"Iceland will honor its obligations" - I

"Iceland will honor its obligations" Interview with Gylfi Magnusson, Minister for Business Affairs

25.2.2009

Gylfi Magnússon, Iceland's Minister for Business Affairs, reiterates in an Interview with the German newspaper, die Welt, that the Icelandic Government will honour its legal obligations abroad; the assets of Kaupthing Edge in Germany will almost certainly be sufficient for paying off depositors.

However, from the point of view of Icelandic taxpayers the the problem with the Landbanki accounts in the UK and the Netherlands, is bigger. It seems now inevitable that when all accounts have been settled, some part of the Icelandic debts will be paid by the Icelandic government and then, of course, also by the Icelandic taxpayers. Read more:
Interview Gylfi Magnússon, 17.02.2009

President Ólafur Ragnar Grímsson said in a German newspaper last week that German Kaupthing customers should understand, that Icelanders lost everything and therefore shouldn’t carry the burden of paying the deposit guarantees.

The government and you contradicted and said that Iceland will fulfill its obligations. But isn’t the president right also? How do you explain to people, that now that they have lost everything they will also have to pay the banks' foreign debts?


Gylfi Magnusson, Minister for Business AffairsI am glad to get the chance to clear up this misunderstanding. First of all, with regard to Kaupthing Edge in Germany I have been told, it seems almost certain that there are sufficient assets within the bank to pay off depositors. There is a much bigger problem from the point of view of the Icelandic taxpayers in the UK and the Netherlands. But those accounts were with Landsbanki, not Kaupthing. It seems now inevitable that when all accounts have been settled, some part of the Icelandic debts will be paid by the Icelandic government and then, of course also, the Icelandic taxpayers.

How is the government going to raise the money for that? Iceland is seriously in debt. So where does the money come from then? The taxpayer?

Well, in a way yes. That’s basically the only revenue that the government has. But you must also look at the economy from a larger perspective. What is really needed is that the Icelandic economy generates enough trade surpluses to pay off the debts. It is vital for everyone involved, the Icelandic government, the Icelandic people and the creditors, that the Icelandic economy gets back on its feet and manages to keep the export industries going in order to to generate the Euros or Pounds or Yen needed to pay off these debts.

... to raise foreign currencies?

Yes. So we must take a dramatic U-turn from the trade deficit of recent years to a trade surplus. In the last few months we have managed to do this and hopefully will continue to be able to do so. There are several factors that are working with us: the fact that the currency has fallen so dramatically, reduces imports and helps strengthen exports. There are of course also factors that may not work in our favour. In particular, the deterioration of global economy will hurt exports everywhere. But there is really no reason to think that Iceland will be significantly worse affected by this than other countries.

Do you think that any Icelandic bank, if re-privatised in the future, will be able to participate in international competition for private clients, to offer money market deposit accounts, etc.?

Well, not like they did before, that is quite clear. They over-extended very dramatically and reached far beyond what was reachable. So, we will not see anything like that. At the moment, our main concern is to get the New Banks fully functional in order to be able to serve the domestic economy. So, basically all their foreign operations have either been seized or are waiting to be sold off. There will be no significant foreign operations of Icelandic banks. We will have a domestic banking system to start with. At some point their finances and reputation may recover, and then they may be able to expand a little bit abroad but that won’t happen in the immediate future.

Are the Icelandic banks doomed to stay in the country just because Iceland is such a small country and the banks shouldn’t exceed the GDP?

You can say that for now they are in this situation. And of course we want to set up a banking system that has solid finances, a solid balance sheet and limit the scope of the new banks’ activities. We have to do everything that it is needed for the domestic business and will not spend resources on expansion abroad. International expansion wouldn’t be feasible anyway given the current banking climate and the seriously damaged reputation of the Icelandic banks abroad. I’m sure that the Icelandic government will set up a regulatory framework to make sure that nothing similar to what happened in the recent past will be repeated. Obviously a number of things went wrong in Iceland. There were some bad decisions made by the bankers and the owners of the banks, but there was also regulatory failure.

In what way?

In many ways. Our regulatory framework put very little limit on how large the banks could become and there were no serious attempts made to try to reduce their growth. There was domestic and foreign criticism before the banks collapsed. But those voices were not listened to at least not by the ones that made decisions

Why not?

Well... (pause)... that is probably a long story, but I think that there were several factors involved. One was that on the surface everything looked extremely rosy. The banks were growing rapidly, generating huge profits. They were hiring people left and right on very high salaries. The stock market was booming. The real estate market was booming. And anybody, who pointed out that maybe we didn´t have the necessary financial support and that we were running too fast, was ignored. The banks were relying to an ever-increasing degree on a horrendous amount of borrowing, both for funding and also to keep asset prices high. There was a real danger, that if there was some disruption in the flow of foreign capital, we could have a very rapid negative spiral where the asset prices could fall and the krona could depreciate. Which is unfortunately what happened. Many people, including me in my previous job, very seriously pointed out this possibility, not just as a theoretical possibility, but as an actual threat.

Don’t you think that the banks would have had the obligation towards the Icelandic customers to advise them not to take loans in foreign currencies, which is – given the devaluation of the Krona - the reason why most Icelanders can’t pay their loans back now?

I’m certain that they should have done that. They have obviously advertised risky behavior and risky products, assets and loans. And it’s quite clear, that when a banker tells a customer, who has no foreign currency earnings, to make a huge bet on the Icelandic krona by taking a foreign loan, the current exchange rate fluctuations can make the customer bankrupt overnight. One more reason why people were taking all these foreign loans was that interest rates in Iceland were very high. This was a policy mistake by the Icelandic Central Bank. It should have used all different kinds of means, rather than just increasing interest rates to reach its economic goals.


After Landsbanki’s seizure Gordon Brown froze all assets of Icelandic banks in the U.K. using anti-terror-legislation. Subsequently Kaupthing had to be put into receivership, the official explanation being that Kaupthing was in technical default of its foreign loan relations after a run on the bank. Do you think that Gordon Brown precipitated the fall of Kaupthing?

This is of course one of the issues between Iceland and the UK. The UK government claims that these actions were justifiable; the Icelandic government sees it differently. I don’t really want to state how much damage the action of the British authorities against Singer & Friedlander, the British Kaupthing subsidiary, actually did. But Iceland was in dire straits, obviously trying desperately to keep a part of its banking system afloat. And the actions taken by the British government certainly didn’t help.