pandora’s Box the Icelandic delegation was given a peek into in order to produce this volte-face.
I cant help but worry over what will happen to Landsbanki assets if this deal works out
we need to fire David Oddson asap before he can do more damage, also Geir Haarde for supporting David
Geir ok but not strong enough as a leader,
someone painted the front of Valholl(independence party headquarters) red last night,someone also lit a large fireworks cake infront of the parliament building, the police are now guarding it
a high power paint gun was used to paint the north side of Valholl up to 6 m, http://www.monitor.is/tengill/404
http://www.malefnin.com/ib/index.php?showtopic=110927&mode=threaded
4000 people protested last week
http://www.youtube.com/watch?v=XyS-bOuCjec
new protest tomorow
From GW in Reykjavik
Cor blimey, enough already, cant see what ALL the fuss is about .. I mean, its only money. If you have good looks or good health (either one will do) then money is secondary.
As for Icelandic politicians, Heads of Central banks, Union heads etc, resigning .. forget it, its never going to happen. The word resignation just aint in the Icelandic vocabulary … not yet anyway!!!
I look forward to seeing what Obama does when in power. But don’t we need to wait till he takes office before declaring him “saviour of the world”? Maybe he will be, but he doesn’t even become president until January!
Ok, why the hell is Obama doing in this discussion? Why does this guy will affect Iceland affairs?
Koben..
Did you know those Great British people have been going into betting shops in the uk asking if they can place bets on Obama to be assinated before he
gets into the Whitehouse.
YEAH enough about Obama ,He’s nothing to do with this..
There is an interesting article in the Icelandic newspaper MBL today (Sunday Nov 16th, not seen it online yet) about the new proposal of the creditors of the Icelandic banks, that got me thinking.
The creditors have actually been mostly an forgotten aspect of the problem during all the hoopla about how to compensate the IceSave depositors and the subsequent disagreements between the governments.
In fact, the money owed to the creditors is actually several times more than the depositors, and they are in danger of loosing much higher amounts (10′s of billions), since they will have lower priority when the Icelandic banks are finally liquidated.
The interesting proposal from the creditors, which are mainly large European and International banks, is that instead of liquidating all the old Icelandic banks and pay out all the depositors, they would simply take over the banks and refinance them. This would mean, there would be no Icelandic banks left, all of them would instead become European.
Everything in the old banks, would be put back to the status they were at in the beginning of October, including returning of all the assets (loans) and liabilities (deposits) that were transferred to the new banks with the emergency laws. The old banks have still not been put into bankruptcy so technically they could legally continue to operate if their assets are unfrozen by the respective governments.
There would be no reason anymore for the majority of the British and Dutch depositors to either withdraw their money or be compensated anymore by any government, since the Icelandic banks would now be owned by much larger European banks that are backed by their respective local governments and the ECB.
This would also remove the need to resolve legally the questions about the deposit scheme. This the EU apparently does not want to happen, since it could jeopardize and unravel the deposit guarantee schemes for many countries. (clearly the EC/94/19 Directive still has to be redesigned or at least reworded, but this can happen later).
Solving the problem this way, would almost be like, we treat the whole issue of all the unfortunate emergency actions and seizing of assets by the various governments, as they had never happened!
The original shareholders of the banks would still loose all their equity or at least most of it. I am not sure they would necessarily be too happy with this, but all shareholders should always know they are taking a risk when they buy shares in private companies.
It is important to remember, that all of the Icelandic banks were actually still quite profitable, were well capitalized, and had no toxic debt. Their real problem, was that they were ONLY backed by the Icelandic Central Bank that was way too small in comparison and it just completely dropped the ball in managing the banks and the Icelandic economy/currency. With a backing from European banks, there is no reason why the “formerly” Icelandic banks couldn’t continue to thrive.
Iceland would get to keep a working banking system locally in Iceland, which was the main justification for the passing of the emergency laws. They could therefore be repealed.
One of the issues that would remain to be resolved is what to do about the Icelandic currency (ISK) that is now worthless outside Iceland. Many of the existing assets of the Icelandic banks are loans to Icelandic companies and individuals at very high interest rates. When and if the Icelandic krona is refloated, there is a real danger that the Icelandic loans, which are mostly either indexed to inflation or foreign currencies, would cause massive number of bankrupcies, and would actually become toxic.
One solution to this problem would be to either replace or peg the ISK with Euros, with the help of the ECB. This is normally not be supported by the EU, but in the current situation could be the only solution available. In turn Iceland would quickly have to adhere to all the conditions of the Maastricht Treaty.
I would be very interested to hear what others here think about this unusual idea, especially if there are any holes in the argument for this, that would make the idea unworkable in practice.
Bjarni, you should update your comment in a new article. We’ll be able to debate longer on this.
A lot of people follow with interest your comments.
“The interesting proposal from the creditors, which are mainly large European and International banks, is that instead of liquidating all the old Icelandic banks and pay out all the depositors, they would simply take over the banks and refinance them.”
I’m wondering what business plan they follow with this idea. Can’t help but being concerned that their core reason for this proposal may be that they don’t want to write down those credits because that would ruin their balances. If the banks were working again, I guess they could pretend that everything is ok with the credits and simply leave them in the books. Right?
“It is important to remember, that all of the Icelandic banks were actually still quite profitable, were well capitalized, and had no toxic debt.”
Hmm,Bjarni, how do you know that? Judging from reports I read it is much more probable that Icelandic banks were not profitable, since the interests rates they paid for deposits were higher than possible RoI in an economy that was already on the downturn. And “Well capatalized”? They were not as big as Lehman Brothers, and look at what happened to them! Size is no insurance against failure anymore. Finally, “no toxic debt”? They bought large UK retail chains, at a time when those where expensive! Now, those assets are worth much less, and their profits have shrunk, too. Imho it’s very likely that they are as underwater with those investments as all those homeowners in the US who bought at the height of the bubble.
