The carrot and stick that completed Iceland’s banking resolution

When he visited the tiny town of Mountain, North Dakota, in August 2013, not long after he had become Iceland’s youngest-ever prime minister, Sigmundur David Gunnlaugsson presumably believed that he would be at a safe distance from the hedge funds that had been stalking him for weeks.

Not so, Gunnlaugsson tells Euromoney. Before he set out on his visit to Icelandic settlers, he was told that arrangements had already been made for a meeting in a cabin in the middle of nowhere and with no phone signal. There, he recalls, it was suggested that he and the funds would be able to reach “a mutually beneficial conclusion without anyone knowing”.

Gunnlaugsson took this as another thinly-veiled threat that, if he thought he could get away with a tax plan that would erode the value of the funds’ investments in Iceland, he and his government should think again.

By then, Gunnlaugsson had become wearily accustomed to this sort of thing. Elected the previous April on the back of promises to force Iceland’s creditors to subsidize the reduction of household debt, Gunnlaugsson had already received countless threatening messages. Overseas and domestically, this campaign had been orchestrated by resourceful funds that feared they would be left short-changed by the government’s plans for addressing the capital controls that were the legacy of the crisis of 2008.

Gunnlaugsson would later have to resign amid allegations arising from the release of the Panama Papers in 2016. During his time in government, however, he and his advisers refused to buckle under very considerable pressure from some of Iceland’s more aggressive creditors.

How had it come to this? Why were distressed debt funds throwing millions of dollars at pursuing the prime minister of a rocky outpost in the north Atlantic to a mountain retreat in the middle of nowhere in America?

Such a situation might have seemed unlikely in early October 2009. A group of civil servants, advisers and politicians had helped to create new and viable banks from the jumble of assets that were the legacy of the crisis. They believed their job was more or less done. And that it was a job well done: a “short, sharp and fluid process” of restructuring, as one adviser describes it, the outcome of which probably surpassed all initial expectations.

For many others, however, the challenge of rebuilding Iceland’s banking sector was only just beginning. For those dealing with claims on the defunct banks, for instance, the process would be painstaking, tedious and protracted. Steinunn Gudbjartsdottir, who by then was in charge of the Glitnir moratorium, says that creditors had six months to file claims, of which there were said to be as many as 50,000.

Most were resolved promptly, but many were dragged through the courts. Their administration would be the responsibility not of the resolution committees, which played an increasingly minor role, but the banks’ winding-up boards, which were appointed by the District Court of Reykjavik in 2009.

“The agreements on compensation structures were no more than the end of the beginning for the new banks, which leapt into the world hamstrung by a range of disadvantages. True, they had held on to their depositors, the vast majority of whom would have been blissfully unaware of the turmoil that had been going on behind the scenes.

“Bear in mind that when the old domestic banks were transferred into the new banks, all the software, all the people and all the buildings went straight across,” says Charles Williams, who was then managing director and head of financial institutions at Hawkpoint. “In other words, to most people the new banks looked and felt exactly like the same institutions.”

The same could hardly have been said for their balance sheets. Even after extensive write-downs in October 2008, the new banks’ loan books were in urgent need of wholesale restructuring.

“When I was recruited, most of our clients were in a mess,” says Steinthor Palsson, who took over as chief executive of Landsbankinn in May 2010. “About 70% of our corporate clients and between 30% and 40% of household borrowers were in bad shape.”

Palsson, who is now at KPMG in Reykjavik, began his career in banking in 1984. Before the crisis he had spent much of his time overseas, representing an Icelandic pharmaceuticals company in India, China, Malta and the US. The Iceland he found on his return was very different, while the atmosphere he encountered enveloping the banking industry was unrecognizable.

“It was very hostile,” he recalls. “Our staff were sometimes attacked when they left work and I often had security guards outside my house.”

Out of this wreckage emerged a strategy for the new bank based on cleaning up the bank’s balance sheet by restructuring the loan portfolio and selling off extensive holdings of distressed assets, many of them to local pension funds. It also called for a charm offensive towards the general public, which involved a series of open meetings throughout the country, spreading the message that the bank was there to “listen, learn and serve”.

Nurturing the new bank through its troubled infancy also meant mending fences with the international community.

“Initially, we were provided with all the FX funding we needed by old Landsbanki,” says Palsson. “But we recognized that we would eventually need to re-enter the international capital market, so we started talking to investors overseas immediately. We explained that we were only there to keep them informed, but at the beginning most closed their doors.”

