Like I wrote last week, the Icelandic banks are working on their own solutions for their indebted customers. Even though the state has complete ownership over all of them, they still behave like they are competing, marketing campaigns et al.
They would like to assume the forces of the markets are still the same but they are in fact working within a disaster zone. Many have called for some sort of canceling of debts, the 20% way which the Progressive Party is agitating for or the Zingales plan which this site has liked ever since the alert reader Vilhjalm A pointed it out. But now Kaupthing has hinted at the solution it will be offering, a canceling of debts above 110% of the home’s worth.
But what is a home worth today? The housing market is basically dead. Around 17.000 properties are for sale, and very few are selling. This means that real home-equity is negative for most people as they cannot get rid of their property. It is most likely that the Official Property Estimate will be used as a benchmark. It is a good start, although the market value is probably less than that. But will some customers get more and others less? The trouble is that most of the people who used to work at the banks are still there, dealing with the same customers. And some customers, especially the larger ones are used to get better treatment from those employees of the banks than the man on the street.
But this is the society that Icelandic politicians seem to be keen on building from the ruins. One where transparency is shunned and nepotism still rules. I have heard stories of people who cannot get a better answer from their bank than “the issue is being debated by a committee”, and then stories of others who can basically get the solutions they want.
The fact that someone is working on solutions is good, but will they be fair?
Related posts:
Vilhjalm A.
1 year ago
The 110% rule is very good – if it means cancelling the debt above 110% of homes’ ACTUAL value, not BOOK value. Now that it looks like old and new Krapthing are being merged, under the ownership of the foreign creditors, the write-off / write-down loss will fall on the foreign creditors.
The Kaupthing news, by the way, means that the Emergency Law is DEAD.
Iceland should now do the following:
1) change the emergency law section that guarantees all Icelandic bank accounts. Guarantee Kaupthing and Glitnir accounts in Iceland, but not Landsanki accounts. The Landsbanki Icelandic depositors lose their money, but give them a big tax deduction instead. That kills the “unequal treatment” argument of the British. Let the Insurance Fund be filled up by the three banks — soon-to-be-owned by the foreign creditors.
2) unify old and new Kaupthing and put it into formal bankruptcy, thus reversing the nationalisation. The foreign creditors get the assets of Kaupthing, but lose their claims against the Icelandic government.
3) impose a new, very high tax rate on the high-income levels of corporations (t.d. 50-60%). If the foreign creditors make a lot of money from owning Kaupthing, they will have to give it back to the Icelandic government. Impose a new 50% tax on dividends.
4) change the bankruptcy laws to allow easy loan and mortgage modification, and put into place a homestead exemption that allows bankrupt homeowners to keep the houses. The effect of this is: the foreign creditors get all of Kaupthing, maybe Glitnir and Landsbanki, but they get an empty bag. They can’t make profits from what they own -either the Icelandic creditors get their debt burden reduced, and if the foreign creditors do make money, the Icelandic government takes it away in taxes.
What happens to the Icelandic deposits in Kaupthing and Glitnir? They become guaranteed by imposing taxes on the assets of mostly the three banks. Since the foreign creditors will now own the banks, the Icelandic deposits of up to 20,000 pounds are guaranteed by — the foreign creditors!
The strategy is similar to what happened when that guy destroyed his own house and buried his car in the front yard. Here, creditors, you can have your assets — a big pile of garbage!
Bromley86
1 year ago
My immediate reaction to (1) was “no”, just because it seems so unfair domestically. Having thought it through though I can see that it makes sense if it get’s Iceland off the Icesave hook. It doesn’t get around the argument that, regardless of discrimination or not, the EEA guarantee requires state backing of the 20,887 euros. Anyway, I’m not sure that guaranteeing 2/3 of the banking system but not Landsbanki would get them off the discrimination hook.
I can’t quiet work (2) through, as I’m sure there are going to be problems with domestic business as usual if the domestic banks start to go into liquidation. I’d need to think more about it. Certainly it’s been shown that Iceland cannot borrow the sort of money needed on the open markets to pay 300k depositors.
(3) will stifle all equity investment, foreign and domestic, and it’s been debt investment that’s been the problem in Iceland. Tightening up the rules on corporate raids may be more sensible. It’ll have a negative effect on the exchange rate too, leading to inflation.