No, I can’t help but being sceptical if new owners really is the simple trick that would float the banks again. This doesn’t pass the smell test.
Bjarni, look at this:
http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C352GZ400
Does this look like successful enterprises to you? Obviously, the stocks of all Icelandic banks were on the downturn since the end of 2007. They stopped paying dividends in 2008. And there situation can now only be worse, with the horrible hit to the reputation. you really think these banks can be profitable again soon and are a reasonable investment? Hmm…
Bjarni, its sounds like a good plan, but I doubt it would work:
“There would be no reason anymore for the majority of the British and Dutch depositors to either withdraw their money or be compensated anymore by any government, since the Icelandic banks would now be owned by much larger European banks that are backed by their respective local governments and the ECB.”
Even if e.g. Kaupthing Edge Germany would be taken over by a bank of supreme standing (e.g. ING) I think savers would still not be reassured. The day the accounts would open again there surely would be a run on the accounts – regardless of the name of the bank that takes over the operations of Kaupthing. At least in Germany Kaupthing Edge is absolutely doomed, I am afraid.
Bjarni – For you sjálfstætt fólk, I doubt this is a political option. We will have to now wait until Wed. for the next shoe to drop with the IMF loan packages and re-evaluate this all over again. Arrrggghhh!
@Bjarni,
this idea is not unusual and is actually very good.
The problem is that it has snowball’s chance in hell to be approved by iceland government.
That solution is obvious first thing to try when banks get into problems in the western world (maybe some similarity to Bear Stearns, although BS was investnment bank).
The reason why icelandic government did not even try to find or negotiate such solution (and with german banks alone having 30bn EUR lent to icelandic banks there would be plenty of listeners willing to consider this) is that, as you noted, it implies
a) very high degree of loss of sovereignity, which in turn translates in
b) loss of influence over domestic loans and krona value
The problem is, that, people who took foreign currency loans for depreciating assets – they are bankrupt. The problem is, that I think this could be as much as 30% of icelandic population.
You cannot solve this. People paid too much for assets worth much less in true market. Krona was so highly overvalued that people took immense risks, which now haunt them – and you cannot solve the problem by propping the krona to artificially overvalue state just to prevent 30% of population going bankrupt.
The sad fact is, that a lot of icelanders face bankruptcy, and that the banks face a lot of writedowns related to those loans. The second is not the problem (I bet that creditors would gladly swallow 10, 20 or 30% asset writedowns and still support the plan), but the first is the political problem, which probably is the reason, that the Haarde gang tried this messed up quasi-nationalization in the first place – they were thinking about their own short therm political survival.
But, in the end, we are looking and the one rock in northern sea with a lot of effectively bankrupt people, which did not became bankrupt because of financial crisis, but simply because they lent a lot of money in foreign currency and either spent it for a good life or invested in the assets that are basically worth lot less than they paid for.
So it is a political problem.
In order for the foreign banks to have any hope that their loans to Iceland be repayed
the Kr would have to be pegged to the € and depending on the pegging level of the kr to the € would determine the ratio of debt to the value of the asset to the earning capacity of the business/individual.
Business and private (property/personal) Loans taken out at 90kr/EU now (officially) have risen 100% to near 180kr/€
Pegging level.
The pegging level kr/€ also can’t be too high because of course there will not be the capacity to earn high income in a severe Iceland recession to repay the loans.
But at the same time the pegging level would have to reflect the realistic economic worth of the country.
Large State Borrowing = proportionate Inflation.
At present there is little hope that an individual/business will have any capacity to repay a foreign linked loan because the Banks here do not have the foreign currency and a floating KR at optimistic forecasts will be gasping for air in no time. The country at present is looking to recapatilise itself with large loans, therefore will have increased it’s debt and seriously devalued its economy. At the most optimistic, a floating KR means the current official rate will drop drastically in value, leaving all the foreign creditors with another large write off.
It would be in the short term interests of all concerned if the Is. Kr be pegged to the €.
In the long term the current EU Banking/Investment/Markets is unsustainable as the credit baloon has been blown up to its limits and an obscene unregulated Markets.
Property prices will have to reflect a rational ratio with income capacity.
The deregulation of EU Banking basically allowed the Banks the freedom to make up the rules to suit themselves.
The EC/94/19 Directive is not the only regulation which has a big hole. A banking stampede has been prevented by the EU member States taking it upon themselves to insure savers deposits. In this matter and quite rightly so, the Iceland Government’s perceived prevarication could not be tolerated by the EU.
bc123a and Knowless – thanks for fleshing out the various vagararies of the argument here and past commentaries (kudos to Bjarni). We are indeed stuck for the moment, but things will become more clear soon we hope! As a person on the ground (below it? :-) ), I hope this all works out soon and for the best!
@Gray, germany
Existing shareholders would be wiped out under this plan, so (current) profitability of the banks does not matter.
Current creditors would become the new shareholders, possibly taking a (significant?) haircut, as I cannot imagine that those banks will have positive equity when many of those loans to icelanders go into default. However, for them this should still be much more desired scenario than outright liquidation, not to mention current quasi-nationalization scheme, in which they are poised to lose all and litigate against the government in years to come.
Under such plan, the creditors, as shareholders, would have total control over the banks and their debt. The only thing I am not sure is how much shareholder equity is left in those banks. If the equity is deeply negative, then a lot of capital would be needed to prop the banks up, a lot even for the banks that would take the failed banks over. In that case, there would be no other way to declare bankruptcy first, and then sell the bankrupt banks. Maybe it would be easier to get agreement in that way.
However, in both plans, Iceland would have to reverse this boggled quasi-nationalization and repay the damage done in the time between they took the control and transferring the control to creditors. And this damage is probably not small, as icelanders have been able to do withdrawals all the time, as far as I know.