That started to change when Greece’s crisis began to unfold, perhaps alerting investors – says Palsson – to the appeal of Iceland’s economic story relative to some of southern Europe’s.

Rehabilitating Landsbankinn, in common with the other Icelandic banks, presented management with the delicate balancing act of fulfilling a social role by supporting struggling companies and households while improving asset quality and generating earnings. This was all the more challenging as new Landsbankinn had the old bank breathing down its neck to maximize returns.

“There was a bit of stress between the two banks arising from the terms of the contingency bond we had issued to the old Landsbanki as part of the restructuring agreement,” says Palsson. “This was based on the understanding that if we increased the value of the two loan portfolios – one of large company loans and one of SMEs – the old bank would be entitled to 85% of the returns and we would receive 15%. At the same time, we had the media accusing us of squeezing small companies to the benefit of the old bank, so we found ourselves stuck between a hammer and a stone.”

As 2009 drew to a close, two other individuals for whom the Icelandic crisis was far from over were Sigurdur Hannesson and Benedikt Gislason. They both worked at the investment bank, Straumur, which had battled on for several months after the capitulation of the big three, before abandoning the struggle in March 2009.

With more time on their hands than they would have liked, they chewed their pencils and pored over the Central Bank of Iceland’s (CBI) forecasts for an economy trapped in a world of capital controls. In time, those capital controls would exercise an increasingly asphyxiating pressure on the Icelandic economy and weigh on its credit profile.

But as early as 2009, the Straumur bankers were uneasy at what they saw.

“From the outside, nobody within the government or the CBI seemed to acknowledge that the country would never be able to support the Icelandic krona held by foreign creditors being exchanged for dollars and euros to pay them out,” says Asgeir Reykfjörd, who was then a finance lawyer and is now managing director of corporate banking at Kvika Bank.

“Even if we had piled up all of Iceland’s reserves and all the money we could borrow in the international market, it still wouldn’t have been enough. To put the volumes into context, the IMF would state in a 2015 report that short-term capital outflows could be close to 70% of GDP if the capital controls were to be unplugged without countermeasures. The failed estates were 115% of GDP, out of which 42% were krona-based. As far as we knew, this was unprecedented.”

It would not be until the autumn of 2012 that the ex-Straumur group committed their views to paper in what came to be known as the Jupiter memo – named after the fund management company owned by Kvika where Gislason and Hannesson were now working.

“This was a game-changer,” says Hannesson, “because it alerted the CBI and the IMF to the fact that the balance of payments problem was much worse than had been assumed and would deteriorate further if nothing was done about it.”

Ultimately, this may have meant putting levies on imported goods. Unaddressed, the problem would also have meant it would have been decades before Iceland’s pension funds would have the chance to buy foreign currency assets. 

Iceland’s pension fund industry is one of the most developed in Europe, with assets worth more than 150% of GDP by 2017, according to OECD numbers, which is a higher share than any other European country except the Netherlands. Locking those funds up at home risked generating severe distortions in the local capital market and foregoing considerable investment opportunities overseas.

The concerns of the Straumur bankers were shared by Gunnlaugsson, who in April 2013 would become the world’s youngest ever democratically elected prime minister. As early as 2009, as chairman of the centre-right Progressive Party, Gunnlaugsson had called for the debt of the estates to be acquired by the government.

“When the banks’ bonds were trading at one to five cents on the dollar, I always felt it would be a safe bet for the government to take over that debt at those prices because I knew they would be far exceeded by the value of the assets in the long run,” he recalls.

When he was campaigning four years later, the leader of the Progressive Party had made no secret of his distaste for hedge funds, which he was on record as describing as vultures. In the run up to the 2013 elections, Gunnlaugsson promised to reduce Iceland’s debt burden by imposing a retrospective tax on the assets of failed banks and forcing foreign creditors to write off their claims in exchange for lifting capital controls.

It was outspoken comments of this kind, combined with his commitment to solving the household mortgage debt problem and his sabre-rattling about capital controls, which made hedge funds with holdings in Iceland deeply anxious about Gunnlaugsson.

