Zero tolerance.

Photographer: Halldor Kobleins/AFP/Getty Images

Iceland Gets the First Jolt From the Panama Papers

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The biggest data dump in the history of investigative journalism, the so-called Panama Papers, is having serious political consequences in one of the world's smallest countries. The leaders of Russia, China, Ukraine and other large nations will survive the exposure of their sometimes tenuous links to offshore accounts, but the political future of Prime Minister Sigmundur David Gunnlaugsson of Iceland is in question.

Gunnlaugsson's alleged transgression is, essentially, that he hid a conflict of interest. The leader of the center-right Progressive Party came to power in 2013 on promises to end Iceland's stifling capital controls, imposed in November 2008 after the country's three biggest banks -- Landsbanki, Kaupthing and Glitnir -- collapsed under $85 billion in debt. The controls, and the decision not to bail out the banks, probably saved Iceland: It couldn't afford to deal with financial disaster on that scale, and its citizens would have been hard put to survive the kind of currency devaluation that would have been necessary without a barrier to capital flight.

By 2013, though, Icelanders were tired of the curbs. In an island nation of 300,000, life outside the global economy can be claustrophobic. The country's economy has been doing well: Iceland has experienced some of the fastest growth in Europe. Unemployment is at 2.9 percent. The country can handle the liberalization.

Back on Track
Iceland's seasonally adjusted year-on-year GDP growth, per quarter
 
Source: Bloomberg

 

The tough part, though, was for Iceland's central bank and government to hammer out a deal with the foreign creditors of the three collapsed banks. Under Gunnlaugsson's government that has largely been achieved. The creditors -- by now mostly hedge funds that had bought the debt -- were threatened with a 39 percent "stability tax" unless they agreed to shell out a smaller "stability contribution" -- almost $4 billion in total. In exchange, the creditors were put first in line among those hoping to get their money out of Iceland. Foreign investors and citizens wishing to invest overseas would come later. 

The deal faces some last-minute obstacles now, but the negotiations were contentious, and some Icelandic politicians, including Gunnlaugsson's allies, pushed for the higher tax to be collected: Why pass up about $1.6 billion in additional revenue when the government hasn't finished paying back the International Monetary Fund, which helped engineer a bailout? The government and the central bank proved more accommodating of creditors, whom Gunnlaugsson has called "vultures."

And all the while, according to the the organization that leaked the documents on offshore accounts from a Panama law firm, the International Consortium of Investigative Journalists, the prime minister's wife owned a British Virgin Islands company called Wintris, which held millions of dollars' worth of bonds issued by the three failed banks. Anna Sigurlaug Palsdottir had inherited a car-dealership fortune, and she and her husband chose to invest it through the offshore entity. Although both spouses say Wintris was perfectly legal, declared to the Icelandic authorities and paying its taxes, the public knew nothing about the company until Palsdottir wrote about it in a Facebook post last month, soon after being asked questions resulting from the Panama leak. 

Gunnlaugsson himself didn't handle questions about  Wintris -- in which ICIJ says he initially held a stake -- too well. He stormed out of an interview with a Swedish TV company, muttering, "This is totally inappropriate."

In his three years in power, the Progressive Party has lost popularity, and the anti-establishment Pirate party -- which has, for example, proposed granting Icelandic citizenship to Edward Snowden -- has gained enough to be the biggest political force if a snap election were called. So its leaders are pushing for a no-confidence vote on Gunnlaugsson. It will take place later this week, and the prime minister insists that he won't resign because he's done nothing wrong. 

But if ICIJ is correct, there is something amiss in this situation: A nationalist politician who ostensibly hates the failed banks' foreign creditors is married to one. Yet it's not proven that Gunnlaugsson did anything to make life easier for the creditors. The semi-voluntary solution is better for Iceland's reputation than imposing the "stability tax" would have been. In any case, the central bank was in charge of the negotiations, and if the prime minister had attempted any self-serving lobbying, it isn't clear how successful he would have been. And if all the taxes on Wintris's activities were duly paid, it may just be that the prime minister has done nothing illegal and should be allowed to finish what he started with the removal of capital controls.

The pressure Gunnlaugsson isn't just coming from political rivals who would benefit from an early election; he also is exposed to the anger of Icelanders at banks and bankers. "So many of the viking raiders, the largest shareholders in the Icelandic banks and their fellow travelers, hugely enriched by their close connections with the banks, also had BVI companies," Icelandic blogger Sigrun Davidsdottir explained

Besides, Iceland has one of the cleanest political and business cultures in the world: It's 13th out of 167 countries on Transparency International's Corruption Perceptions Index. So even the appearance of a conflict of interest doesn't play well here.

As a result, the investigative journalists who studied the Panama Papers may have the biggest political impact in the country where repercussions would make the least sense. Russia, Ukraine or Pakistan would benefit much more from scandal-induced leadership shakeups than Iceland, which is about to rejoin the financial world as a citizen in good standing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net