Some people have been doubting that the following statement from me was correct:
>>>>It is important to remember, that all of the Icelandic banks were actually still quite profitable, were well capitalized, and had no toxic debt.
When you evaluate the financial standing of any company, one thing you have to look at is their quarterly financial statements and their annual reports:
https://www.glitnir.is/english/investor-relations/financial-reports/annual-reports-archive/
http://www.landsbanki.is/english/investorrelations/reportsandfinancials
http://www.kaupthing.com/Investors/Archive
I have consolidated here in a table below all three of the last quarterly report (Q2, 2008) so you can evaluate them yourself. As far as I know none of the banks have yet published the Q3, 2008 interim report, which will probably be a quite interesting read.
I hope the tables lines up correctly in the variable length font, but if not you can just cut and paste it into notepad.
Income statement
Glitnir Landsbanki Kaupthing TOTAL
Interest Income 93887 89097 115402 298386
Interest Expense -76097 -68179 -88539 -232815
Net Interest Income 17790 20918 26863 65571
Fee/commission income 11170 14256 16396 41822
Fee/commission expense -1913 -3366 -2138 -7417
Net fee/commission income 9257 10890 14258 34405
Net financial income -842 5253 927 5338
Other net income 706 -94 1928 2540
Net operating income 26911 36967 43976 107854
Administrative expenses -14786 -18564 -22474 -55824
Net impairment losses -4492 -6953 -5591 -17036
Other gains/losses 24 0 -3029 -3005
Profit before income tax 7657 11450 12882 31989
Income tax -83 598 2372 2887
Net Profit 7574 12048 15254 34876
Assets
Cash 37550 27874 154318 219742
Loans to credit institutions 328027 337003 529620 1194650
Loans to customers 2548164 2571470 4169181 9288815
Financial assets at fair value 730916 864190 1393342 2988448
Other assets 218140 169835 357254 745229
TOTAL ASSETS 3862797 3970372 6603715 14436884
Liabilities
Credit inst/central banks 311775 463058 670930 1445763
Deposits 709584 1617298 1848155 4175037
Financial liabilities fair value 133215 230663 363878
Borrowings 2241976 1301435 2883261 6426672
Subordinated loans 145902 152506 328153 626561
Other liabilities 119910 234259 204857 559026
TOTAL LIABILITIES 3662362 3768556 6166019 13596937
Total Equity 200435 201816 437696 839947
These statements are, like for any other public company, verified and certified by respected accounting firms.
At the time 6/30/2008 of these statements the exchange rate of the Icelandic krona was approximately 120 to Euro.
Approximately 1/3 of the deposits of Landsbanki were from Iceland, while about 2/3 were from various European countries (UK, Netherlands, etc.).
As you can see if you read these statements over, most of the profits came from relatively high net interest income and net fee/commission income, while their net financial income and impairment losses were relatively low (at least compared with various European and American banks that have been loosing billions).
The problems for the Icelandic banks were therefore not from their core operations, but rather lack of support from their lender of last resort, the Icelandic central bank, and the subsequent general lack of trust from banks and governments in other countries.
To bc123a:
>>>>this idea is not unusual and is actually very good.
>>>>The problem is that it has snowball’s chance in hell to be approved by iceland government.
We will see. The Icelandic government might actually like this when they think the whole thing through. They would get to keep the Icelandic banking system operating (as European banks), resolve the guarantee issue, calm the fears of the population/depositors in Iceland and Europe. Remember also, the government will probably fall sometime next year, and new elections will be held. We will also have the need to apply for foreign loans for large new infrastructure projects in the near future to revive the economy.
>>>>That solution is obvious first thing to try when banks get into problems in the western world (maybe some similarity to Bear Stearns, although BS was investnment bank).
>>>>The reason why icelandic government did not even try to find or negotiate such solution (and with german banks alone having 30bn EUR lent to icelandic banks there would be plenty of listeners willing to consider this) is that, as you noted, it implies
I agree this kind of solution should have been tried right at the beginning, but its quite possible that during the weekend of October 4-5th, they simply didn’t realize the full gravity of the situation and how this whole thing would play out with the rest of Europe.
To Knowless:
>>>>In order for the foreign banks to have any hope that their loans to Iceland be repayed the Kr would have to be pegged to the € and depending on the pegging level of the kr to the € would determine the ratio of debt to the value of the asset to the earning capacity of the business/individual.
The only way the Icelandic central bank would have any hope of pegging the ISK to Euros, it would need to have support from other European central banks and/or the IMF. You cannot peg any currency without adequate foreign reserves.
Peter (Germany):
>>>>Even if e.g. Kaupthing Edge Germany would be taken over by a bank of supreme standing (e.g. ING) I think savers would still not be reassured. The day the accounts would open again there surely would be a run on the accounts – regardless of the name of the bank that takes over the operations of Kaupthing. At least in Germany Kaupthing Edge is absolutely doomed, I am afraid.
Why would German depositors still be concerned, if Kaupthing Edge would be taken over by some much larger German bank that does not have problems?
I would think the German banks would probably benefit most from this, since they are the largest lenders (21 Billion Euros) to the Icelandic banks and therefore have the most to gain if they would own the old Icelandic banks and continue to operate them. That will give them the best chance to collect a larger share of the Icelandic bank loan assets.
Remember, this idea originally comes from the European banks, so clearly they are interested in this outcome.
I forgot to mention in the previous post, that all the numbers in the table are in millions of Icelandic kronas. Every number in the table therefore needs to be multiplied by 8333 (1000000/120) to compute how much it is in Euros.
For comparison, the GDP for Iceland was less than 10 Billion Euros last year.