“My main objective was to prevent the taxpayer from being burdened with the debt of the collapsed banks,” Gunnlaugsson recalls. When the EFTA Court (The Court of Justice of the European Free Trade Association States) ruled in January 2013 that UK taxpayers would be unable to reclaim £2.3 billion of deposits from the Icelandic guarantee scheme, he sniffed an opportunity.

“I used the headwind created by the EFTA ruling to raise the issue of the failed banks and capital controls and their impact on the economy again,” he says. “We were accused of populism and told that our plans would never work. But we gained substantial support, got into government and from day one we were very focused on implementing our plans for dealing with capital controls.”

That is not quite how Barry Russell, financial restructuring partner at Akin Gump, remembers things. You can still hear the frustration in his voice today when he says that much of 2013 was marked by a protracted stalemate between creditors and the government.

“In late 2011 and the start of 2012, there was a lot of momentum towards a composition plan for Kaupthing and Glitnir,” Russell explains. “Things were a little slower at LBI [as the old Landsbanki had been renamed] because of the priority claims of the UK and Dutch governments, which at one point appeared to absorb all the value of the estates, leaving nothing for the unsecured creditors. But when the priority claimants were paid and the economic recovery accelerated, a composition plan could be put into place for Landsbanki as well.”

The problem, however, was the so-called krona overhang, which is described as the “greatest economic challenge the Icelandic state faced,” by Ottar Palsson, a partner at Logos in Reykjavik who acted as a local legal adviser to the creditors of the large banks. “This reflected the position that the banks had huge liabilities towards foreign creditors – essentially FX liabilities – and assets in Icelandic krona.”

The CBI outlined the magnitude of this challenge in early 2014.

“The calculated settlement of the estates shows that settling the estates will have a negative impact on Iceland’s international investment position in the amount of just under IKr800 billion ($7.2 billion), or about 41% of GDP,” its Financial Stability Review explained. “This is equivalent to the difference in the value of domestic assets that will revert to foreign creditors, on the one hand, and foreign assets that will revert to domestic creditors, on the other.”

Russell’s confidence in 2012 about the prospects for a speedy composition in the case of Glitnir and Kaupthing was based on the applications the two estates had made to the CBI for exemptions from restrictions placed on the distribution of proceeds to foreign creditors.

As the CBI explained, exemptions under the Foreign Exchange Act drafted in March 2012 could “only be granted from the restrictions provided for in the Act if it is ensured that monetary, exchange rate and financial stability will not be jeopardized by the winding-up process.” 

In other words, exemptions could only be made if it could be guaranteed that distributions overseas would not lead to a massive devaluation in the krona and to serious balance of payments problems as a result.

Although Russell was reasonably confident in 2012 that the necessary exemptions would be granted, by early 2013 it was becoming apparent that the applications from the Kaupthing and Glitnir estates had become jammed in what he describes as a “political quagmire”.

It was surprising and exasperating in equal measure, Russell recalls, that the prime minister who had taken office on a wave of support for his creditor bashing, refused to open a dialogue with him or the parties he was representing for well over a year.

“We spent the whole of 2013 and most of 2014 trying to engage,” he says. “We were making phone calls and sending e-mails that were ignored, and presenting proposals that met with no response.”

Gunnlaugsson counters that there was good reason for his radio silence on the capital controls issue. He tells Euromoney that to the Icelandic public, the tactics adopted by hedge funds in 2013 appeared so outlandish that they were dismissed as the stuff of Hollywood.

“The result was that while people would spend days on end debating some minor expenditure issue, whenever I raised the subject of the hedge funds I was ridiculed,” he says. “Recognizing that any statements we might make about our strategy might be used against me, we never spoke about it to each other on the phone, left our mobiles outside meetings and were very careful about who we let into the loop.”

Those outside this loop pour scorn on some of the stories of phone tapping and computer hacking that did the rounds in 2013 as media speculation about the government’s plans for capital controls liberalization became something of a national sport.

The arrival of Gislason as an adviser to the ministry of finance on liberalization of capital controls towards the end of 2013 appeared to signal that some progress was being made on finding a way out of the impasse. The appointment of Gislason, who had set out his thoughts on capital controls in a well-regarded paper named ‘Captive krona’, did not come a moment too soon.

“This was the first time anybody had been officially appointed by the government to work full-time on the capital controls project,” says Hannesson. “Until then, although dozens of people had looked at the problem, they had only done so as part of their other responsibilities.”

