Viking accounting

Just before last weekend’s election, the FME (Iceland’s Financial Supervisory Authority) received two reports on the health of to “New” banks (New Kaupthing, NBI and Íslandsbanki), one from accountant Deloitte and the other from management consultants Oliver Wyman. The reports have not been made public, but were leaked to Morgunblaðið, whose article has been translated by Anya. Apparently, 40% of the assets of the new banks are “non-performing”: ie, they consist of loans which are not being paid back.

While 40% of worthless assets may seem a lot, it is actually far less than the FME's initial estimates. These were not made public either, although we know some details thanks to the IMF. The FME wanted to write off 66% of Kaupthing’s Icelandic loan book and 50% of Landsbanki’s (later upped to 55%). The FME didn’t dare give an exact figure for Glitnir, but crossing the FME's figures with Glitnir's 2008Q2 financial statement suggests that they were working on a 75% write-off! “We do not intend to pay the debts of banks that have been a little heedless” toned central bank chairman and former Prime Minister Davíð Oddsson on 7 October, in comments that are widely suspected of having prompted the UK government to freeze the British assets of Landsbanki. For a while, it appeared that the Icelandic authorities didn’t expect individual Icelanders and Icelandic companies to pay their debts either.

Icelanders built up household debts of more than twice their disposable income in a credit frenzy fuelled by their banks’ foreign borrowings, making Americans, with household debts of “only” 134% of disposable income, seem positively virtuous in comparison. Iceland’s companies went even further: corporate debt is more than three times GDP, compared to 77% in the eurozone. An old British adage runs that if you owe the bank a thousand pounds you have a problem, but if you owe the bank a million pounds then the bank has a problem. If so, Iceland’s new banks have a very big problem.

The new banks were set up to take on the assets and liabilities in Iceland, and the assets (mostly loans) far outweigh the liabilities (mostly deposits), at least in book value. But how much are those assets actually worth? The question is doubly important because the new banks have to compensate their predecessors for the net value of the assets. That money will then help pay the old banks’ overseas creditors. The larger the provisions, the lower the net value of the new banks’ assets and the less they will have to pay out to their predecessors. The FME’s provisions amounted to a 4000 billion krónur loss for the foreign creditors of the old banks; the leaked report would put these provisions at nearer 2500 billion krónur. The difference – roughly the size of Iceland's GDP – would have to made up in part by increasing the capital of the new banks.

The valuation of the assets of the new banks was supposed to be completed with ninety days: it has dragged on for more than twice as long. Yet it is absolutely fundamental to any recovery plan for the Icelandic economy. Until the initial balance sheet is known, there can be no capital injection into the new banks, no restructuring of loans, and no sale of assets to pay off the debts. One can only hope that the new government will move swiftly to publish the relevant parts of the reports after the holiday weekend: to do so might be politically painful within Iceland, but it is essential for regaining Iceland's international credibility.

***UPDATE*** (Saturday 2 May)
See also this press release from the Ministry of Business Affairs and this article in today's Iceland Review.

Order of the Puffin - lundisorða

The Order of the Falcon (fálkaorða) is Iceland's highest honour. The Order of the Puffin (lundisorða) is this blog's highest honour. Both are quite difficult to get – especially the former, as U.S. Ambassador Carol Von Voorst found out this month.

Now in the world of world diplomacy, handing round a few gongs here and there is nothing particularly unusual. The British, always the experts in the finer distinctions of relative snobbery, have even created an entire order of knighthood, the Order of St Michael and St George, which is only given to diplomats. So it can't have been too much of a surprise to Ms Von Voorst when the President's office rang earlier this month to say that she would be awarded the Order of the Falcon on the occasion of her moving on from Reykjavík to a new posting: three previous U.S. ambassadors to Iceland had been similarly honoured.

The surprise came last Friday, as she was on her way to the Presidential residence at Bessastaðir to pick up her medal. It was all a terrible mistake, apparently, and she wouldn't be getting it after all! But she was welcome to come in anyway for a cup of tea and a chat with Ólafur Ragnar Grímsson if she wanted too. "Grímsson allegedly explained to her that only those who were deemed worthy were honored this way." according to Iceland Review. The Order of the Falcon, or tea and a chat with Óli and Dorrit?

