Is Iceland actually being bullied?

Felix Salmon argues that Iceland is being bullied by the UK, which is threatening international financial isolation after Iceland’s president vetoed highly unpopular legislation that would have paid back the UK and Dutch governments for bailing out the losses their citizens took from Iceland’s banking collapse, while racking up 40% of GDP in debt for the Icelandic people.

The threat of Iceland dropping off the face of the financial world is a real one, and the country’s bonds have been downgraded to junk status as a result. It’s really that bad: the ratings agencies have downgraded Iceland for not taking on an extra 40% of GDP in new debts.

I’m quite ashamed of the bullying tactics being used here by the UK government. What happened was that an Icelandic bank, Landsbanki, started attracting UK depositors through its Icesave brand. When Landsbanki failed, the UK government bailed out those depositors in full. And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits.

In fact, I think Iceland did guarantee the Icesave deposits, as far as I can tell. In two separate statements, the PM’s Office and the Financial Supervisory Authority of Iceland indicated that “domestic deposits are fully guaranteed”. Presumably this differentiates between deposits made in domestic Icelandic banks, regardless of the nationality of the depositor, and deposits Icelanders made in foreign banks. According to other sources, consumers (and perhaps financial experts), understood accounts to be protected.

Icesave savings accounts are covered by the Icelandic Deposit Guarantees and Investor-Compensation scheme. Under Iceland’s scheme the first €20,887 (approximately £15,000) is protected in full. But savers also have a further guarantee under the FSCS which is limited to 100% of the first £35,000 less any payments made under the Icelandic scheme.

If Iceland did in fact guarantee the deposits, then I think it’s perfectly fair for firms to downgrade Iceland’s bonds, and for the UK to be furious that they will not be repaid after they had to bail out UK citizens who lost their savings in Icesave accounts. Maybe countries have a general right to access international financial markets, but if you want people to play with you, you have to play fair and honor your promises. “International isolation” is not an actual status, it’s a description of the relationship Iceland will experience when they default on their obligations. Trust is the whole underpinning of the financial world, and if Iceland doesn’t honor promises even while taking on debt, no one will trust Iceland’s promises in the future.

Advertisements

3 thoughts on “Is Iceland actually being bullied?

  1. Couldn’t “domestic” mean deposits by domestic Icelanders rather than deposits by foreigners? That’s what the Salmon’s commenters seem to think.

  2. Reading more about it, you might be right that the unlimited domestic guarantee only covered Icelandic nationals. I can see how a lot of people might have thought they were protected as well, however. To me, the language suggests that Iceland would back domestic banks, not just domestic citizens with accounts in domestic banks (if domestic describes the account-holder instead of the account, would an Icelander’s money be guaranteed if he invested in a foreign account?). You can also consider how you would commonly interpret “foreign deposit“, not as a deposit made by a foreign individual but a deposit in a foreign bank/bank branch not in the U.S.

    A policy discriminating by nationality seems a little unfair, counterproductive, and possibly illegal. It’s counterproductive because deposit insurance isn’t just meant to be a social safety net, it’s also meant to prevent fear of a bank’s insolvency from creating bank runs that hasten a bank’s collapse, jeopardizing all of the depositors. It’s better thought of as insurance for the bank, not the individuals. If the deposit insurance only covered “domestic” accounts as Iceland understands it, then foreigners would still be able to create bank runs that tip any banking crisis into failure.

    On to why it’s illegal then. Even if you don’t think “domestic” implies all domestic banks (and domestic branches of foreign banks!), I also posted a link suggesting that some minimum of 20,000 euro was understood to be covered. It’s best explained by a commentator on the original Felix Salmon post which you can read below. Right now the issue is the repayment to the UK/Netherlands of the first 20,887 euro of each bailout, so the UK/Netherlands aren’t seeking the guarantee of the whole deposit anyway.

    “4. Although not a member of the EU Iceland is a member of the European Economic Area and EFTA. It was therefore bound by the regulatory bank compensation scheme under EEA law under Decision 18/94 of the EEA Joint Committee, which Iceland wrote into its national law in 1999.
    5. This EEA law is based on and regulated by EU Directive 94/19/EC and Article Seven states: ‘ 1. Deposit-guarantee schemes shall stipulate that the aggregate deposits of each depositor must be covered up to ECU 20 000 in the event of deposits’ being unavailable. Until 31 December 1999 Member States in which, when this Directive is adopted, deposits are not covered up to ECU 20 000 may retain the maximum amount laid down in their guarantee schemes, provided that this amount is not less than ECU 15 000. ‘

    9. In this regard, with breathtaking hypocrisy, while blindly ignoring its constitutional obligation to represent and protect Crown Dependencies in its negotiations with Iceland, and repeatedly seeking to defame and discredit UK small depositors in UK offshore Icelandic banks, the British Government has sought to accuse Iceland of a breach of its obligations under Article 4 of the EEA Agreement which prohibits “any discrimination on grounds of nationality”, reflecting Article 7 of the Treaty of Rome.”