Even then, it was not until 2014, says Russell, that headway was made with the informal establishment by the government during the summer of a task force on capital controls to look into ways of dealing with the problem of the overhang.

The existence of the task force was acknowledged in the CBI’s Financial Stability Review published in October 2014, which reported that: “working for the steering committee is a task force of experts and foreign advisers. The objective is to produce a well-grounded strategy that, together with synchronization of effort, is the prerequisite for successful capital account liberalization and preservation of financial stability.”

For several months, however, the details of the solutions the task force was working on remained a closely guarded secret, not least because a number of its preliminary ideas for addressing the capital controls problem were binned. Foremost among these was the grand idea of repatriating all the FX assets of the estates to Iceland in one fell swoop, which – in the words of one task force member – reached a “dead end”.

This probably explains why the original task force was disbanded in early 2015, with most of its members reconvening in February. This was when formal recognition came of its establishment by finance minister Bjarni Benediktsson and Glenn Kim, an ex-Lehman banker of Korean descent who chaired the task force and played a role advising Greece. 

The four members of the task force were Gislason, Hannesson, Jon Sigurgeirsson at the CBI and Reykfjörd, who at the time was general counsel for MP Bank.

The government also lined up a who’s who of external advisers. It included JPMorgan, which advised on the ratings implications of the various options the task force was exploring; former World Bank chief economist and first deputy managing director of the IMF, Anne Krueger; and the veteran restructuring specialist, Lee Buchheit of Cleary Gottlieb in New York.

“My role was to assist the Iceland government team in negotiating the arrangements that would achieve the objectives of protecting the exchange rate and the balance of payments,” Buchheit explains. “I think my principal function was to remind the government team that these were the only legitimate objectives in this affair.”

Although the four Icelandic members of the task force knew each other very well and shared the same objectives, each was regarded as representing different personalities and interests. This was an important detail, because while prime minister Gunnlaugsson and finance minister Benediktsson were part of the same governing coalition, they came from opposite ends of the political spectrum and it was an open secret that they held very different views on economic policy.

While Gislason was an appointee of Benediktsson, Hannesson was brought in by the prime minister, with Reykfjörd providing additional legal firepower and Sigurgeirsson representing the CBI.

“One of the reasons the task force was so successful was that it managed to bring together three key players – the prime minister’s office, the ministry of finance and the central bank,” says Hannesson.

Much of the credit for pooling their sometimes differing interests, says one insider, should go to Lilja Alfredsdottir, economic adviser to Gunnlaugsson, who had previously been at the IMF and the CBI.

“Alfredsdottir was the prime minister’s eyes and ears,” the insider says. “She is an incredible operator who went everywhere with the group from the very beginning. She mixed well with the group, commanded the trust of all around the table and brought the prime minister’s office into the discussions. I think it was Hannesson and Alfredsdottir who were instrumental in convincing Gunnlaugsson from backing down from his original proposal on capital controls.”

What the hedge funds that had the most to lose or gain from this proposal still had no way of knowing at this stage were the details of the initiative the task force was devising to solve the krona overhang.

As one member of the task force recalls, the strong suspicion among some of the funds was that Iceland was preparing an exit tax for offshore krona holders, which they did not take kindly to.

“The creditors made us well aware that they had law firms working on a plan that would be initiated if the tax would be applied,” he says. “The main point of that plan was to make things as difficult as possible for Iceland.”

Making life uncomfortable for Iceland meant much more than stalking Gunnlaugsson as far afield as a cabin in North Dakota in 2013. It also meant retaining scores of lawyers and PR consultants to nose around in Iceland on their behalf.

“We had never seen anything like it in this country,” says one insider. “These guys seemed to have most law firms and PR outfits in their pockets. I was even aware of PR firms who were paid by foreign creditors to do nothing other than ensure that nobody bad-mouthed them.”

Another remembers especially nasty threats from some pockets of the international hedge fund community.

“We were told we’d be sued in 30 countries and that if we set foot in the US our planes would be grounded,” he says.

Even foreign governments were reportedly leaning on Iceland to go easy on hedge funds.

“One of the things I found surprising was meeting ambassadors – I prefer not to say which ones – who told me they were very concerned about what might happen if Iceland didn’t reach a solution in accordance with the playbook of international finance,” says Gunnlaugsson. “I was reminded of Charles de Gaulle’s quote about nations having interests rather than friends.”

