ÍSLANDSBANKI PRIVATE STOCK OFFERING

The Icelandic government’s sale of 22.5% of Íslandsbanki bank in a private stock offering last March has resulted in allegations of corruption, investigations by two state institutions, weekly public protests, and calls for Finance Minister Bjarni Benediktsson to resign. What went wrong?

Background

After the 2008 banking collapse, a restructuring of Iceland’s financial system took place. From the ruins of banks that had become insolvent, three state banks were established: Íslandsbanki, Landsbankinn, and Arion Bank. Landsbankinn remains in 98.2% state ownership to this day, and there are no plans to sell it. Arion Bank has passed into private ownership, and the current government is in the process of selling Íslandsbanki in stages.

State ownership of financial institutions has long been higher in Iceland than in neighbouring countries, much to the chagrin of local finance experts, and the sale of Íslandsbanki has been on government agendas for years. Recent governments have argued that its sale would reduce state risk on the financial market and that the earnings could be used to finance muchneeded infrastructure projects.

Step 1: Public stock offering of 35%

In early 2020, the Icelandic government began preparations to sell Íslandsbanki, but when the pandemic hit and economic conditions worsened, the sale was put on hold. At the end of that year, it was once again announced that Íslandsbanki would be sold in stages, beginning in 2021. The first partial sale was carried out in June of last year: a public stock offering where a 35% stake in the bank was up for grabs.

The sale was successful: the state still owned 65%, with 24% now in the hands of local investors and 11% held by foreign investors. Share value rose immediately following the sale, which led to some criticism of the low share price state authorities had set for the sale.

Step 2: Private stock offering of 22.5%

The next stage of the sale was announced early this year: the government would sell another 22.5% of Íslandsbanki in a private stock offering in March 2022. Unlike the first offering, in which the public could buy shares, this second offering would solely be open to professional investors or investment companies, which would receive an invitation to buy shares. The sale was successful, reducing the state ownership of Íslandsbanki from 65% to 42.5%. Yet cracks in the surface quickly began to appear.

The handling of this second share offering was criticised by opposition MPs both for its lack of transparency and the discount given to investors, who purchased shares at a 4% discount from their market value despite high demand. The discount amounted to ISK 2.25 billion [$17 million; €16.1 million], which opponents argued should have ended in the state treasury.

The lack of transparency on how the sale was conducted was also harshly criticised. Financial expert Ásgeir Brynjar Torfason told RÚV that it was unclear on what grounds investors had been selected to take part and that Icelandic State Financial Investments (ISFI) and the Ministry of Finance needed to answer that question. He also called on authorities to answer why such a large discount was given, despite high demand for the shares.

Finance Minister Bjarni Benediktsson, legally responsible for the sale, responded to the criticism by stating that the goal of the offering was to acquire long-term investors in the bank, and that Icelandic pension funds had been the main purchasers in the offering. As more information about the sale became public, however, a different picture emerged.

Investors made public

At first, the public had no knowledge of who had taken part in the March offering. The ISFI initially stated that there were legal obstacles to making the list of investors public, but as public demand mounted, the government eventually decided to publish the list. It contained slightly over 200 individuals and companies that had

participated in the sale. The largest single buyer was Gildi Pension Fund, followed by the Pension Fund for Icelandic State Employees, Brú Pension Fund, and the VR Union Pension Fund. All other investors purchased less than 4% each of the total shares available in this offering.

Among the investors of that remaining 4%, however, were some notable names. They included Jón Ásgeir Jóhannesson, the largest shareholder in Glitnir bank before it went bust in Iceland’s 2008 banking collapse; Samherji CEO and former Glitnir chairman Þorsteinn Már Baldvinsson; and, perhaps most notably, Benedikt Sveinsson, the father of Finance Minister Bjarni Benediktsson. Other purchasers included employees of the consulting company that had been hired to manage the sale.

Just two weeks after the sale, share prices had risen by 11%. In contrast to the Finance Minister’s stated goals for the offering, updated shareholder lists revealed that over half of the investors that purchased shares in the March offering had sold them within days or weeks.

Government reacts

In early April, as anger and disappointment rose among the nation, government ministers laid low, refusing requests for interviews. Then, on April 19, the government released a statement announcing its plans to introduce a bill to dismantle ISFI, the state institution that managed the sale of the bank. The statement admitted to some shortcomings in the handling of the private offering, primarily that it was clear “that the implementation of the sale did not fully live up to the government’s expectations, e.g. on transparency and clear dissemination of information.”

The decision to dismantle Icelandic State Financial Investments did not appease critics of the sale. Chairman of the Centre Party Sigmundur Davíð Gunnlaugsson asked whether government ministers had any plan as to what would replace ISFI. One analyst describes the decision as a cover-up, and political analysts agreed that the government was on thin ice. A public protest was organised and calls for Bjarni Benediktsson to resign grew louder. As of the time of writing, weekly protests continue, and are well-attended.

Two investigations

In early April, the Ministry of Finance appointed the Icelandic National Audit Office (Ríkisendurskoðun) to review the March 2022 sale. A report from the office is expected to be published in June 2022. The Central Bank of Iceland also announced in April that it was investigating some aspects of the sale but declined to reveal further details. Opposition MPs have also called for Parliament to launch an independent investigation into the sale.

What next?

The government’s ratings have plummeted since the fallout of the Íslandsbanki private share offering. Polls in late April showed that all three governing parties had lost significant following, with the Finance Minister’s Independence Party showing the biggest drop. Another poll showed that trust in Bjarni Benediktsson had fallen by half since last autumn, from 37% of respondents to 18%. More than seven out of ten respondents stated that they had little or very little trust in Bjarni.

Any further sale of Íslandsbanki shares has been shelved for the time being: the government has stated that it will not sell any more of its stake in the bank until ISFI has been dismantled and a new system has been established in its place. Whether the sale – or the continued protests – will have any long-term impact on the governing parties remains to be seen. While some expected the issue to sway voters in the recent municipal elections, it’s difficult to say whether it did. In the short term, at least, the handling of the sale hasn’t had a concrete impact on the government, aside from lower ratings from the public.