Now Ólafur Ragnar is no stranger to controversy. Last November, he allegedly tried singlehandedly to sell the Keflavík naval air base (and international airport) to the Russians – the Russians politely declined the offer – before lashing out at virtually every other country with an embassy in Reykjavík, especially the British (no surprise there). It's really quite hard to take him seriously when there are so many accumulated speeches from before last October in which he claimed that Iceland's bankers were financial wizards rather than the deluded psychotics they turned out to be. But with this latest incident, he seems to have stooped to new lows of ridicule.

Ambassador Von Voorst might not be the best U.S. ambassador to Iceland in the short history of diplomatic relations between the two countries. She was only in the job for three years, and presided over the somewhat muddled announcement of the withdrawal of U.S. Navy aviators from Keflavík. The commentators at the Iceland Weather Report don't seem to think much of her. But that's no reason to snub the woman, it's only a medal after all all: if she'd been told she was going to get it, she should have got it, and tough if a few people felt she wasn't "worthy" enough. After all, there are plenty of people who think that Ólafur Ragnar is hardly worthy of being President of the Republic and hence ex officio Grand Master of the Order of the Falcon! So, in a belated attempt to set things right, I've whipped off an email to the U.S. Embassy in Reykjavík bestowing the Order of the Puffin on Ambassador Von Voorst for her services to the Icelandic people in proving that their Presidency really couldn't organise a piss-up in a brewery.

If you have any other suggestions for worthy – or unworthy, I don't care – recipients of the Order of the Puffin, the comments box is below!

Get this man a job!

Thanks once again to Anya the eyes for finding exactly the sort of absurd news stories which appeal to the Ministry of Puffins. Apparently a certain Halldór J. Kristjánsson is thinking of leaving Iceland to try to find gainful employment abroad. Sadly, there's nothing unusual about that these days, with unemployment up 650% in the last twelve months. Halldór says he wants to work in the financial sector, so I guess it makes sense to look for work in a country which actually has a financial sector – somewhere like Albania, for example, which this week managed to apply for EU membership, a feat which seems beyond Iceland's political class.

Does Halldór have any experience in this type of work? Well, that depends what you count as "experience". Until 8 October 2008, Halldór was chief executive of Landsbanki: he lost his job when the Icelandic government had to take over the bank. His disastrous scheme of taking deposits in Britain and Holland and lending them to Icelanders without the means to repay them has cost the country thousands of billions of krónur. Unsurprisingly, he has been unable to find steady employment in Iceland since he bankrupted the country (with a little help from his friends), hence his search abroad.

Still, it pains me to think of Halldór sitting doing nothing in Reykjavík, using social security benefits which could go to more deserving causes, so the Ministry of Puffins is making this appeal: if you know of a job, preferably a long way from Iceland, that Halldór could do, please let us know, and I'll do my best to pass on the information.

I'll start the ball rolling with a job offer I found from a company at 41/42 London Wall, in the heart of the City of London (postcode EC2M 5TB, telephone +44 20 7638 7787): Halldór can even apply online here… i'm lovin' it®

Today is Monday

Back to work it is. And Saturday's election results send a clear sign to Iceland's government as to what the People want that work to be.

Samfylkingin (the Social Democratic Alliance) was the most voted party (29.8%, 20 seats). Together with Vinstrihreyfingin – grænt framboð (Left-Green Movement, 21.7%, 14 seats) they now have a majority in the 63-seat Althing. Borgarahreyfingin (the Citizens' Movement, or Civic Movement depending on how you translate it) came from literally nothing – it was only "formed" nine weeks ago, and had a campaign budget of about a million krónur – to gain 7.2% of the vote and four seats. And perhaps the great surprise of the night was the showing of Framsóknarflokkurinn (the Progressive Party), which won 14.8% and nine seats (more on that later).