In December 2014, the task force held its first meeting with representatives of the estates in the Grand Hotel in Reykjavik, which to Russell’s astonishment and discomfort was the subject of considerable public attention.

“We agreed afterwards that we couldn’t conduct meetings on such a sensitive issue with TV cameras being stuck in our faces, and we drafted confidentiality agreements over Christmas,” Russell recalls.

Finding a conclusive solution to the issue of capital controls was not in everybody’s interests. The winding-up boards of the old banks, for example, were reportedly raking in millions of krona a week for their management of the estates’ liabilities.

“It was like winning the lottery every month, which meant they had little incentive for resolving the capital controls stalemate,” one Reykjavik banker recalls.

By now, however, it was becoming clear that capital controls were inimical to the interests of the creditors of the old banks’ estates and for other holders of offshore krona. As a result, it was believed that they were becoming more likely to agree to some form of compromise to resolve the problem once and for all.

Iceland’s investor base had been entirely transformed from the creditor group that had held the bulk of claims when the restructuring process had begun in 2008.

“Prior to the crisis, the banks had issued tons of unsecured debt on the back of their ratings,” says Matt Hinds, managing partner at independent restructuring firm Talbot Hughes McKillop (THM).

“Those bonds were soon traded into the hands of hedge funds, and by late 2008 and early 2009 Iceland had become the world’s second biggest market for distressed bonds behind Lehman. An entire industry was set up around the trading and pricing of Icelandic bank bonds.”

The result, by the time Gunnlaugsson came to power, was that holders of Icelandic debt included an assortment of overseas bondholders ranging from those that had built up an exposure to Iceland well before the crisis to speculators who had loaded up at bargain prices since then. Many of these were sharp-pencilled distressed debt funds that were effectively buying options on the krona.

“It was obvious to us that the cost of capital at the distressed funds would give them a good incentive to reach a conclusion sooner rather than later,” says Reykfjörd. “If you discounted future cash flows, you could come up with a number in the range that we needed to neutralize the failed estates.”

It was recognition of the destructive influence of capital controls on inward investment flows and on the people of Iceland, as well as on the offshore krona holders and the failed estates, that formed the basis of what has come to be known as Gunnlaugsson’s “carrot and stick” solution to the deadlock.

The carrot was the offer of a composition agreement on IKr1,200 billion of assets that would give the estates the exemptions they needed to distribute proceeds overseas. The stick was the threat of a one-off ‘stability tax’ of 39% on the total assets of the three failed banks, which would have amounted to IKr682 billion and would have become due had the composition agreement not been reached.

The twist in the tail of the task force’s proposal was the so-called stability contributions that the estates were required to make to the Icelandic government.

“The idea was that a very significant amount of the krona assets were contributed to the state in order to neutralize the overhang,” explains Palsson. “This was the price the creditors were asked to pay for the CBI to exempt the old banks from the capital controls, unlocking payments to their creditors.”

The details of this proposal were not outlined to creditor representatives until March 2015, by which time they had signed non-disclosure agreements designed to ensure that no market-sensitive information about the deal seeped out.

The chief advantage of the carrot-and-stick proposal for the creditors was that it offered them a speedy exit from positions that could have spent years in litigation.

“Ultimately, everyone agreed that it was essential for the Icelandic economy to deal with the overhang situation,” Palsson adds. “Creditors had the choice of making the capital contributions or being stuck with capital controls for many years while the overhang was gradually reduced. The fact that there has been no material recourse to the courts for any legal claims against the agreements that were reached suggests that they were beneficial all round.”

That depends largely on who you talk to. Hinds at THM, which advised an international group of about 80 Glitnir bondholders from 2011 to 2015, says that his clients were understandably loathe to swallow the terms of the capital contributions proposal.

“The irony was that it was the Glitnir bondholders who were most keen to own krona assets and had researched the Icelandic economy extensively,” he says. “However, since it was the krona that was generating the balance-of-payments problem, a larger absolute stability contribution was required from Glitnir. The creditors took a lot of convincing to accept the deal, move on and avoid a drawn-out litigation process.”

In Iceland, however, there were still many who believed that there was too much carrot and not enough stick in the capital contributions plan. One member of the fiery InDefence movement, formed soon after the UK’s freezing order in 2008, tells Euromoney that his preference was to say to the hedge funds: “Pay the bloody tax and we don’t care what you do after that.”

