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.

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!).

How much is a króna worth?

A couple of days ago, I commented on Sjálfstæðisflokkurinn's crackpot idea to unilaterally adopt the euro as Iceland's currency. Nobody has pointed out the flaw in my argument, so I will come clean and admit it myself! Iceland can't adopt the euro on its own, at least not yet and not at the current exchange rate.

Today's Central Bank of Iceland selling rate is 168.09 krónur per euro, down 12% since 1 February. On the other hand, if you look at Yahoo! Finance, they quote a rate of 290.66 krónur per euro… The European Central Bank hasn't quoted a ISK exchange rate since 3 December, when it was 290 krónur to the euro. How much is a króna really worth?

Entire textbooks have been written about exchange rate theory: fortunately, we only need to consider a very simple definition here. You'll just have to trust me that we would reach the same results through more complicated theory, but we can just consider that a currency is worth what people are willing to pay for it. This leads to two important conclusions, neither of which you are likely to hear from the mouths of Icelandic politicians.

Firstly, in reality, the króna is worth less than 168 to the euro. It must be, because 168 to the euro is the rate it "trades" at within Iceland, where there are strict controls on selling krónur. If the currency controls didn't exist, more people would want to sell krónur – that's only logical, otherwise there'd be no need for the controls! If more people are selling krónur, it's exchange rate will go down. Hence the CBI exchange rate is artificially high.

Secondly, the króna must be worth more than 290 to the euro. To see why, we need to look at where this exchange rate comes from. Imagine you are a foreign investor who bought a million krónur's worth of Icelandic government bonds when times were good (you would have paid about €11,000 for them). As things stand at the moment, you can't get any of your money out of Iceland. because of the currency controls. You have two choices: either you can be patient and wait for the currency controls to be lifted, or you can sell the bonds onto someone who's more patient than you are. If you sell the bonds, you have to agree a price for them, which is equivalent to setting an exchange rate for the Icelandic króna. The 290 krónur to the euro rate means that people outside of Iceland are selling a million krónur's of glacier bonds for about €3500 (once you've factored out interest payments, etc). Now the people who are buying these glacier bonds don't know when they're going to be able to get their money out of Iceland, so they apply a risk premium: they want to make a profit from their patience, so they buy krónur at an artificially low exchange rate.

In other words, we don't know how much a króna is worth and we won't know until the glacier bond problem is sorted out. We can say that the króna is not worthless. Jokes like "What's the capital of Iceland?"—"About twenty euros and a couple of dried cod." are exactly that: just jokes. The offshore exchange rate, as quoted by the ECB, reached a high of 200 krónur to the euro last November: that's about as good a guess as you're going to get for the real exchange rate, but it's only a guess.

Last week, Finance Minister Steingrímur J. Sigfússon predicted that "it is possible that there will be news about the arrangements of the glacier bonds at the annual meeting of the Central Bank of Iceland" last Friday. I've heard more reassuring politicians… Governor Svein Harald Øygard did indeed speak of the problem: apparently "the Central Bank also reviews selected measures that may allow the most impatient investors locked in by the capital controls to convert their holdings of ISK, in a way that does maintain the currency reserves of the Bank."

Hints of these "selected measures" came out over the weekend. Apparently Norðurál is looking at financing the new aluminium smelter at Helguvík with "glacier bonds". In effect, they propose to exchange ISK-denominated securities for Norðurál bonds denominated in US dollars. An interesting proposal, but the devil is in the details. What will be the exchange rate proposed to holders of glacier bonds? Will it even be made public? Or will this just be another deal between friends of the type which has made Icelandic business infamous over the last few months? In any case, the Helguvík smelter will cost 80–90 billion krónur, less than a fifth of the total value of the glacier bonds: at best, the Norðurál solution will only be a partial one.

A better bet would be to set up currency auctions to allow holders of glacier bonds to liquidate their króna capital. If, at the moment, the Central Bank of Iceland can only afford to pay back, say, €500 million euros to glacier bond holders, it should organise an auction. Investors could offer their bonds to the Central Bank at a given exchange rate and, once the pot of euros is used up, the CBI stops buying. The sellers (ie, bond holders) determine the exchange rate at which they wish to bid, and those who bid the most krónur for each euro get their bonds bought off them. Auctions could be organised every few months until the problem is resolved. That way, the Central Bank gets the benefit of the current offshore speculation on the króna and overseas investors get to put a cash price on their impatience. Don't expect this idea to become reality though – it would require too many people to face up to difficult realities as to the true value of Iceland's currency.

