Iceland arrests banker in crisis probe

ICELANDIC authorities today arrested Hreidar Mar Sigurdsson, the former chief executive of the collapsed Kaupthing bank, making him the first high profile banker to be detained in the wake of the Nordic country's financial crisis.

The special prosecutor investigating the Icelandic banking crash of October 2008 said Mr Sigurdsson was suspected of falsifying documents and breaking laws on stock trading for personal gain.

Mr Sigurdsson is being held in police custody until a bail hearing tomorrow at the Reykjavik District Court.

Prosecutor Olafur Thor Hauksson said he planned to ask that the former banker be kept in custody for two weeks to prevent the possibility of him tampering with evidence or interfering with the investigation.

Mr Hauksson was appointed by Iceland’s post-crisis government to investigate whether there was any criminal activity in the lead up to the banking crash that crippled Iceland’s economy, sent its currency into a tailspin, frightened off foreign investors and forced out the country’s leaders of the time.

Britain’s Serious Fraud Office is still conducting its own investigation into suspected fraud at Kaupthing, with a focus on efforts by the bank to attract British investors to its “high yield” deposit account, Kaupthing Edge.

About 30,000 British individuals, companies and organisations made an investment.

When it opened the investigation in December, the British agency said that it would work with the Icelandic special prosecutor because it also looked closely at a series of decisions that appear to have allowed substantial value to be extracted from the bank in the weeks and days before its collapse.

The demise of Kaupthing, one of several Icelandic banks to collapse, sparked a political row between Reykjavik and London because Kaupthing had failed after the British Government invoked anti-terrorist legislation to freeze the UK assets of another collapsed Icelandic bank, Landsbanki.

Britain’s Treasury said that the move was necessary to ensure the money that British savers had placed in the bank would not be whisked back to Iceland.

But Iceland’s prime minister at the time, Geir Haarde, criticised the move as an “unfriendly act” and blamed the decision for inspiring panic that led to the subsequent collapse of Kaupthing.

A cross-party committee of British lawmakers was later critical of London’s handling of the situation, saying that the government’s statements on the ability and willingness of Reykjavik to compensate non-Icelandic account-holders was “ultimately unhelpful”.

Iceland default unlikely: central bank

THE risk of Icelandic sovereign default is “almost non-existent” and the country could honour all of its debt obligations by relying purely on its existing reserves, its central bank governor says.

In an interview on the sidelines of meetings at the Bank for International Settlements in Basel, Mar Gudmundsson said agreement could be reached on the repayment of losses linked to failed internet bank Icesave within one to two weeks.

But the central banker warned that an extended dispute could damage Iceland’s economy.

A plan to reimburse Britain and Netherlands for €3.8 billion ($5.7bn) in related debts was rejected by 93.5 per cent of voters in a referendum last Saturday.

But Mr Gudmundsson said that was hardly surprising, since negotiations have been continuing and the British and Dutch had put forward more favourable offers.

“It’s conceivable that there could be a settlement (on Icesave) within one to two weeks if there isn’t a backlash from the referendum,” Mr Gudmundsson told Dow Jones Newswires, adding there was “no reason” to expect Iceland’s currency, the Krona, to take a hit on the result of the vote.

The concern, he said, would be if negotiations dragged on, raising the possibility of downgrades by rating agencies, delaying expected aid from the International Monetary Fund and Nordic countries, and creating more economic uncertainty.

“If it starts to do that to a significant degree, then our recovery program will be delayed,” Mr Gudmundsson said.

“We will not be able to take any steps to lift the capital controls in the near term; the room for manoeuvre for monetary policy would be less than we would like…; and then this would effect the level of investment in the economy and have macroeconomic consequences.”

Going forward, the key issues will be setting Iceland’s economy on a recovery track, and ensuring it can honour the heavy debt repayments that will come due in the northern hemisphere autumn of 2011 and early 2012, worth €1.4bn and €400 million.

In a worst case scenario, Iceland could honour those obligations without the hoped-for external aid, but that would take its reserves to a very low level, making it very vulnerable, and necessitating a bigger economic adjustment.

“You would not be able to intervene to support the exchange rate, you would actually aim for a higher current account surplus with lower living standards,” Mr Gudmundsson said.

“You would have to do more fiscal retrenchment; you would have less financing to smooth the adjustment, so the adjustment would just have to be harder.”

Iceland baulks at paying up on bank bailout

REYKJAVIK: Iceland's President has refused to sign an unpopular bill to compensate Britain and The Netherlands over the failure of Icesave bank, triggering warnings that Reykjavik will be frozen out of the European Union.

London and The Hague had expected Reykjavik to approve the terms of repayment for a loan extended during the financial crisis. The loan meant that 400,000 savers with deposits in Icesave did not lose their money.

But President Olafur Grimsson stunned the world’s financial community yesterday by refusing to sign the repayment schedule into law. Instead, he said the matter would be decided in a referendum among Iceland’s 243,000 voters.

“I have decided, according to Article 26 of the constitution, to refer this new act to the people,” he said in a televised speech. “The involvement of the whole nation in the final decision is therefore the prerequisite for a successful solution, reconciliation and recovery.”

The decision threatened to bring down the Icelandic government and took its financial system to the brink of collapse. Fitch, the international rating agency, downgraded Iceland’s credit rating to junk status.

Britain insisted that the compensation deal must go through, while The Netherlands said the decision was “unacceptable”.

The dispute over the Icesave compensation scheme had delayed the disbursement of funds under a $US2.1 billion IMF standby loan arranged in November 2008 following the collapse of Icelandic banks. The IMF announced on December 14 it had reached an agreement with Iceland on the release of a third instalment of the loan.

The Icesave bill, narrowly approved by the Icelandic parliament on December 31, calls for the payout of E3.8 billion ($5.9bn) to the British and Dutch governments for having compensated more than 320,000 British and Dutch savers who lost money in the collapse of the Icelandic bank.

The payout has stirred up resentment among many ordinary Icelanders hard hit by their country’s financial meltdown in October 2008.

About 60,000 people – about a quarter of the country’s electorate – have signed a petition protesting against the bill and calling for the issue to be put to a referendum.

“Public opinion polls indicate that the overwhelming majority of the nation is of the same opinion,” the President said in his speech.

A poll taken in August suggested that nearly 70 per cent of Icelanders were against the Icesave deal, the compensation amounting to about E12,000 for each citizen on the island nation.

British Financial Services Minister Paul Myners said that if the decision was allowed to stand, Iceland would be frozen out of the international financial system and would be unable to join the EU.

He said Iceland risked pariah status if voters said “no” to the package: “The UK government stepped in to ensure that all retail depositors with Icesave were fully paid out, and now we expect the Icelandic government to ensure that we are repaid that amount which Iceland owes us.”

AFP, The Times