    • David Yin makes good points – they should be, they directly quote parts of my own post to the IceNews website:
      Perhaps it is time for some fundamental truths to be pointed out to the Icelandic people.

      1. HM Government claims that extensive discussions were held between senior UK officials and their counterparts in Iceland in the months prior to October 2008 in efforts to address and avert the impending disaster in respect of Landsbanki, Kaupthing Singer & Friedlander and Heritable Banks trading within the UK.
      2. Both jurisdictions appear to have a different version of their discussions and events, however, the outcome indicates that whatever conversations took place, all meaningful negotiations failed.
      3. on 6th October the Icelandic Government rushed an emergency bill through the Althing which guaranteed domestic commercial and savings banks.
      4. that same day the Guernsey FSC ‘approved Landsbanki’s Guernsey branch directors’ decision to place the branch in voluntary administration.’
      5. on 7th October the Icelandic FME placed the bank in receivership, announcing that all Landsbanki’s Icelandic deposits would be protected in full.
      6. at 10:10 on 8th October the Landsbanki Freezing Order 2008 came into force, freezing all assets of Landsbanki, the Central Bank of Iceland and the Government of Iceland.
      7. on 9 October, the Icelandic assets and liabilities of Landsbanki were transferred to a new government-owned bank, Nýi Landsbanki. As Landsbanki had been acquiring assets in Iceland with foreign loans and deposits, the assets of Nýi Landsbanki exceeded its liabilities (domestic deposits and government equity capital) by 558.1 billion krónur (€3.87bn, £3.06bn) even after Nýi Landsbanki had made provisions for over half its loans to customers. Icesave deposits, along with all foreign borrowings, remained in the old Landsbanki, which was left with 1743 billion krónur (€12.1bn, £9.56bn) in assets to face up to 3197 billion krónur of liabilities (€22.2bn, £17.5bn). [Source: Wikipedia]
      8. While the ultimate use of Part Two of the Anti-terrorism, Crime and Security Act 2001**, to justify the Landsbanki Freezing Order 2008 and thereby paralise movement of Icelandic banks’ funds held in UK; together with the threat of legal action by Great Britain, may or may not have been ‘heavy-handed’ and ‘highly offensive’, there appears to be little doubt that these banks were in serious trouble with some extremely questionable practices taking place, if recent reports regarding UK-SFO investigations are to be believed. believed.
      9. HM Government’s use of these particular measures, where other legislation may arguably have been less emotively and better employed, has merely served to provide Iceland’s Government and people with the extremely useful and much utilised diversionary tool of raucous furore and indignation at the concomitant inference of ‘Terrorism’ to thereby distract its populace and media from the fundamental issues: that inadequate regulatory control meant that these banks were operating at the very least outside accepted international banking practice, if not – as is now emerging in certain instances and possibly with some senior officials’ compliance – illegally. Railing against perceived allegations of terrorism, while allowing Icelanders to vent their understandable rage and humiliation, it would be more accurately directed at the failure of their Government, banks and as a direct result, their economy and monetary system.
      10. Despite the findings of the respective banks’ administrators and/or liquidators as to the financial status of the Icelandic Banks, the Icelandic Government audaciously claimed that the UK Government had caused the Icelandic banks’ collapse by its actions and continues to divert attention from the real issues.

      The unequivocal facts are:

