5. Icelandpaystheinterests The estate of Landsbanki does not compensatetheinterests of theIcesaveobligation 0% 5.55% Icelandpays€2.02billionof interests 5 February 2010
6. Noaccumulation of foreign exchange 2016 2009 2023 6 * BasedonMorgunbladid 5 February 2010 February 2010
7. The currentagreement is badincomparison The currentagreement Icelandpays 5.55% interest. Thatequals 1.26% spreadonthebaserate The baserate, the OECD CIRR ratein€, was 4.29% inJune 2009. Notethat at thattime, thebaseratein £ was 3.94%. Hencethespreadonthepoundobligationwas 1.61% - despitetheuse of theanti-terroristlegislationagainstIceland Bradford & Bingley – floating LIBOR withlowerspread The UK bank Bradford & Bingley was taken over by the FSA in 2008. Deposits were moved to other financial institutions. The FSCS guaranteed deposits and was funded with a loan from Bank of England and later the British Government This sets an example of financing of depositary guarantee funds Floating LIBOR plusspread for sevenyears, fixed 5.55% interestthereafter Sincetheaccruedinterest for thefirstsevenyearsaresuch a significantamountitwouldbebetteriftheobligationwouldbearfloatingrates, not fixed UK andDutchwould get allpaymentsfrom Landsbanki for sevenyears UK andDutchwouldreceiveallpaymentsfrom Landsbanki, thaIcelandwouldotherwise get The involvedpartieswouldnegotiateonthepayments of theremainingprincipal February 2010 7 Looking at a fewexamplesitbecomesclearthatthecurrentagreementputsunnecessarilyheavyburdenonIceland. Alltheexamplesassume a sevenyearsgraceperiodandmaturity of 15 years
8. Comparison – a fewexamples February 2010 8 InDefence is not taking a viewontheseexamples. Theyareheretoshowthatthecurrentagreement is badcomparedtootheroptions.
10. A weakercurrencymeans less recoveryandgreaterobligation Ifthekronaweakensfromcurrentleveltheobligationwillgrowsinceit is denominatedin foreign currencies. UnfortunatelythepaymentsfromLansdbankiwill not increasetothesameextent. Hencethe net obligationwillgrowon a weakening of thekrona. Ifthekronarevaluestherecoveryratewill not changethatmuch. Wetakeintoaccountthattheassets of Landsbanki aremainlydenominatedin foreign currencies. February 2010 10
11. Therearetworecoveryrates Recoveryrate of Landsbanki claims This is theproportion of claimsthatare met by Landsbanki assets If a claim is worth 100 and 80 arepaidbackbythe bank, therecoveryrate is 80% Thisproportionnevergetsabove 100% Theproportion of theIcesaveobligation (principal) thatgetspaidbyLansdbankiassets Iftheobligation is 120 and 80 arepaidbythe bank then 67% of theobligation is met by Landsbanki assets Theclaimon Landsbanki is kronadenominatedbuttheobligation is in€ and£. Thereforethesetworecoveryratesare not thesame Seesomeexamplesonthenextpage February 2010 11
12. Therearetworecoveryrates The FX rateeffectsboth of therecoveryrates Graphicalpresentation February 2010 12 Claim 100 Obligation 120 80 67% 80% Here, 80% of theclaim is paidbackbutthatpaymentonlycovers 67% of theobligation
13. Recoveryrisk Nooneoutside of Landsbanki hasvaluedthe banks assets The portfolio is partlyinkronasbutmainlydenominatedin foreign currencies Foreign denominatedloanstodomesticpartiesareoftenpaidinkronas. Thereforekronaassetsare a greaterproportion of theassetportfoliothanonmightthink at first The value of theassetsdependsinteraliaontheexchangerate of thekrona Dependsonhowthevaluedevelopsinthedenominatedcurrency Dependsontheexchangerate of thekrona. A weakerkronagivesgreatervalueinkronas The finalrecoveryrate (rate of claimsrecovered) neverexceeds 100% The recoveryratesurges of thekronadevaluesbutplungesifthekronarevalues. Seegraphtotheright Therewillbenopaymentsfrom Landsbanki untillegaldisputeshavebeensettled. Thatcouldbein 2011 at best, perhapslater 13 The x-axisshowspercentagechanges of theexchangeratefromcurrentlevel. Positivenumbersindicatestrengtheningandnegativenumbersweakening February 2010
14. Economicgrowthreducedpermanently February 2010 14 IoES* criticises the Central Bank for not systematically identify the risks associated to Icesave Icelandwillbecome a productioneconomy *IoES is the Institute of Economic Studies in Iceland
15. Downward spiral of the economy February 2010 15 * 13bln kronas is a bit above the average for the three preceding quarters
