Iceland Must Renegotiate

The big debate in Iceland these days is whether the legislature should approve an agreement with Great Britain and the Netherlands requiring the Icelandic government to repay losses incurred by the citizens of those countries resulting from the failure of Landsbanki's IceSave accounts. The stakes are high, and various commentators speculate that the ruling coalition will fall if the agreement is not ratified.

It is, however, time to step back and look at matters in a rational manner.

As matters stand, we're damned if we do, and damned if we don't. If we ratify the agreements, we'll be looking at a very strong possibility of a sovereign bankruptcy. If we don't, the strong implication is that Great Britain and the Netherlands will block further IMF assistance and Icelandic entry into the European Union, and do whatever else is within their power to send us back to the Stone Age.

Imagine that Iceland was a private corporation that had guaranteed the debts of one of its subsidiaries. Under American law, if the subsidiary had obtained funds through fraudulent means, then declared bankruptcy, the parent corporation's guaranty would be called in. If the parent was also in financial distress, it would likely file for bankruptcy itself.

The subsidiary's fraud would preclude it from discharging its debt, but the parent would likely be entitled to a discharge, absent a showing that it was aware of and participated in the fraud. The subsidiary's assets would be liquidated, and distributed among creditors, but the parent would likely submit a plan of reorganization that would permit it to cram down the guaranty obligation, paying only a portion of the remaining debt to the creditors.

2009-06-29-ICESAVElitlastulkanmedeldsp.jpg "No problem boys, I'll take care of the bill." The Icelandic nation pays the bill, but Landsbanki owners and directors enjoy the feast: Icelandic cartoonist Halldór Baldursson's take on H.C. Andersen's fairy tale "Little Match-Seller Girl."

The bankruptcy filing would impair the parent's credit rating, but would not require replacement of the parent's management or otherwise damage its ability to function as a going concern.

British and Dutch authorities have already seized all of Landsbanki's assets in their countries, and are proceeding with plans to liquidate them to satisfy the IceSave obligations. As with any liquidation, the successful those efforts will be will depend in large part on matters outside any of the governments' control, such as the stabilization of property values, the market for the bank's assets, and the speed with which liquidity is required.

In Iceland, Landsbanki's collapse is attributed, at least in part, to Great Britain's decision on October 8, 2008, to invoke anti-terror legislation to freeze the bank's assets. Landsbanki appeared to be well-situated to survive as a going concern after another Icelandic bank--Glitnir--went into receivership on September 29, but the British regulators' action led to a run on Landsbanki, and forced it into receivership.

There are, to be sure, any legal and factual issues that can be debated: Did Great Britain's action cause Landsbanki's insolvency? Did Icelandic regulatory officials have enough facts at their disposal to foresee Landsbanki's imminent collapse? What legal obligation did the Icelandic authorities have to warn of Landsbanki's purported instability? Is the interest rate called for by the IceSave agreements punitive?

Although Iceland's Finance Minister, Steingrímur J. Sigfússon, insists that ratification of the agreements is essential to the government's recovery plan, and implies that a North Korea-like pariah status is the only alternative, Professor Jón Daníelsson of the London School of Economics suggests that rejection of the agreements would simply imply that Iceland is not shirking from its responsibilities, but wishes to restart negotiations to achieve a fairer result for Iceland. Since the collapse of the entire EU banking system is no longer imminent, there is no gun to anyone's head.

Negotiations between sovereign states take time, and the stakes are so high for Iceland that we must be sure that we're getting a fair shake. No neutral third party has found the Icelandic government solely responsible for the IceSave deposits, so why is our government conceding the point? If this were a dispute among equals, I suspect the terms would not be so one-sided.

Iceland should reopen discussions, and request the assistance of a neutral third party (such as the United States or the Scandinavian countries) in negotiating a more equitable agreement. It cannot be in the long-term interests of any of the parties to these agreements to reduce the entire Icelandic nation to utter destitution. The terms of the current agreements would require severe cuts in health care, education, and infrastructure spending in Iceland, which would only serve to weaken our value as a trading partner and military ally.

I understand the depositors' anger towards the bankers who took their money and promised high returns. I sympathize with the newly-impoverished pensioners whose futures have suddenly been thrown into doubt. I appreciate the strong stand their governments have taken on their behalf. I despise the arrogance of the "New Viking" raiders who still cavort in London like princes with the money they stole from honest hard-working depositors.

The pain and loss they feel is exactly the pain and loss the vast majority of Icelanders feel. We, too, were bamboozled by their promises of easy cash. What we need now is for our government to stand up for us the way the British and Dutch governments have stood up for their citizens, and to reach an arrangement that is equitable for all.