(4) was another of those “no” moments, but then I realised that you don’t mean to do away with bankruptcy totally. So the mortgagee will lose all of their assets, but there won’t be a claim on their future salaries and they’ll still have a roof over their heads. Big problem though. Credit will dry up, be secured and/or come with punative rates, especially if any profit that is made is taxed to the hilt. Many of those bankrupted people will find it hard to reintegrate into the economy just because they won’t have any transportation or prospect of getting any.
Vilhjalm A.
1 year ago
Daði, you get credit for doing something POSITIVE in an otherwise NEGATIVE public policy debate full of stupid proposals (taxes on alcohol and tobacco, mortgage payment extensions). I don’t know if the MB article got much attention, but it at least pointed out the obvious – people who can’t pay their mortgages, won’t pay them, and the government or banks had better come up with a solution. If 25% are in danger of defaulting now, that figure will soon rise to 50% and then the situation will be very serious. Perhaps someone inside the banks realized that something like the Zingales plan (too complicated for the bankers’ small brains) would come up if the banks didn’t do something, so they made this simpler 110% proposal. The problem here (as you point out) is that the debt reduction must reflect real property values, down 40-50% from the peak, not necessarily the Official Property Estimate offered by the government, who seem to dribble out only 10%-property value loss a year rather than the real figure of 40-50%. Also, the debt reduction must be done in a fair and consistent way, not on a case-by-case basis.
As for my other points, the government will come around to reality, sooner or later. If they stick with the present scheme of nationalised banks, they will see that there is no way the government can keep all of the domestic assets of the three banks and owe 300% of GNP (i.e. 3000-4000 billion kr.). So they have no choice but to give the banks (or at least Krapthing and Landsbanki) to the foreign creditors, by letting them officially go bankrupt.
Bromley, Point 1) is a little unorthodox, but it reduces the British argument only to a governmental guarantee of up to 20000 euros, as you say, and for that argument Iceland has a possible counter-argument (Insurance fund guarantees the depositors, not the govt; force majeure conditions when entire banking system collapsed, etc.). And it kills off the possibility of the British & Dutch councils coming after Iceland for 300-600 billion euros. If nothing else, this increases the Icelandic government’s (weak) bargaining position. The unknown factor here is, how much is/was the amount of Icelandic deposits in Landsbanki before nationalisation?
Who says you can’t treat all your own citizens unequally? The answer of the Icelandic govt should be, if we guarantee all Iceland Landsbanki deposits, then Iceland is liable for Icesave and the govt goes broke.
2) the unification of Krapthing has already started. This is the same thing as declaring Krapthing bankrupt – the creditors get all the assets.
3) I meant to say a high “progressive” tax rate, that starts at a low level and increases to 50-60% only at the highest end, after, say, 500m euros a year. In effect the tax would only be on the banks (now owned by foreign creditors). Yes, it would discourage foreign investment – what foreign investment?
4) the effect would be to make personal bankruptcy easy, and at the same time preserve the right of homeowners to stay in their homes even if they do go bankrupt. The state of Florida in the USA has a “household exemption” in its state bankruptcy code. This means that someone who goes bankrupt in Florida gets to keep the equity in their house. The rule are rather complicated but that effect would be that homeowners either keep their houses, or something like 100000 euros of equity in their home, or their mortgage payments are reduced to an amount they can actually pay. Since other, non-household debt (eg student loans, loans from the state or banks) is reduced or wiped out, homeowners can use their income for paying off their mortgages.
Yes, it’s true the Icelandic govt would lose money, but it’s only ISK and the state can easily print more of those.
Would an Icelander rather have an ocean of unpayable debt, or a situation where they have no or limited debt although they lose future credit lines? I think the latter.
Einar Jón
1 year ago
Yes, it’s true the Icelandic govt would lose money, but it’s only ISK and the state can easily print more of those.
The ISK is already practically worthless abroad. Printing more would only decrease it’s value even more, until we end up with currency like the Zimbabwe dollar.
The net result would only be a wipeout of the savings of the few people who have such a thing.
Vilhjalm A.
1 year ago
The Kaupthing story gets stranger and more cynical.
The first news report was that Old and New Kaupthing were going to be unified, for reasons unknown, but presumably because there was not enough value in New Kaupthing, so that it would be easier to give up the New Kaupthing assets than let the Kaupthing debt fall on the Icelandic government.