Politically, however, the carrot-and-stick plan may have been a masterstroke, says a local political adviser to the creditors during their negotiations. It was helpful, he says, that the deal to release Iceland’s economy from the shackles of capital controls was seen to be advocated by a government that had presented itself as the implacable antagonist of the creditors. That, he adds, gave it a level of popular legitimacy that it may not have had if it had been championed by a pro-creditor prime minister.

Gunnlaugsson’s stance on the hedge funds makes him one of the heroes of the Icelandic restructuring story to some. To others, he was what one international observer describes as an intransigent, accidental hero who refused more or less from day one to negotiate constructively with the hedge funds.

For the task force, the carrot-and-stick proposal was not entirely risk free. The four musketeers on the force say they had been careful to consult the IMF, the ratings agencies and others to be sure that what they had in mind was entirely legal. But there was still a possibility that it could have been challenged by disgruntled investors, which may have led to it being bogged down in the Icelandic and EFTA courts for several years.

The capital contributions scheme also called for some tweaks in the law, one of which – according to one anecdote – became necessary when it transpired that one of the creditors of the failed banks was from North Korea. It was not a big holding and it was not even clear if the creditor from Pyongyang was aware of the eligibility of its claim. Nevertheless, Icelandic law dictated that in order for a composition to succeed, all creditors need to be paid. Because creditors from the US or those with US subsidiaries were unable to deal with North Korea, a clause had to be inserted into the restructuring chapter allowing for payments not to be released in certain circumstances.

Another key element of the task force’s proposal that has perhaps been misunderstood or overlooked by many market participants is that the capital contributions made by offshore krona holders could take the form of purchases of new Icelandic bank bonds in international markets.

“One of the conditions under which the failed estates were deemed fit to take majority equity stakes in two of the new banks was that they helped to facilitate foreign funding,” says one task force member. “That had not happened, which gave us the moral high ground to insist that, as part of the capital contributions deal, they agreed to buy into the bond issues of all three of the new banks. We knew that the creditors were a well-diversified group and that it would help if they had an interest in the performance of Icelandic bank debt. The spread contraction in Icelandic bank bonds since then shows that this has been a major success.”

From Iceland’s perspective, the most visible sign of the success of the task force’s initiative came, however, on June 8, 2015, immediately after the details of the scheme were announced. Or more precisely, 10 minutes after the press conference began, which is when Glitnir (the last of the big three to confirm and reportedly the least-enthusiastic) said that it would be participating. The joint announcement from the prime minister and minister of finance addressed an overhang made up of IKr500 billion in assets of the failed banks’ estates, IKr400 billion in foreign-denominated claims against Icelandic residents and IKr300 billion in offshore krona held by non-residents.

Government bond yields nose-dived and the krona soared in response, delivering the sort of beneficial self-fulfilling prophecy for Icelandic assets that the task force had foreseen. “One of the arguments we had presented to creditors was that if they backed this deal, they would make a huge economic gain from the performance of the Icelandic economy,” says Reykfjörd. “These were, after all, the biggest investors in Iceland.”

It was a nail-biting finale to the Icelandic crisis. Russell went without sleep for 48 hours during the concluding negotiations. He was told by his wife that he looked shocking when he returned from the final meeting on the proposal in the same clothes he had been wearing when he had set out. For him, the wait for a resolution had been much longer than expected – about two-and-a-half-years longer, to be precise.

But it had clearly been worth it.

“The clients we represented had more than $30 billion of claims at the last count,” he says. “At last, they were able to start realizing value from their holdings. Had the bank estates gone into complete liquidation, which was the alternative, a lot of people would have lost a lot of value.”

To some, that may sound like a glass-half-full postscript to the negotiations. Hinds says that, from a professional perspective, he was very proud of the role he played in helping the deal to cross the line and extracting as much value as possible for his clients under the circumstances.

To be sure, it was a deal that unlocked plenty of gains for those who had bought into Icelandic debt at low-single digits in early 2009.

But it was not quite as enriching for those who came in much later.

“Prime minister Gunnlaugsson made a lot of political capital out of attacking the funds that came in at five or six cents,” says Hinds. “But the arithmetic truth is that the blended price paid by Glitnir creditors was closer to 28 cents. By mid-2015, the face value of Glitnir claims was above 40 cents in the dollar and the terms of the deal announced on June 8, which was in any case revised later in the year, meant that they were paid something in the low 30s. So in most cases, if you were a creditor, you did not lose money; you just did not make nearly as much as you expected.”