I worked the original tables in a spreadsheet and one of them had an empty value, the Financial liabilities fair value for Landsbanki. It should have of course have been listed as zero (0), rather than just a blank space. All the extra spaces between the amounts were automatically removed by the IceNews site, so you will need to put them back in text editor to get the original lining up of the columns.
To orchafine:
>>>>Bjarni, you should update your comment in a new article. We’ll be able to debate longer on this.
A lot of people follow with interest your comments.
Thank you for your nice compliment.
The way the IceNews site is designed, I and all the others can only post our comments on existing news articles by IceNews, rather than create our own new ones.
To make things easier here is the same table converted to millions of Euros (using the exchange rate of 120 kronur):
Income statements
Glitnir Landsbanki Kaupthing TOTAL
Interest Income 782 742 962 2487
Interest Expense -634 -568 -738 -1940
Net Interest Income 148 174 224 546
Fee/commission income 93 119 137 349
Fee/commission expense -16 -28 -18 -62
Net fee/commission income 77 91 119 287
Net financial income -7 44 8 44
Other net income 6 -1 16 21
Net operating income 224 308 366 899
Administrative expenses -123 -155 -187 -465
Net impairment losses -37 -58 -47 -142
Other gains/losses 0 0 -25 -25
Profit before income tax 64 95 107 267
Income tax -1 5 20 24
Net Profit 63 100 127 291
Assets
Cash 313 232 1286 1831
Loans to credit institutions 2734 2808 4414 9955
Loans to customers 21235 21429 34743 77407
Financial assets fair value 6091 7202 11611 24904
Other assets 1818 1415 2977 6210
TOTAL Assets 32190 33086 55031 120307
Liabilities
Credit institutions/central banks 2598 3859 5591 12048
Deposits 5913 13477 15401 34792
Financial liabilities fair value 1110 0 1922 3032
Borrowings 18683 10845 24027 53556
Subordinated loans 1216 1271 2735 5221
Other liabilities 999 1952 1707 4659
TOTAL Liabilities 30520 31405 51383 113308
Total Equity 1670 1682 3647 7000
Again, you will probably have to cut and paste this into text editor and use spaces or tabs to line up the columns again.
What is interesting in these statements, is that the deposits are only about 35 Billion Euros, only part of which will be guaranteed by the Icelandic government. On the Icelandic TV news tonight (Sunday) was that the Icelandic government has finally accepted the liability for the IceSave accounts, but there are very few details on the actual agreement so far.
The more concerning amount, is the loans from foreign banks to the Icelandic banks that are over 53 Billion Euros. This will be mostly lost if the loans are sold quickly and the old banks liquidated.
@Peter,
the takeovers of banks are usually done in the way the customers become customers of the new bank, their accounts indistinguishable from others. This kind of reduces the incentive for run on the bank.
For example if ING would take over landsbanki and icesave depositors, it would not look like icesave site is back on line and allowing withdrawals. It would look like: “Dear saver, now you are part of the big ING familiy. Your account at ING can be accessed at:” and so on.
If people would withdraw their money from icesave, where would they put it? Under pillow? I doubt it – probably with some other, less stressed bank, and with lower interest.
Now, with transfer of accounts to some other bank, this is exactly what happens: their money already IS with some other bank, without any action required by them.
As far as I know, such operations never resulted in bank run (for example in USA, where a number of banks has been seized by FDIC this year).
“Why would German depositors still be concerned, if Kaupthing Edge would be taken over by some much larger German bank that does not have problems?”
If you take a rational point of view then you are of course quite right.
However, I don’t rationality can be applied here. German savers who had their money with KE are certainly so impressed by what has happened that I bet the very first thing they would do once their KE-accounts are opened again is to withdraw all their savings and to bring it to a rather conservative German savings or cooperative bank…
But who knows… Maybe you are right which would be a very good thing indeed of course.
(BTW: Sorry for my clumsy wording… Of course I meant ‘However I do not THINK …’)
Icelandic friends, you are Europeans but have repeatedly rejected membership in the EU. So I see no reason why EU taxpayers should now bail you out. You fear “loss of sovereignty” ? Well milions from Germany to Malta have accepted it for the sake of a greater project, a greater sense of belonging to our common culture. So you now have a choice : but if you wish to sulk in your corner, which is of course your right, do not ask for my sympathy.
“The only thing I am not sure is how much shareholder equity is left in those banks. If the equity is deeply negative, then a lot of capital would be needed to prop the banks up, a lot even for the banks that would take the failed banks over.”
Exactly, bc, that is the problem. now, come on, we all know that lamost every European nation has started a rescue program for their banks. do you think it will be popular among taxpayers if part of those moneys will be used for floating the “old2 icelandic banks again? This may make some sense to the bank insiders, but they would be a horrible time when trying to convince the public that this is a good idea.
“Why would German depositors still be concerned, if Kaupthing Edge would be taken over by some much larger German bank that does not have problems?”
Uh, excuse me pls, but which “larger German bank” does NOT have problems? Or which European bank? Even the Swiss giants are said to be in dire straits.
No, I don’t think this is the right time for such a risky deal. And it would be a very hard sell to both the shareholders, and the taxpayers who fund the rescue plan. It may make sense for the banks, ok, but politically it has only a snowball chance in hell, imho.
To Vincent Negre (France):
I would not say its necessarily so much that Icelanders fear the “loss of sovereignty”, although they tend to be very proud and independent people. Remember, we only gained our independence 64 years ago.
Iceland is basically a rock in the middle of the atlantic ocean, and it has very few resources it can actually export in any significant volume to other countries: fishing, energy-related products (aluminium smelters, etc.), and something what we thought would be a good addition, banking and retail (which turns out didn’t work so well :-)).