Sjálfstæðisflokkurinn (the "Independence" Party) was clearly punished for being the architect of the economic bubble that burst with such dire consequences, although it still polled 23.7% and won 16 seats. Many bloggers have been surprised at how many voters could still bring themselves to vote for this heap of crap: 23.7% represents 44,369 votes, less than the 50,000 members that Sjálfstæðisflokkurinn boasts about on its website. It really is that much of an institution in Iceland: hopefully in a couple of years' time, we will be able to write that sentence in the past tense.

Other losers were Frjálslyndi flokkurinn (the Liberal Party), which was wiped off the political map; the newish Lýðræðishreyfingin (Democracy Movement), which gained the votes of its candidates and some of their close family members; and L-listinn, which was doing so badly that it didn't even bother to stand in the elections.

Ironically, the Left-Greens are also on many lists of election losers. Education minister Katrín Jakobsdóttir – the Left-Green's one woman charm offensive – looked incredibly glum on Saturday night for someone whose party was scoring a historic victory, with more than 50% more votes that at the last election. While the results were the best in the Left-Green's ten-year history, opinion polls just a week before the election were predicting them 26–28% of the vote, instead of 21.7% which they ended up with. Left-Green environment minister Kolbrún Halldórsdóttir lost her seat in the Althing: that's right, Iceland's first green environment minister lasted twelve weeks…

So what divides the winners from the losers in Saturday's election? The Social Democrats, the Progressives and the Citizens' Movement all support negotiations to join the European Union: they were the winners on Saturday. The "Independence" Party, the Liberals and the Left-Greens all oppose membership negotiations with varying degrees of vehemence: they were the losers on Saturday, even if the "loss" of the Left-Greens is only relative.

Let's be clear that the idea of a referendum to approve the start of negotiations is just a manoeuvre to prevent negotiations starting at all. What is there for people to vote about? It is frighteningly obvious that most of Iceland's politicians don't understand what EU membership negotiations entail, let alone the rest of the population. That includes Iceland's foreign minister, which is truly worrying, but more on that another time. A referendum before negotiations start would be a vote on peoples fears and prejudices, and we all know which way that one would fall.

All the same, Icelanders have voted in representatives who are favorable to starting negotiations on behalf of the nation. The government should do so without delay. Like today. OK, maybe wait until the first Cabinet meeting, but that meeting should not just discuss negotiations, it should agree how to move forward. Too much time has been wasted already.

And the (early) results from the Icelandic jury…

22:23 UTC
Projections from state broadcaster RÚV, based on about 40% of votes counted:

• Progressive Party: 9 seats (+2)
  
• Independence Party: 15 seats (–10)
• Liberal Party: 0 seats (–4)
  
• Civic Movement: 4 seats (+4)
• Democracy Movement: 0 seats (–)
  
• Social Democratic Alliance: 22 seats (+4)
  
• Left-Green Movement: 13 seats (+4)
  

The international observers from the OSCE have declared the elections to be "of the highest standard": they certainly seem to be giving a reasonable result so far.

22:36 UTC
Those predictions seem to be based on rather less than 40% of the vote counted: thanks to the team at The Reykjavík Grapevine, whose Icelandic is far better than mine is, for the correction!

23:44 UTC
No real movement in the projected figures, except maybe the Civic Movement will gain an extra seat at the expense of the Social Democratic Alliance.
Apparently "thousands" of ballot papers have candidate's names struck out, perfectly legitimate in Iceland's "open list" system. The speculation is that the candidates concerned are those that were named as having received campaign donations from corporations during the 2007 elections. The striking out of candidates does not affect the number of seats for each party, although it might affect the individuals who are elected from certain lists and will slow down the count.