      1. The Iceland electorate democratically voted for their Government, thereby providing its elected representatives with an unequivocal mandate to oversee the control and regulation of Icelandic banks.
      2. The Iceland Government, for whatever reasons – and so far speculation has ranged from incompetence, through ‘blind-eye’ and ‘arms length’ management, to outright complicity – clearly completely and utterly failed to effectively regulate or responsibly control its banks, either to local or international standards. The actual reasons and accountability for these failures are currently under investigation and have yet to emerge.
      3. During the years prior to 2008, many Icelanders apparently unquestioningly and bizarrely took out a high number of loans in foreign currencies, including US dollars and Japanese Yen and were happy to live an inflated and economically unrealistic lifestyle. With the collapse of the banks and the krónur and the knock-on effects of job-losses, those same creditors have found themselves unable to repay their loans and in parlous financial situations. Their anger is understandable, but misdirected if focused anywhere outside Iceland.
      4. Although not a member of the EU Iceland is a member of the European Economic Area and EFTA. It was therefore bound by the regulatory bank compensation scheme under EEA law under Decision 18/94 of the EEA Joint Committee, which Iceland wrote into its national law in 1999.
      5. This EEA law is based on and regulated by EU Directive 94/19/EC and Article Seven states: ‘ 1. Deposit-guarantee schemes shall stipulate that the aggregate deposits of each depositor must be covered up to ECU 20 000 in the event of deposits’ being unavailable. Until 31 December 1999 Member States in which, when this Directive is adopted, deposits are not covered up to ECU 20 000 may retain the maximum amount laid down in their guarantee schemes, provided that this amount is not less than ECU 15 000. ‘
      6. Known as Tryggingarsjóður [the Depositors’ and Investors Guarantee Fund] it was to be funded via a 1% levy on all bank deposits. According to Wikipedia: ‘At the time of Landsbanki’s collapse, the Tryggingarsjóður had equity of only 10.8 billion krónur, about €68 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.’
      7. Upstreamed funds from Landsbanki Guernsey and personal account deposits in IceSave aside, it is known that ‘wholesale depositors including 123 local authorities and other public bodies had a total of £920 million (€1.1bn) deposited with Icelandic banks. The Audit Commission, the independent body responsible for overseeing local government finances, admitted having £10 million deposited with Landsbanki and its subsidiary Heritable Bank.’
      8. Such a shortfall would surely justify an independent audit, comprised of international politically unafilliated experts, of the funds transferred to Nýi Landsbanki to investigate the correlation between the deposits of Icelandic origin, which were allegedly transferred to the (surprisingly liquid) new bank, as compared to the total amount of deposits made over time via upstreaming from international branches and subsidiaries; a large part of which appear to have totally evaporated if the balance remaining in Old Landsbanki is to be believed.
      9. In this regard, with breathtaking hypocrisy, while blindly ignoring its constitutional obligation to represent and protect Crown Dependencies in its negotiations with Iceland, and repeatedly seeking to defame and discredit UK small depositors in UK offshore Icelandic banks, the British Government has sought to accuse Iceland of a breach of its obligations under Article 4 of the EEA Agreement which prohibits “any discrimination on grounds of nationality”, reflecting Article 7 of the Treaty of Rome.
      10. If the UK and Dutch Governments individually or collectively chose to exceed their own predetermined EU or National depositor compensation schemes’ maximum payment limits and/or reimburse savers in full, it is surely a matter for those individual countries, not Iceland, to underwrite. Nevertheless, it cannot be denied that Iceland does have a financial commitment to the extent of its declared liabiity under EEA legislation. Despite such fundamental logic, these governments have sought to bully Iceland into repaying ‘loans’ which were made arbitrarily without prior discussion or agreement, together with a 5% interest charge which is patently excessive by today’s standards. These demands were leveraged via pressure on the IMF and its delivery of loans to Iceland. The result of its economic situation and financial pressure on Iceland has resulted in that island’s reluctant application for EU membership, with the inevitable impact on its historical primary economic resource; its fish stocks.
      11. Concurrent with this debate and long after all Icelanders’ interests have been protected, it is apparent that depositors in Landsbanki Guernsey are to be treated as non-preferential creditors by the Iceland Landsbanki administrators. This will place LG depositors’ claims behind those of many other creditors, ie: the British and Netherlands Governments (for IceSave payouts), public bodies etc. This will result in a negligible reimbursement when compared to ‘preferred creditors’.
      12. In the event that this course of action is not adjusted to a fair and equal distribution, surely the argument surrounding the interpretation of Article 4 of the EEA Agreement should also apply to LG depositors’ rights. Iceland claims its decision to pursue the legitimate objective of the survival of a banking system complies with the precedent established by the Garcia Avello case brought in the European Court of Justice, which held that: ‘It is in this regard [Articles 12 EC and 17 EC] settled case-law that the principle of non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. Such treatment may be justified only if it is based on objective considerations independent of the nationality of the persons concerned and is proportionate to the objective being legitimately pursued. ‘ If this judicial decision is upheld in Iceland’s case then there is an argument that the failure to recognise that Landsbanki Guernsey depositors have equal claims to those of other parties is discriminatory and also that Iceland completely failed to protect the Icelandic-owned banking entities (surely by definition ’systems’) in other jurisdictions.

      As mentioned earlier, one can empathise with Icelanders for electing the wrong people to government: people who failed to fulfill their entrusted roles with due diligence and selfless responsibility and who have landed them in this ghastly mess by ignorantly or knowingly allowing the bankers free rein to create a false economy with the resultant and inevitable consequences.

      The ’soft touch’ regulatory approach to banking of the various authorities in the UK, Netherlands, Germany, Guernsey, etc: must bear some responsibility for not having acted more strongly and considerably earlier to halt the excesses and possibly salvage not only wholesale and private deposits of their own citizens and possibly, thereby, Iceland’s banking system. The misguided and bullying actions of Gordon Brown and other international leaders was a stark demonstration of too much and too late – BUT, it should be remembered that at the end of the day, full accountability lies with Iceland – its Government of the day and the Icelandic people who elected them, thereby allowing their own bankers to run the Iceland economy into the ground, to destroy the Krónur’s exchange rate and to destroy the reputation of an honest, diligent and internationally respected nation.

      ** It should be noted that this Act is an unfortunately emotive and inflamatory title for what is largely a reincarnation of its predecessor, which was used against Rhodesia in 1965 and Argentina in 1982, ie: Section 2 of The Emergency Laws (Re-enactments and Repeals) Act 1964 – which itself originated from the Defence (General) Powers Regulations, 1939.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s