More euro madness

So now Sjálfstæðisflokkurinn (the Independence Party to English speakers) have decided they want Iceland to adopt the euro after all… Not to join the European Union, at least not when they answered the questionnaire posed by the Reykjavík Grapevine (maybe they've changed their minds on that one as well…), but simply to decree that the euro will henceforth be the currency of Iceland.

The idea isn't a new one – indeed it dates from long before the current financial crisis. The response from the European Commission and the European Central Bank has been a consistent "no", most recently from Commissioner for Enlargement Olli Rehn in January 2009 and from ECB board member Jürgen Stark in February 2008. Before the kreppa, it was usually the bankers who were keen to adopt the euro, which makes it all the stranger that Sjálfstæðisflokkurinn should choose to put aside its traditional reticence just now, with less than a week to go until the parliamentary elections. Perhaps they think it will somehow make them sound "pro-European", or perhaps they just think it's more sensible than talking about adopting the Norwegian krona. It is more sensible than talking about adopting the Norwegian krona, but not by much.

How would this currency changeover come about? Well let's imagine that a Sjálfstæðisflokkurinn government were to decide to change the króna, not for the euro but for gold: one króna being worth a couple of thousandths of a gram of gold. It's not a silly as it sounds: it is the equivalent of the gold standard used by most major economies from 1946 to 1971. First the government buys enough gold to compensate the holders of all the króna banknotes in circulation, some 22 billion krónur. Then it simply insists on selling all Icelandic exports for gold – that would make the fish market in my native Grimsby a much more glamorous place! – and offers to pay for imports in gold. Not everyone would accept gold in return for sending goods to Iceland but, so long as imports were roughly equivalent to exports, the Central Bank of Iceland could sell some of the gold to buy dollars or euros or Thai bahts or whatever to pay for imports.

At first sight, it looks feasible to change the króna for another currency, based on that analysis. After all, the international reserves of the Central Bank of Iceland amount to some 383 billion krónur, more than enough to buy back all the krónur banknotes and still have plenty left over. But it ignores the fact that the "money" in circulation is much more than physical notes and coins, and, in the case of Iceland, not all of it is held by residents who can easily be subjected to exchange controls.

Accurate figures are hard to come by, but most estimates I've seen of the "glacier bond" problem put it at around 500 billion krónur. These are foreign investors who have lent money (in krónur) to the Icelandic government, the Íbúðalánasjóður (Housing Finance Fund) or the Central Bank of Iceland. They are being paid back in krónur when the bonds or certificates of deposits mature but, since last November, they cannot convert those krónur into foreign currencies, only reinvest the money within Iceland. If Iceland were to adopt the euro, these bonds and certificates of deposit would have to be repaid in euros, and the CBI simply doesn't have that much foreign currency at the moment.

No country has unilaterally adopted the euro in the way that Sjálfstæðisflokkurinn proposes. Several countries outside the EU use the euro as their currency, but this was because they didn't have their own currency when the euro was introduced. Take Andorra for an example: before 1999, it used both the French franc and the Spanish peseta. When those currencies were abolished in 1999, all Andorran assets and liabilities in France and in Spain were automatically converted into euros; when euro notes and coins were introduced in 2002, the French and Spanish notes and coins circulating in Andorra were exchanged for euros at the respective central banks. On the other hand, Andorran banks cannot turn to the European Central Bank if they get into difficulties, as Andorra is not a member of the EU or the eurozone.

Sjálfstæðisflokkurinn's idea is not just unworkable, it is sheer intellectual dishonesty. This party – whose membership is around 25% of the Icelandic electorate and which has been the most voted party for most of the last century – seems to believe that the nation belongs to them and that they have a god-given right to govern. I can only hope that ordinary Icelanders will take the opprotunity to send it to the outer reaches of the political wilderness next Saturday.

***UPDATE*** (Tuesday 21 April)

• NewsFrettir reports the comments of Professor Kristjan Vigfusson, saying that Sjálfstæðisflokkurinn's proposal is unrealistic.
• Economic Disaster Area reports that Sjálfstæðisflokkurinn is plastering Reykjavík with posters announcing their mad idea.

***UPDATE*** (Friday 24 April)

• J. Halldór in Morgunblaðið seems more optimistic about Sjálfstæðisflokkurinn with this cartoon. Only time will tell.