I’ll Huff And I’ll Puff And I’ll Blow Your House Down

“The creditors who could potentially suffer the fate of recovering nothing from the Landsbanki estate are the same creditors to whom Iceland will be looking in the future to raise much-needed foreign funding.” —Unnamed Landsbanki creditor quoted in The Financial Times
According to Ólafur Ragnar Grímsson, things are starting to look up.
In an interview with Bloomberg TV—while in attendance at the World Economic Forum— Ólafur stated that he expected that Iceland would be able to cope without further assistance from the IMF this year. He was also extremely upbeat about the new Icesave deal, which Alþingi is currently deliberating. “All export sectors in Iceland,” he says, “are performing much better partly due to the devaluation of the currency and also because of the economic measures and various other reforms that we have instigated.” And, indeed, the IMF itself estimates a possible expansion of 2 percent this year. Not much, for sure, but better than most of us were probably thinking.
And yet, something doesn’t quite smell right. The Wall Street Journal suggests that in the new Icesave deal, “…drafted jointly with the UK and the Netherlands a month ago, Iceland would pay 47 billion ISK (USD 406 million). This compares with the 162 million ISK in costs the country was facing under the previous deal. The rest will be covered by Landsbanki assets, according to the estimates by the country’s central bank.” This all sounds like a vast improvement on the former deal, which, in the words of Ólafur himself, “was fundamentally unfair.” And it appears that we have a tendency to agree with him. Fréttablaðið’s January 25 poll showed that more than 50% of the population were behind the new arrangement.
But let us consider a further aspect of this picture:
Since their demise in 2008, Iceland’s three largest banks, Landsbanki, Glitnir and Kaupthing, owe more than 80 billion USD to creditors, and many of them are well-known European hedge funds. Germany’s DekaBank, one of the largest creditors, is currently suing the Icelandic state over an emergency legislation, which puts depositors ahead in the queue. This month, Andrew Ward in The Financial Times stated that “…according to the bond market, creditors are expected to lose between 70 and 80 per cent of money owed by the three big banks.” However, the DekaBank lawsuit is expected to reach the courts during the first half of 2011. Should it meet with success, the entire Icesave debate would literally be turned on its head. As noted by Ward: “If the depositor priority law was overturned, the UK and Dutch would have to share proceeds from the Landsbanki estate with creditors. Any shortfall in the 4.1 billion Euros guaranteed by the Icesave deal would be paid by the Icelandic taxpayers.” And bear in mind, DekaBank is only the first of many poised to start knocking on doors.
Stefán Karlsson, in The Christian Science Monitor, suggests that there is “bizzaro” notion that Iceland is some kind of “poster child” for turning the crisis around. He says that—aside from 2009—2010’s deficit “…was worse than all the other previous years in Iceland and wasn’t even close to a balanced budget.” He then adds that Iceland has most certainly not yet returned to growth. In fact, “The opposite is true…despite a 2% increase in real hourly wages, real aggregate labour income continues to fall three years into the crisis, after having previously fallen during the previous two years by roughly 20%.”
One saving grace may be the potential sale of the Iceland Foods chain in the UK. On January 28, The Daily Telegraph ran an article with the headline: “Landsbanki to sell Iceland Foods for GBP 1.5bn.” These represent the bulk of the assets that the Icelandic state suggests would cover any shortfall. A previous offer by Malcolm Walker, Iceland Foods’ founder, for GBP 1bn last year was rejected. Yet, as the Icesave deal comes closer to closure, a sale seems inevitable—bargaining chips are few and far between.
There are some who might see the recent surge of foreign acquisitions of Icelandic ventures as a natural progression of economic events: consider HS Orka by Magma, Canada/Sweden; Orkuveita Húsavíkur by Wasabi Energy, Australia; the Grundartangi ferrosilicon plant by China National Bluestar; and possibly the Icelandic Group (one of the world’s largest seafood producers) by Triton Partners, UK. I would hazard a guess that before 2008, no one would have paid the slightest heed to this wave of foreign multinationals sailing into scoop up Icelandic firms, let alone singing karaoke marathons to try and prove a point.
So, the question is, by the time all the courts, governments, lawyers and their respective God-knows-whos have reached accord, what will be left to divvy out?
To quote a famous Icelander: “You ain’t seen nothing yet.”