16. Agreed to avoid Icelandic laws The first €20,887 in each account should have superpriority This was one of the safeguards approved by Althingi in August but was rejected by UK and the Dutch This safeguard is in accordance to Icelandic law This has been avoided under the current agreement This might increase the obligation of Iceland hundreds of millions of euros The next page explains the difference graphically with an example. There we have a deposit of €50,000 and assume that 80% of claims will be met by Landsbanki February 2010 16 Claim of €50.000 – comparing how much UK and Dutch will receive according to the current agreement (blue bars) and according to Icelandic law (red bars)
17. Icelandtakeson €20.887 February 2010 17 Icelandtakeson €20.887 A singledepositbecomestwoclaims Given 80% recovery Icelandpays Onedeposit – a singleclaim Given 80% recovery Icelandpays UK/Dutchreceive UK/Dutchreceive Agreements €50.000 €4.177 plusinterest Depositbeyondmaximumguarantee UK/Dutchshare UK / Dutch €29.113 Iceland €20.887 92% EU maximumguaranteeIceland’s share Recovery from Landsbanki Recovery from Landsbanki Icelandiclaw €50.000 Interest Depositbeyondmaximumguarantee UK/Dutchshare UK / Dutch Recovery from Landsbanki Iceland EU maximumguaranteeIceland’s share 80% Recovery from Landsbanki Recovery from Landsbanki
18. Icesave: differsfromotherobligations ApartfromIceland’s claimontheestate of Landsbanki therearenoassetsbehindtheIcesaveobligation It is misleadingtocomparetheIcesaveobligationtootherobligations of Iceland Ifonehas got overdraftandthemoney is not usedbutarekeptinthe bank therearenoarrangementstobemadeinordertopaybacktheoverdraft Moneywillflowout of theIcelandiceconomyoverthenextfewdecadesbecause of Icesave – inexchange for nothing 18 February 2010 Usualdebt Icesave
20. Foreign reservedrawedon Itwillbedifficult for Icelandto get enoughforwignexchangeoverthenextfewyearsinordertoserviceexternaldebtwithoutdrawonthe foreign reserve. Icelandneedstosecure a foreign reserve for thenext 15-20 years IfIcelandrunsout of the foreign reservetherewillbe a defaultonexternaldebts 20 February 2010
21. History of running a trade deficit Since 1945 there has been trade deficit in 44 years out of 64 (until 2008). On average the deficit has been 2.2% of GDP. Note that the figures on the x-axis show the centre of the interval. For example “0%” is the interval from -0.5% to 0.5%. 21 February 2010
22. Trade balance of goods and services as % of GDP – Icesave will not be financed by trade surplus Iceland has a history of running trade deficit. In 1994 there was a record surplus, 5.15% of GDP. In seven years out of 64 (1945-2008) the surplus has been greater than 3.1% - the average annual payment of the Icesave obligation in 2016-2024. That is without mentioning other obligations that has to be serviced as well. 22 February 2010
23. A weakkrona for theyearstocome 23 Howwillthestatetreasuryobtain FX belongingtotheprivatesector? February 2010
24. Terms References Economic statistics are from Statistics Iceland, http://www.hagstofan.is and from the Central Bank of Iceland, http://www.sedlabanki.is Calculation assume the exchange rates of 14 January 2010. Then EURISK was 180,29 kr/€ and GBPISK was 202,28 kr/£. On 22 April 2009 the claims were fixed in kronas at the exchange rate 169,20 kr/€ and 191,10 kr/£ Calculations are based on the excel file by Jon Danielsson (see right) with some additions Information on Landsbanki’s assets and liabilities are found here http://www.lbi.is This document is based on information that was known at the end of January 2010 TheBradford & Bingleyterms http://www.fsa.gov.uk/pages/Library/Communication/Statements/2008/bradford_bingley.shtml TheIoESreport (inIcelandic) http://www.mbl.is/media/34/1634.pdf ReportfromtheCentral Bank 15 July 2009 (inIcelandic) http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=7199 Landsbanki AssetsandLiabilities http://www.lbi.is/Uploads/document/091124%20Survey%20of%20Assets%20and%20Liabilities.pdf ArticlebyDrJonDanielsson, Morgunbladid 15 January 2010 http://risk.lse.ac.uk/icesave/files/english-7.pdf Excelfilewithcalculation – DrJonDanielsson http://risk.lse.ac.uk/icesave/files/reikningar.xls ReportbyInDefenceonIcesave (inIcelandic) http://dl.dropbox.com/u/3133573/umsogn_indefence_um_icesave_samninga10july2009.pdf The OECD CIRR rates http://www.oecd.org/dataoecd/21/52/39085945.xls 24 February 2010 Webpage: http://www.indefence.is Email: info@indefence.is