01:00 UTC
These projections are from Morgunblaðið, based on 53.6% of votes counted:

• Progressive Party: 13.2% (+1.5%), 9 seats (+2)
  
• Independence Party: 23.4% (–13.2%), 15 seats (–10)
  
• Liberal Party: 1.9% (–5.4%), 0 seats (–4)
  
• Civic Movement: 8.0% (+8.0%), 5 seats (+5)
  
• Democracy Movement: 0.5% (+0.5%), 0 seats (–)
  
• Social Democratic Alliance: 32.2% (+5.4%), 21 seats (+3)
  
• Left-Green Movement: 20.9% (+6.6%), 13 seats (+4)
  

01:50 UTC
Anya at NewsFrettir passes on a warning from the National Electoral Commission that the large number of strike-out ballots may mean that the current figures are "giving off the wrong image" of the final result. The reason is that struck out ballots are counted last, and there are clear differences between the parties as to the proportion of ballots having names struck out.

Election special

A small country goes to the polls this weekend to elect a new parliament after a very hectic six months. A country with a thousand-year history and an innate sense of independence, but which has nevertheless been repeatedly bullied into submission and poverty by its more powerful neighbours. A country which thought it had found riches, only to have the recent global crisis brutally expose the weakness of its economic model: a model which, at times, seemed to be based entirely on banking and shopping.

The last opinion polls predict a historic victory for the social democrats, after decades of hegemony by a centre-right party far too cosy with the nation's bankers. In recent years, it has seemed that the banks were supporting the state, not the other way round.

Everyone agrees that some sort of change is needed. The social democrats support EU membership, while the centre-right wants simply to revise the current agreements. Nobody seems to have a clear idea of what sort of deal they would be able to get from Brussels or (at least as importantly) from Frankfurt and the City of London.

The population are understandably worried. What will be the cost of unraveling the excesses of recent years? How can the prosperity of the nation's children be assured? Or will it all just end up with yet more of the stunning wilderness concreted over by foreign "investors" who couldn't even find the country on a map? Those foreign "investors" are already trying to impose their own terms, with varying degrees of tact and diplomacy, yet surely their "solutions" are just more of the same, exactly what got the nation into its current problems…

The polls are open from 09:00 to 19:00 Central European Summer Time on Sunday 26 April. The country is Andorra, not Iceland. Plus ça change, plus c'est la même chose, but I'll let you know the results when I get them ;)

On glacier bonds and Frankfurters

On the eve of today's elections the newspaper Morgunblaðið (linked to Sjálfstæðisflokkurinn, the "Independence" Party, as are many of the Icelandic media) published a report, translated at NewsFrettir, on the glacier bond problem. See "More euro madness" and "How much is a króna worth?" for the Ministry of Puffins' take on the issue.

Morgunblaðið claims (quite plausibly in my opinion) that the European Central Bank has been left holding 100 billion krónur in these once-cool financial instruments, money which is now trapped behind behind Iceland's currency controls. That's about one-fifth of the total outstanding value of the glacier bonds, according to several estimates seen by the MoP. The ECB accepted the bonds – 57 billion krónur in Íbúðalánasjóður (Housing Finance Fund) bonds, 28 billion krónur in Iceland treasury bills and 15 billion in króna-denominated bonds issed by Dutch bank RaboBank – as collateral for a euro loan to Landsbanki Luxembourg S.A., a subsidiary of Landsbanki h.f. which is now in suspension of payments.

Less plausibly, Morgunblaðið also claims that the interest payments on glacier bonds are driving down the króna exchange rate. Foreign investors are allowed to convert króna interest payments into hard currency under the currency controls; only the principal (capital) is locked into Iceland. But with some 500 billion krónur in glacier bonds, even the interest payments are a significant drain on Iceland's foreign currency. Significant, yes, but nothing compared to Icelandic domestic debt – 4827 billion krónur according to the latest available figures, of which a whopping 60% is denominated in foreign currencies according to the IMF. Although the foreign-currency loans to households (with no foreign-currency income) represent the pinnacle of stupidity, these are only a small proportion of the total: most of these loans are to Icelandic businesses. The hard currency which goes on paying off these loans can't be used for other things, like paying for imports, so the businesses have to buy more hard currency for squidgy-soft krónur, which pushes the value of the króna down.

Don't expect to hear any of this from Sjálfstæðisflokkurinn in the foreseeable future: it's simply more than they could humanly bear, to admit that sold the independence that they pretend to cherish so dearly, all for a fist full of euros (no less!).