Now the news is that New Kaupthing wants to unify because there is not enough assets to guarantee the deposits of Icelanders in the bank. In other words, New-K wants Old-K to pay money to New-K to cover deposits, and this money would come out of the pockets of the foreign creditors, who now in effect “own” Old-K. (These Icelandic bankers have a lot of balls! First, the bank cheats the foreign creditors, then it expects the bank creditors to cover the Icelandic deposits! Actually, I doubt the bank will be reunified for this reason (nice try, though), it will be reunified under demands from the IMF and EU, with the foreign creditors owning it all.)
It’s not clear what the amounts of the deposits are, or the value of New and Old Kaupthing. Supposedly foreign creditors (mainly the German banks) lent at least 2000 billion in ISK the three banks. Some Icelandic bloggers have suggested that Kaupthing owes 1000, Glitnir 500, and Landsbanki another 500 (? – I suspect Landsbanki could owe more).
If that was the complete story then you could say that there was some “economic justice” at work, and that Iceland should have to pay back the Bavarian banks so that Herr und Frau Schweinmuller in Würzburg would be able to buy new lederhosen and dirndl.
But that’s not what happened. Apparently at the debt auction in London last October-January the big banks creditors dumped all or most of their Icelandic debt, at a fraction of their book value (2-5%), and other – unknown – parties bought up the debt. It seems that buyers were … American banks and hedge funds. Of course you can’t be certain who the banks and hedge funds were but some have speculated that they include JP Morgan and one particular hedge-fund that made windfall profits by betting against Iceland in the last several years. And the speculation runs further, that the Americans used their influence with the IMF to guantee that the foreign creditors will be paid off.
Icelandic assets will not be given to anyone who actually lost money, but to opportunistic speculators and shady financiers in the US, just as Michael Hudson predicted.
Where is the justice in that?
“Síðustu fréttir eru þær í bankahruninu, að bandarískir eigendur muni taka yfir að fullu og öllu KB banka. Viðskiptaráðherra segir það hina bestu lausn að hér komi erlendir aðilar að eigu þessa banka. Margir hafa verið þeirrar skoðunar, að upptaka bandaríska dollarans sé næsta skrefið og það nærtækasta í gjaldmiðilsmálum Íslands.
Þannig hafa bæri verið ritaðar greinar í blöð hér þessa efnis og innhringjendur á Útvarpi Sögu sem er orðin ein vinsælasta útvarpsstöðin hér hafa lagt hart að ráðamönnum að notfæra sér þá lausn. Er þá gjarnan nefnt að J.P.Morgan bankinn bandaríski sem er einnig tengslabanki AGS sem hér ræður orðið ríkjum að mestu í efnahagsmálum verði fenginn til að setja upp ákveðið ferli til að koma Íslandi inn í efnahagslíf í Bandaríkjunum – allt án þess þó að Ísland gangi inn í ríkjasamband Bandaríkjanna.
Enda hugnast víst flestum Íslendingum það betur að tengjast Bandaríkjunum með þessum hætti heldur en að gerast ríki í ESB og missa þannig yfirráð yfir landi sínu og auðlindum. Nú er bara að sjá hver verður niðurstaða eignaskipta á KB banka og hvernig tengsl okkar Íslendinga verða við þann senn erlenda banka hér á landi. -
Bromley86
1 year ago
>Where is the justice in that?
Does it matter though? If the assets belonged to the bank, does it matter to the average Icelander whether they go to speculators or to the original owners?
Only if the assets transferred are greater because of the change in ownership. If the bank split was, in any way, shielding assets from the creditors then there’s a certain moral justice to the creditors accessing those assets. After all, they may be scumbags, but they have legal title – for people, no matter how nice they are, without legal title to benefit would be theft. If the split was not shielding assets, then it doesn’t matter to the Icelandic people one way or the other.
Blubber
1 year ago
To look for any sort of justice in this mess is quite useless, IMO. It was lost years ago when the banks were “sold” to a handful of people.
Most of the conspiracy theories seem to want to blame outside forces in the “Economic Hitman” scheme.
However, many of the proponents of this theory neglect to factor in the local breeding grounds.
The Economic Hit will not work in a society with a solid democratic base where the laws of ownership and trade are transparent and strict.
The Economic Hit will not work unless there are local players willing to play along in order to make money.
Thus, pondering what “Evil American Hedgefund” might be scheming to have their piece of Icelandic pie is dangerous in that it renders Icelanders passive, xenophobic and victimized, rather than own up to the huge mistakes that were made in governing the country.
For as long as those mistakes aren’t rectified anyone, Icelandic or not, can continue to use Iceland as a haven for shady business.