What has been the main bottleneck for joining the EU has been the more practical issues, such as how to manage fishing stocks. In Iceland there is a very strict fishing quota system, which is used to manage the trade-off between keeping employment up in the numerous small fishing towns around the country and the protecting of the fishing stocks.
If Iceland is to join the EU, according to the rules, it would have to give up the management of the fishing grounds to the EU within few years. This is very difficult since fishing still provides more than half of Icelandic exports. If we were to loose our exports, through overfishing or some other mistakes, Iceland would simply not survive. If the EU were to somehow alleviate those worries, I am sure the support for joining EU, from the people in Iceland that now oppose it, would increase considerably.
This collapse of the banking system, has now shocked the Icelandic population right to the core. I would not be too surprised, if during the next year, the direction towards joining the EU would gain considerable support.
To Gray, Germany:
>>>>Uh, excuse me pls, but which “larger German bank” does NOT have problems? Or which European bank? Even the Swiss giants are said to be in dire straits.
I must admit, that I have not been following the problems of German banks very closely, but I have noticed news about some of them making very bad loans and/or investment decisions (toxic debt, etc.) and subsequently needing government assistance. Is this generally true for more or less all of them or just some of them?
The German bank that has mostly made it to the news here in Iceland, was the BayernLB. That was bank that cancelled the 600 million Euro loan to Glitnir, which was the trigger that started the domino effect that led to the fall of all the Icelandic banks. I am not saying it was their fault, they probably finally realized they had lent too much to Icelandic banks.
It was in my view, the complete incompetence of the Icelandic Central Bank, in handling the Glitnir loan issue, and other decisions they made, that played a major role in the fall of the Icelandic banks.
UBS gets a special prize, having bought $80B worth of mortgage-backed securities in just 2 years on the assumption these were completely safe investments which must be some kind of a record.
>>>>No, I don’t think this is the right time for such a risky deal. And it would be a very hard sell to both the shareholders, and the taxpayers who fund the rescue plan. It may make sense for the banks, ok, but politically it has only a snowball chance in hell, imho.
With over 20 Billion Euros at risk just for German banks out of total of 50+ Billion total of loans to Icelandic banks, they seem to be fond of this idea (in fact it originally came from them).
If they now leave it up to the Icelandic, UK, and Dutch governments to sell all the assets quickly just to cover the depositors, they will be left with all the losses. If they keep the old Icelandic banks going in each country, they at least will have the chance to collect some of their loans back.
Leipzig bank collapsed “loaded up on asset-backed securities and derivatives manufactured and sold by Wall Street amounting to more than 27 times the bank’s equity.”
Saxony taxpayers have to pick up that tab of €2.8bn
Landesbanken, lost about $22 billion in the same market.
Bjarni. Is there a link to an English translation of the artcile in MBL? Any suggestions that you have re further comment on this problem would be appreciated.
Bjarni
” loans from foreign banks to the Icelandic banks that are over 53 Billion Euros. This will be mostly lost if the loans are sold quickly and the old banks liquidated.”
When/if the loans are sold then it will be an auction, akin to
‘Selling Iceland by the Euro’
@Gray,
I think there would be support for such a deal, as german banks are deeply invested into this already. And these banks would then became german banks, not iceland banks anymore. If the equity is negative, they would need to book a loss, but still it is better to write of 20% of 20bn than 100% of 20bn.
My doubts were directed to the idea that banks would survive to be taken over – I think this is unrealistic, too much capital would be needed. But declaring the banks bankrupt and selling their operations to german banks is different thing. In that case all creditors except savers would take a loss proportional of the negative equity in these banks, and if the banks are declared bankrupt, no agreement would be needed for this (as opposed to selling the banks intact).
Remember, the alternative for germans is writing off 20bn of icelandic bank debt.
“Is there a link to an English translation of the artcile in MBL? Any suggestions that you have re further comment on this problem would be appreciated.”
I don’t think they have it, but newsfrettir is a good site for Icelandic paper articles in english:
http://newsfrettir.com/
To MarkLondon:
Here is a quick translation of the article in the Morgunbladid on Sunday, Nov 16th. I tried to make the translation as accurate as possible, but I apologise if I made any errors:
Foreigners want to own banks
Representatives of the foreign creditors for Landsbanki, Kaupthing, and Glitnir prefer that a holding company be established that will own the assets of the old banks and the debt will be changed into shares in the holding company. This way some of the largest banks in the world would be managing banks in Iceland as owners of Icelandic banks.
They say it would be negotiable whether one of those assets would be the new banks, but the key point is to keep the old banks in operation to maximize the value of their assets. The owners would be the creditors and possibly the Icelandic government.
The foreign creditors finally were able to meet the administrators for the old banks this week in formal meetings. At these meetings, the creditors were given briefings on what the status of the old banks was and given overview of the early indications on how much the assets that were left in the banks were worth. Sources of Morgunbladid say that in the future, the creditors hope they will be included further in any decisions than they have so far on how to go forward.
Want to maximize value of the assets
When companies go into bankruptcy in normal circumstances, then the creditors take over the assets of the company. Administrator then manages the division of the demands in accordance of their claims. In bankruptcy estate of the old banks this is different. There all the assets were transferred to new banks owned by the government to guarantee domestic deposits and keep domestic banks going. Then independent appraisers can take up to 3 months to estimate the value of those assets, hold back the guarantees for the deposits, and put the difference into a single bond into bankruptcy estate of the old banks.
This the foreign creditors think is not a good solution. They rather prefer that the operations of the banks will be kept going so the assets of the old banks will not reduce in value. They think this can happen if they will be among the owners of the banks.