Amazingly, Iceland’s spectacular meltdown seemed to produce more winners than losers. That is not to say that it was a victimless crisis. Those who lost their jobs or their houses as a direct consequence of the bankers’ recklessness were the most obvious casualties.

Repairing the damage the banking industry caused to the egalitarian fabric of Icelandic society is still a work in progress and will remain so for many years.

“People today are less eager to show off their money, and since the crisis we have seen a widespread return to family values, which is good for Icelandic society,” says Johannes Karl Sveinsson, the Reykjavik-based lawyer who had helped kick-start the resolution process by drafting the emergency law safeguarding the functioning of the banking system back in 2008. “But there is still a great deal of mistrust of politicians and bankers, which will take years to resolve.”

Others agree.

“If anyone had told me in the darkest period of 2009 and early 2010 that Iceland would be where it is today, I wouldn’t have believed them,” says former finance minister Steingrimur Sigfusson. “We put heavy burdens on the wealthy, which was the right thing to do. But despite our best efforts, a lot of people were hurt and there are still wounds to be healed.”

Politically too, Iceland has lived through a decade of unprecedented turmoil.

“We’ve had five elections in the last 10 years,” Sigfusson adds. “Let’s hope that we can enjoy some stability now that we’ve established a grand coalition between left and right.”

In the global financial markets, meanwhile, the principal losers from the Icelandic meltdown were the international banks that supported the country’s hell-for-leather expansion and those that thought it would be clever to buy double-A credits at knockdown triple-B prices.

Among depositors, however, those in the UK and the Netherlands who were seduced by the high rates offered by Icelandic internet banks were repaid in full, as was the UK government. Permanent secretary at Iceland’s ministry of finance, Gudmundur Arnason, says that the UK and Dutch authorities have never publicly acknowledged that they were fully reimbursed for the IceSave loans they granted to Iceland or that they even made a small currency gain on the deal.

The crash of 2008 even ended happily for speculative borrowers who had taken out personal loans in foreign currencies. When those loans were deemed to have been illegal, they were redenominated in krona at the low rates at which they had originally been contracted. Today, that makes some Reykjavik-based observers uncomfortable.

Pall Eiriksson, who was on the Glitnir resolution committee and winding-up board and is now a partner at the Borgarlogmenn law firm, says that the concessions later given to these borrowers smacked of moral hazard.

“Allowing them to switch back into krona at 0.5% rewarded those who had taken the most risk and penalized the conservatism of more responsible borrowers stuck with much higher rates,” he says.

There may also be some discomfort at the fact that many of those who gained most from the crash were highly aggressive funds that gorged so successfully on Iceland’s predicament in 2008.

“The people who made serious money were the ones who started shorting the Icelandic banks through the CDS market in early 2008,” says Sigurgeirsson at the CBI.

“They were lucky in the sense that having bought in at 200 or 300 basis points, they got their full principal back when the Icelandic banks went bust. Some of them then came in again when they saw value in the estates at 2% or 3% of face value. I don’t believe in holding grudges. While one can question its morals, in hindsight it was a good trade.”

In purely financial terms, however, the most notable beneficiary of the crash was the Icelandic state itself, thanks largely to the stability contributions agreement. According to numbers published in a recent book by Kaupthing Bank’s former head of research, Asgeir Jonsson, between 2008 and 2015, the net gain made by the Icelandic Treasury as a direct consequence of the measures taken since the crash amounted to close to €2 billion, or 2.6% of GDP.

The main driver of this astonishing outcome, according to Jonsson’s numbers, was the stability contribution, which alone generated a gain for the Treasury of 17.5% of GDP. How much personal credit for that should go to Gunnlaugsson is a subject of some debate in Iceland and beyond. But there is no disputing that a messy crisis that had dragged on for seven years reached a very satisfactory conclusion for Iceland on his watch, which would end so unhappily for him.

“People talk about the tourism boom we’ve had here,” he tells Euromoney when we meet in one of the overpriced Reykjavik hotels that has been a beneficiary of this bonanza, much of it caused quite by chance when a volcano with an unpronounceable name put Iceland on the global map in 2010. “But we would have needed 20 or 30 years of tourism revenue to create the same effect as we achieved with what we did to resolve the problem of the failed banks in 2015.”