10 questions of Össur about the Framsókn way answered

Össur Skarphéðinsson recently asked 10 questions about the Framsókn path. Here are the answers to them.

“1. Is the Framsókn path only about the ISK holdings of creditors in the bankrupty estates, that is, cash and the value of Arion Bank and Íslandsbanki? If the answer is yes, is it not clear then that the 300 billion Stefán talks about will not be used twice, that is, (A) to reduce the amount of króna in circulation, lower the government's debt, and facilitate the removal of foreign exchange restrictions on the one hand, and (B) on the other hand, to reduce household loan debt by 20%?”

Answer: In item (A) conflicting objectives appear: “reduce the amount of króna in circulation, lower the government's debt, and facilitate the removal of restrictions.” It is not possible to withdraw króna from circulation by reducing the government's debt. It is obvious that if the government uses króna to pay its debts, then someone gets that króna for use and they are then back in circulation. Unless the recipients of the króna can pay off some debts with banks and do so. In item (B) it is possible to reduce household debt and reduce króna at the same time. In so far as króna would be used to pay down household debts with banks – then the money supply would decrease accordingly.

“2. If 300 billion is poured into the economy where there is already too much money in circulation, would it not have inflationary effects similar to those experienced with Kárahnjúkur Power Plant, cause inflationary pressure and erode a large part of the one-time reduction in loan principal – in addition to maintaining capital controls?”

Answer: Reduction of household debt does not automatically lead to an increase in the money supply. Here the method matters. If the reduction were paid in full to the financial institutions, it would indeed lead to an increase and increase the risk of inflation. If the reduction is paid out over a long period (e.g. 20 years), then the inflationary effects would be negligible.

“3. Can it perhaps be inferred from the rhetoric of Framsókn members that their path rather involves declaring the failed banks bankrupt and converting the debts into króna, which can be argued to be in accordance with Icelandic bankruptcy law, where settlements are usually made in Icelandic króna?”

Answer: There is no reason to commit beforehand to either of the two paths that can be taken, bankruptcy or settlement agreements.

“4. Does the Framsókn path involve demanding that the creditors of Glitnir and Kaupthing return all the foreign currency of the estates to the Central Bank against payments in króna at the official rate – and subsequently offering them to buy it back at a rate more favourable to Icelanders? Or against paying a hefty exit tax?”

Answer: Creditors of the old banks should not have advantages over Icelanders regarding the authorization to take capital out of the country. Uniformity must prevail over all in this matter. Those who wish to be prioritized for exit need to sacrifice something in return. An exit tax would be one way to achieve this.

“5. The path in question 3 is more likely to yield funds that can be used for two purposes than the path in question 1. But has Framsókn considered how the “vulture funds” will respond to it? That is also a billion-pound question.”

Answer: Yes, we have considered it.

“6. Will the “vulture funds” seek legal remedies on the basis that it involves asset confiscation which affects the property rights clause of the Icelandic constitution? Has Framsókn considered the obvious defensive plays of creditors on this basis?”

Answer: Framsókn has actually not advocated for the confiscation of the assets of the failed banks, as there are various other viable paths to an acceptable resolution.

“7. With the call for the foreign currency of the estates and the conversion into króna, a giant króna mountain would be created, which is many times the current overhang. Has Framsókn thought of at least one toxic defensive play of creditors? It might involve not demanding the conversion of the currency mountain into foreign currency but instead putting pressure on Icelanders by holding it here for a few years to profit from the interest rate differential while we struggle with high inflation with sky-high interest rates?”

Answer: “If” the conversion of all the foreign currency of the estates into króna came to be, the Central Bank could use the same methods it uses today to lock them in special accounts. Therefore, the pressure would not be on Icelanders, but on the creditors.

“8. Is it enough to impose a return obligation on all foreign currency, including creditors? Is there also a need to impose an exchange obligation? But would it be possible to impose an exchange obligation on the estates alone without violating the equal treatment rule? Would it then be necessary to impose an exchange obligation on all export companies so that the Framsókn path works out? What would the fishing and aluminium companies say, if they could no longer have foreign currency accounts in Iceland, but had to exchange all the foreign currency they earned at the rate the Central Bank saw fit from day to day?”

Answer: An exchange obligation on foreign currency would not be necessary. It would be more straightforward to clarify the provisions of the law that all bankruptcy estates in the country pay out in króna. Thus, the equal treatment rule would be respected.

“9. The estates of the failed banks have been operating for about four years. The question then arises whether laws on the return obligation on foreign currency with an exchange obligation would cover them? It would be interesting to know how Framsókn has examined this matter.”

Answer: Refer to the answer to 8.

“10. Framsókn's argument that it is not correct to spare the “vulture funds” is based on the fact that the funds purchased claims on the estates at a bargain price and will profit immensely from the settlement of the estates. Certainly true, but do these arguments also apply to those 30-40% of the creditors in the estates who lent money to Kaupþing and Glitnir and are still so-called original creditors who hope to recover some of their lost money?”

Answer: Yes, this also applies to the original creditors. They did well not to sell at a bargain price like many others did and have profited well from that decision. They, like other creditors, will need to bring their assets to real value to get out of the controls.

FROSTI SIGURJÓNSSON