15 August 2011 | By Dale McEwan
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Iceland is making a glacial recovery after the devastating 2008 financial crisis. Dale McEwan reports
Few discussions on Iceland can dodge the country’s financial crisis of 2008. The collapse of the three big commercial banks - Glitnir, Kaupthing and Landsbanki - continues to occupy column inches. But according to Iceland’s law firms, there are signs of a more promising future emerging.
An IMF’s report published in June on the fifth review of Iceland’s standby arrangement concludes that the programme is “on track”. The arrangement, which has been running since 2008, is set to expire at the end of August.
“Three years on, we’re making progress,” says Geir Gestsson, partner at Jonsson & Hall. “Matters relating to the collapse still dominate public discussion, but once we’ve finished the winding-up process of the banks we can move on.”
As part of the standby arrangement Iceland is required to develop a collaborative strategy for bank restructuring. In a recent amendment to the 2008 emergency legislation drawn up in response to the crisis, two of the old banks, Glitnir and Kaupthing (now Íslandsbanki and Arion respectively) must enter into composition agreements.
“We expect this to be quite a heavy process in the next 12 to 24 months,” says Gudmundur Oddsson, partner at Logos Legal Services, whose firm has been advising Bingham McCutchen, which is acting for a group of bondholders, on issues regarding Icelandic law in connection with the composition agreements.
Of the two banks, the composition of Kaupthing appears to be more advanced, says senior associate Gunnar Thorarinsson.
“I presume the composition is a significant part of the recovery process, to really close the chapter,” says Thorarinsson. “Ownership of these banks will be clearer, which will have a significant effect on recovery.”
“We still see a few cases from this crisis,” says Áslaug Árnadóttir, managing partner at Landslog Law Offices.
The firm has been working mainly on the government’s behalf, but is currently acting for the resolution committee of Kaupthing, litigating disputes on the settlement of several derivative contracts.
Tryggingamidstodin, one of Iceland’s leading insurance companies, has also hired Landslog to handle claims made against it under D&O policies purchased by Glitnir.
As a result of the crisis, competition law is a significant area for firms. As Gestsson explains, prior to the crisis a number of Icelandic companies operating in competitive markets were highly leveraged. The three banks that were established on the ruins of the collapsed ones - Arion, Landsbanki and Íslandsbanki - have now assumed direct or indirect ownership of these companies to repay their debts.
“The competition authorities in Iceland are concerned about banks assuming control of companies that are in competition. Usually, the competition authority wants banks to give up ownership and sell their shares ASAP,” says Gestsson.
The most recent report from the Icelandic Competition Authority notes that from the beginning of 2010 to June this year it has intervened in 20 mergers by imposing conditions. Examples include Arion’s takeover of fish exporter Fram Foods and Landsbanki’s takeover of building materials company Húsasmidjan.
“Parties that are competing withHúsasmidjan have publicly stated their concerns about Landsbanki’s ownership,” says Gestsson. “I guess the banks won’t be interested in holding these shares indefinitely, but whether there’s an interested buyer depends on economic progress in Iceland.”
Investment is crucial for the recovery, and seems to be picking up.
“The international banking community is showing a strong interest in lending into Iceland again and even the new Icelandic banks seem to have been able to create some interest,” notes Oddsson. “Immediately after the collapse the international finance market wouldn’t touch Iceland, but that’s changed in the past six to 12 months.”
“The economy is in dire need of foreign investment,” says Thorarinsson. “While the political environment has not yet been focused on this, hopefully that will change.”
Firms are in agreement that the energy sector is a good option for foreign investors, but this is a political hot potato. There is debate about whether or not to hand ownership of natural resources to foreign investors.
“I think this will interest foreign investors,” says Árnadóttir. “Many are now creditors of the banks. They have one foot in here, so we hope to have more work with them.”
Predicting alternative areas of investment will ultimately depend on Iceland’s succession to the EU, says Gestsson. This is a contentious issue, with opinion divided over sovereignty losses in the fisheries sector. A slight majority of Icelanders want the country to withdraw its EU application.
In the legal profession itself, the past two years have seen considerable movement.
“[Many of] those who were in-house have moved into private practice,” says Oddsson. “There are quite a few small firms now. I won’t be surprised if they start merging.”
These have been trying times for firms, but they have risen to the occasion.
“The legal profession has obviously adapted,” says Thorarinsson. “The collapse has meant a significant amount of work for it which, I think, has been well-handled in general. These are quite complex issues and firms have stepped up to the challenge.”