Consider their interests the same as Iceland
The benefits the foreign creditors see with this solution are obvious, this maximizes the value of their assets. They are worried that if the current path will be continued, then the assets will be sold far under their real value and the creditors will be get little for their claims. In support of this they point to that bonds for the Icelandic banks have been selling for about 3 to 7 percent of their original value. This means the credit default insurance is 93 to 97 percent and it is obvious it would be impossible for Iceland to receive any loans at those rates. Therefore they think that the best solution for them is also the best solution for Iceland. By large foreign banks becoming owners of the Icelandic banks, this will open up foreign exchange, credit lines and other money flows, as well as ownership holding of the banks will be distributed. Therefore they will have direct financial incentive for the Icelandic economy to recover as quickly as possible.
The foreign creditors mention as an example that one of the solution that has been talked about to get Iceland out of the misfortune it is in now, is building up more large energy industries. In order for large energy industries to be established, there will be need to build more hydro dams. Energy companies of Iceland finance the building of their hydro dams mostly with foreign loans. As the situation is today, all credit lines are closed. The energy companies would not be able to keep their obligations that they have already taken and certainly not take on new ones. This same picture can then also be applied to other sectors.
Consequential mistake to pass emergency laws
Concurrance was between the representatives of the foreign creditors that Morgunbladid talked to, that the passing of the emergency laws on October 6th was a mistake by the Icelandic government. By this they made two consequential mistakes: Nationalize assets they didn’t own and change the rules afterwards. There they mean that the Icelandic government transferred to themselves assets that were actually owned by the creditors of the Icelandic banks and by giving Icelandic deposits priority to the bankruptcy estate, they discriminated badly against other creditors.
The opinion of the foreign creditors, is therefore that when banks go into bankrupcty, it is not the country that regulates the bank, that owns its assets, but rather the creditors that financed their operations.
If I understand that process, the assets represent the borrowings of the Iceland banks that the Iceland banks have already lent out to Icelandic business and people. The assets are actually a €53bn debt that the Iceland banks cannot service any longer towards the EU banks.
The process is, that the assets are gathered together into one lump and sold for possibly 3% to 7% of their value to somebody else at auction
.
Then, whoever has been the beneficiary of a loan in Iceland, house,personal or business loan, which has come from those EU banks (the creditors), has to pay off that loan in full (according to the terms of the loan and as long and as they are solvent) to the new owners of the bonds?
Sounds insane, but maybe I have got it upside down.
That ordinary people in Iceland who have a € 100k loan would have no possibility to pay up the loan for €10k? Instead they will still have to pay off the €100k
That when a Government puts capital into a desperate bank, it never thinks to set up a scheme that the capital is fed into the bank from the bottom up by buying up a part of the most needy taxpayers mortgage.
To take the sharp edge of the predicted slump in property equity.
53bn into 320k inhabitants, is that about €170,000 for each person?
BC, Bjarni, as I see it, most of the 20 billion incredits is already lost, only a small part will be salvaged through bankruptcy. And German Banks taking over “old” Icelandic banks won’t cahnge that. How shall those stinking corpses become succesful enterprises again? Their international reputation is gone, their domestic brands have been transferred to the new banks, and they don’t even have the most necessary assets to work with. Maybe some German banks are thinking that by managing the troubled credits directly they will get more money out of them than from any administrator liqudizing the old banks, I don’t know.
>>they don’t even have the most necessary assets to work with
The new banks were given a couple of billions euro’s of the old banks assets.
To Knowless:
>>>>If I understand that process, the assets represent the borrowings of the Iceland banks that the Iceland banks have already lent out to Icelandic business and people. The assets are actually a €53bn debt that the Iceland banks cannot service any longer towards the EU banks.
The 53B Euros, is actually debt and borrowings on the liability side on the balance sheet, not the asset side. The liabilities are mainly deposits from customers 34B, deposits from credit institutions and central banks 12B, and the 53B in borrowings and debt. The assets are mainly loans to customers 77B and other financial assets 24B. The total balance sheet for the Icelandic banks was about 120B Euros.
How these amounts divide between Iceland, Nordic, Europe, and the rest of the world, is quite different depending on which of the three banks you are looking at. So its not good idea to make general assumptions, like saying all the customer loans are in Iceland.
Glitnir was mainly funded by borrowing 65% (more than half from Europe, rest Nordic countries and elsewhere) and about 25% deposits (about evenly divided between Iceland, Norway, and Europe). Their lending to customers was about 25% Iceland, 35% Norway and 30% Europe.
Landsbanki was mainly funded by deposits 50% (about 3/4 from UK and rest of Europe, 1/4 from Iceland), and less from borrowing 30% (2/3 from Europe, 1/3 from Iceland and elsewhere). Their lending to customers was about 25% Iceland, 50% Europe, and 25% elsewhere).
Kaupthing, which was about twice the size of Glitnir or Landsbanki, was mainly funded by borrowing 50% (mainly from Europe 60%, Nordic 15% and 25% from elsewhere), and less from deposits 30% (mainly from Europe 60%, Nordic 25%, and 15% from elsewhere). Their lending mix to customers was about 15% Iceland, 20% Nordic, 45% Europe, and rest elsewhere.
Taking all the banks together, the deposits 35B divide approximately into 60% Europe, 20% Iceland, 10 Nordic, 10% elsewhere. The borrowing 53B divides into approx. 60% Europe, 6% Iceland, 8% Nordic, and 25% elsewhere. On the asset site, the customer loans 77B divide approx. 40% Europe, 20% Iceland, 20% Nordic, and 20% elsewhere.
Therefore you cannot say that all the money ended up in Icelandic loans, just a somewhat higher percentage than on the funding side. It actually made financial sense for the Icelandic banks to lend higher percentage to Iceland and Nordic countries, since the interest rates there were higher than in Europe.
