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.

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