These numbers and computations are of course very rough estimates and may have changed in the later months of the year. If anyone wants to check the original amounts themselves, they can be found in the annual and quarterly reports for each of the banks:
https://www.glitnir.is/english/investor-relations/financial-reports/annual-reports-archive/
http://www.landsbanki.is/english/investorrelations/reportsandfinancials
http://www.kaupthing.com/Investors/Archive
Just look towards the end of each report in the notes and comments section, where they show the distribution of the assets and liabilities for each of the currencies.
>>>>Iceland, The process is, that the assets are gathered together into one lump and sold for possibly 3% to 7% of their value to somebody else at auction
.
The other option is, as has been discussed here before, is to keep the loan assets and collect the payments over number of years. This will probalby lead to much higher percentage recovery rate.
>>>>Then, whoever has been the beneficiary of a loan in Iceland, house,personal or business loan, which has come from those EU banks (the creditors), has to pay off that loan in full (according to the terms of the loan and as long and as they are solvent) to the new owners of the bonds?
>>>Sounds insane, but maybe I have got it upside down.
Actually its very sane, if you want to maximize the value of the assets.
>>>>That ordinary people in Iceland who have a € 100k loan would have no possibility to pay up the loan for €10k? Instead they will still have to pay off the €100k
Not sure if I understood this comment from you. Most loans in Iceland are for either businesses, mortgages, or cars, just like in most other countries. Independent of whatever happens, the people will keep paying those loans, so long as they don’t go bankrupt.
The Icelandic government is taking three types of loans:
a) 2B from IMF
b) 3-4B from other countries
c) 5-6B loan to cover IceSave/Edge depositors.
This comes to about 150-200% of the GDP (GDP in Iceland is now shrinking fast, so its kind of difficult to figure what it is exactly now, it was about 12B dollars last year).
The a) and b) loans are mainly to support the Icelandic krona and allow Iceland to restart the foreign trade. The c) loan is probably going to be long-term loan that will be mostly paid by the loan assets as they come in.
>>>>That when a Government puts capital into a desperate bank, it never thinks to set up a scheme that the capital is fed into the bank from the bottom up by buying up a part of the most needy taxpayers mortgage.
>>>>To take the sharp edge of the predicted slump in property equity.
>>>>53bn into 320k inhabitants, is that about €170,000 for each person?
No one has been talking about making the population of Iceland responsible for the whole 53B. Dealing with the 10-12B to support the Icelandic krona and the 20K Euros for the IceSave depositors will be difficult enough.
To Peter – London:
>>>>The new banks were given a couple of billions euro’s of the old banks assets.
They were not given anything. According to the emergency laws that were passed, the new banks will be required to pay back to the old banks the appraised value of any assets they received.
Bjarni.
I’ve just read the FME doc on New Kaupthing. It appears to talk about the net assets transferred, rather than the assets themselves.
Does that not effectively prioritise the Icelandic creditors transferred from the Oldbankis to the new ones? i.e. it effectively grants them a recovery rate of 100% of their loan/deposit, whereas the recovery rate in the Olbankis will be much lower.
http://www.fme.is/lisalib/getfile.aspx?itemid=5725
>>They were not given anything. According to the emergency laws that were passed, the new banks will be required to pay back to the old banks the appraised value of any assets they received.
They didn’t pay for the assets. By any definition thats a gift that has been given.
Call it a loan. But its been given and not earned in any way.
To Bromley86:
>>>>I’ve just read the FME doc on New Kaupthing. It appears to talk about the net assets transferred, rather than the assets themselves.
>>>>Does that not effectively prioritise the Icelandic creditors transferred from the Oldbankis to the new ones? i.e. it effectively grants them a recovery rate of 100% of their loan/deposit, whereas the recovery rate in the Olbankis will be much lower.
http://www.fme.is/lisalib/getfile.aspx?itemid=5725
You are right, I should have said “net assets” instead of just “assets”. The original comment I was responding to just used the word “assets” and I simply didn’t notice the mistake.
We simply do not know yet, exactly which method the appraisors will be using to estimate the “true worth of assets and liabilities”. I am sure whichever method they will use, this will provide a lot of fodder for future debates :-).
To Peter – London:
>>>>They didn’t pay for the assets. By any definition thats a gift that has been given.
>>>>Call it a loan. But its been given and not earned in any way.
If you in any kind of business or other circumstance, receive an asset, and then promise to pay for it completely either with a bond or a loan, the asset has not been given. You can argue whether the payment is enough or fair, but that is a different question.
Please Bjarni, don’t compare Iceland with Switzerland, mein lieber Freund… In Switzerland the economy is built on solid ground and approaches are pretty much cautious than here. Yes, who says that even a big swiss giant could not fall. But believe me, it wouldn’t sink the whole country with it. One thing that swiss have never done is to live above our possibilities and we don’t need to spoil other countries to get rich in two days. It took for us a long time to built what we have step by step, being really careful and hardly working. We have such a sense of patriotism that makes us be a solid nation. We speak three languages at our goverment but we understand each other perfectly because we always think of the common well being of our nation. We are pretty democratic and people participate of a good democratic system from the smallest villages to the biggest cities. We are a model of stability for the entire world. Why do people trust us to take care of their moneys? Because we just don’t mess things up like you did. Icelandic goverment needs more experience. You just have been fooled by some people who are just mafia and did not look for the wealth of this country but just for getting rich in two days. and you see…
As we say in my country: ” Lieber ein Ende mit Schmerzen als Schmerzen ohne Ende” ooooholereliiihiiiiiiiiiiiiiiii !!! ;)
To Gus:
>>>>Please Bjarni, don’t compare Iceland with Switzerland, mein lieber Freund… In Switzerland the economy is built on solid ground and approaches are pretty much cautious than here. Yes, who says that even a big swiss giant could not fall. But believe me, it wouldn’t sink the whole country with it.
Well, lets look at the Swiss main economic and bank statistics and see if they are so different from the Icelandic:
Swiss:
GDP – $303 Billion (PPP)
GDP – $40K (per capita)
Population: 7.6 Million
Bank Assets 2007 (exhange CHF/USD 1.13):
USB: $1950 Billion
CS: $1200 Billion
Total: $3150 Billion
Size of banks compared to GDP: x10
Iceland:
GDP – $12 Billion (PPP)
GDP – $40K (per capita)
Population: 300000
Bank assets 2007 (exchange ISK/USD 62.10):
Kaupthing: $86 Billion
Landsbanki: $49 Billion
Glitnir: $48 Billion
Total: $183 Billion
Size of banks compared to GDP: x15
Both countries are relatively small economies with their own free-floating currency and a banking sector thats much larger than the country GDP.
While Iceland comes out at x15 compared to x10, this can be partly explained by abnormally high exchange rate for the Icelandic krona at end of 2007, which then dropped considerably during 2008.
The Icelandic banks did NOT fail not because they were loosing money, but rather that they were considered too large compared to the Icelandic economy, and no one believed they could be backed up by the Icelandic government (which turned out to be true).
If you compare the relative numbers for the Swiss banks, you will see they are not that different.
I do not wish any similar financial disaster to happen to Switzerland (or any other country) as happened to Iceland, but in the current economic climate, no country with either large debt or large banking sector is completely safe.
Bjarni, thanks for the long and informative answer.
How will these loans be used to support the kronur when it is floated?
In other words what does the Government have to practically do to keep its currency stable in such a crisis?
Surely there will still remain restrictions on buying foreign currency like in early 1980′s?
Are there similarities to that time?
To Knowless:
>>>>Bjarni, thanks for the long and informative answer.
>>>>How will these loans be used to support the kronur when it is floated?
>>>>In other words what does the Government have to practically do to keep its currency stable in such a crisis?
>>>>Surely there will still remain restrictions on buying foreign currency like in early 1980’s?
>>>>Are there similarities to that time?
This is one of the critical questions, that the Icelandic government is now facing. In my view there is no single good answer, since every available option can potentially have dire consequences.
1. If the government tries to keep a relatively fixed exchange rate, this can quickly become very expensive, especially if its shorted like earlier this year. There are also large amount of “glacier” bonds, with their owners just waiting to get out of Icelandic kronas. We could easily waste most of the foreign currency loans on trying keep it stable at a rate thats not sustainable.
2. If the government decides to let the krona float on its own, then there is a great danger it will sink even further. This could cause many local companies, especially those depending on imports, to go under leading to large unemployment. This would likely also lead to heavy inflation (we have to import almost everything, except food and energy). Since most loans in Iceland, are indexed on either inflation or exchange rate, this would cause many more bankruptcies.
3. The third option is to keep the restrictions on currency flows, but this of course introduces its own problems. There are already signs, that export companies in Iceland are not bringing foreign currencies home, but rather keeping them in accounts in foreign banks. This will also further undermine the trust in the Icelandic krona, which is not at its best at the moment.
From what I have read from the government, central bank, and IMF press releases, it seems they are going to do some kind of combination of all three options. That is float the currency as soon as possible, but use the IMF loans to keep it relatively stable, without trying too much to keep it up, while retaining the option of introducing emergency restrictions on foreign exchange if needed.
Into all of this comes also that the Icelandic government is particularly weak at the moment and may fall soon (probably early next year). The Icelandic Central Bank has also completely lost the trust of the Icelandic people. In a recent poll, over 90% thought that the chair of the Central Bank should be replaced now. Trying to build up new trust in the Icelandic krona, will be very hard, without the added problems of missing trust in the government and the central bank, both in Iceland and abroad.
P.S. I do remember well the foreign currency restrictions in the 80′s and it was very damaging to the economy at the time.
There does not seem to be much talk of an adoption of the Euro or the DKK. Why is that the case when it seems to be the best way out of this mess? Sure the ECB or Denmark or Norway wouldn’t be celebrating, but I doubt they would actually block such a move.
“in the current economic climate, no country with either large debt or large banking sector is completely safe.”
Not completely safe, agreed. Not even the Brits are completely safe. But still, the Swiss is in a much stronger position than Iceland, not only because of its bigger poplation, but because of its very long history of keeping the Swiss Franc stable. Plus, it’s in the heart of Europe, with strong economical links to its neighbors, and so both too big and too important to be allowed to fail. The same isn’t true of the icy island at the outer limits of Europe with its small number of residents.
Well, imho it would be a much better idea to compare Iceland with Liechtenstein. Still two quite different cases, but with at least some similarities.
To Peter (Germany)
>>>>There does not seem to be much talk of an adoption of the Euro or the DKK. Why is that the case when it seems to be the best way out of this mess? Sure the ECB or Denmark or Norway wouldn’t be celebrating, but I doubt they would actually block such a move.
Actually, EU/ECB do not like it at all if countries try to take up EUR without going through their official process (which takes a long time). They have in the past specifically said they would not like Iceland to do this unless it joins the EU first.
Norway’s (NOK) or Denmark’s (DKK) are an interesting option, but in both cases cooperation and support of their central banks and governments would be needed.
Bjarni
To Gray, Germany:
>>>>Not completely safe, agreed. Not even the Brits are completely safe. But still, the Swiss is in a much stronger position than Iceland, not only because of its bigger poplation, but because of its very long history of keeping the Swiss Franc stable.
I agree, Switzerland and the Swiss frank have history of being very stable. The worry is the UBS, which has been making some very bad investments, including for example $80 Billion in US mortgage-backed securities, large share of which has been written off. There is a lot of unhappyness in Switzerland now of having to bail UBS out, using tax-payers money.
Bjarni
“There is a lot of unhappyness in Switzerland now of having to bail UBS out, using tax-payers money.”
Let’s hope they do it right this time and not screw it up, like they did with Swissair!