We’re flying out of Berlin in a couple of hours after a fabulous week-long break from everthing back home. It’s been fantastic. Seriously. Icelandic current affairs, which I’ve loosely kept up with via mbl.is and Facebook, have seemed a whole lot more dreary from over here than back home. It’s like the old adage about the fish who don’t know they’re wet – when we’re in the thick of things back home we don’t always notice how heavy they really are.
The big thing now, of course, is the public discontent over the Icesave agreement. If you’ve just joined us, Icesave was an online bank opened in the UK by Iceland’s Landsbanki in 2006, which managed to accumulate around 6 billion pounds in deposits over a period of 18 months. Icesave operated in the UK and Holland, and was a branch of the Icelandic mother bank, which means the Icelandic state is liable to cover the deposits of British and Dutch nationals as if they had had their funds in the bank in Iceland. Immediately upon the bank’s collapse, the UK [definitely] and Dutch authorities [I believe] compensated their citizens via a “loan” to the Icelandic state, and the terms of repayment of that loan have just been negotiated.
The main dispute revolves around the horrible injustice of the Icelandic public being made responsible for a debt that was accrued by a private banking institution. And this is no small debt – the total amount that the Icelandic state has just taken on is enough to run the Reykjavík city police force for the next 130 years. It doesn’t take a rocket scientist to figure out that this will make a colossal dent in the country’s budget and will mean severe cutbacks in all areas of society – in our health care system, educational system, etc. etc. etc.
So why IS the Icelandic public being made liable for the debts of a private institution? Well with the emergency laws that were set when Landsbanki collapsed last October, the deposits of all Icelandic citizens were covered 100% in all Icelandic banks. And because Landsbanki was a branch of an Icelandic bank – as opposed to a foreign subsidiary – there is an EEA [European Economic Area] directive that states that citizens cannot be discriminated upon on the basis of nationality. So foreign nationals who were customers of Landsbanki must obviously receive the same treatment as the Icelandic citizens in that same bank.
I’ve heard a lot of people say over the last few days that it might even have been better not to cover the deposits of Icelanders in those banks – to just allow the whole thing to collapse. But anyone with a bit of sense can see that it would have completely paralyzed Icelandic society. If everyonehad lost everything they had in the bank, society would have completely ground to a halt and collapsed within days, as companies went bankrupt, etc. So it was simply the least terrible of two horrible choices.
We had dinner with a friend last night who happens to be British, and he was adamant that Iceland should simply default on its loan to the UK – just refuse to pay. It’s not a new argument – however, it’s something that’s easy to say, for someone who would not have to stick around to face the consequences.
Meanwhile, many young people – like Ragnheiður, my youngest stepdaughter who we have been visiting here – are not very keen to return to Iceland at all. She’ll be going to school in Salzburg this fall, and who knows what she’ll decide to do when she’s finished studying. If things are in the toilet back home, I wouldn’t blame her – and would even encourage her – not to come back. It’s the same with other young people, who have nothing to lose and everything to gain by leaving Iceland. Even YT, who has lived in Iceland now for 15 years and have never wanted to leave, am thinking how tempting it would be just to jump ship.
However, those of us who own property and have committments back home can’t leave that easily. And in any case, I’m not sure it’s the right solution. Still, I will not be getting on that plane this evening with a light heart. Sadly.
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{ 20 comments… read them below or add one }
from what i understood of the deal as it stands right now, the loan is to cover the first 100.000 euros for every account in holland and the uk. the problem is that that would be the guaranteed amount if the bank were bankrupt. however, as things stand, landsbanki is not bankrupt and all deposits IN iceland are covered IN FULL. depositors in holland who have lost more than 100.000 are now taking the icelandic government to the european court, claiming they are being discriminated against for not being icelandic. if they win, they stand to get another 440.000.000 euros from landsbanki(iceland) and the english account-holders will not be far behind, looking to claim another 2 billion euros…..
for those who understand a bit of dutch….
http://www.nos.nl/nosjournaal/artikelen/2009/6/8/080609_icesave.htm
Alda,
My apologies if you’ve already mentioned this in a previous post, but I don’t understand why the UK and Dutch governments don’t share the responsibility for Icesave’s conduct. It’s very possible that I don’t understand all of the facts or the law, but even if Icesave was/is a subsidiary of Landsbanki, and even if Icesave was established in Iceland, it’s my understanding that foreign banks are subject to the laws of the countries in which they operate.
In this sense, if laws were violated in the UK and Netherlands, it would seem that these countries might share some of the responsibility for not properly regulating/overseeing Icesave’s activity. Even if no laws were ostensibly violated, why was Icesave able to operate in the manner that it did with virtually no regulatory oversight? I am not trying to deflect all responsibility from Icesave, but I think these countries, as well as Iceland, have a responsibility to their citizens when it comes to the banks operating within their country to ensure that they are aren’t playing casino with other people’s money.
Here is a link to the actual Icesave agreements with the UK and NL:
http://www.economicdisasterarea.com/index.php/features/the-icesave-agreements-pdf/
There is much discussion going on about this agreement beeing fair or not. With respect to the UK document above, I found the section 6.9 quite irritating, which refers to the treatment of Landsbanki creditors in general. It appears to limit the options for the Icelandic government to alleviate the impact of household debts.
I would think, at large those contracts are a consequence of what had been agreed by the predecessor government, which makes their opposition appear somehow insincere.
In general, I would agree to be cautious about advices concerning Iceland defaulting on its loans. I have heard this many times but couldn’t find any scenario outlined, which would be an improvement of Iceland’s situation.
And one week away from the daily grind is often biased in favour of the visited destination. In Germany the impact of the crisis, so far, is not as dramatic as in Iceland but there are more and more companies facing bankruptcy and people unemployment every day. I’m sure I will be boarding the plane back to Germany after visiting Iceland with some regret, too.
Goodevening!
some corrections on this all, quite important:
- the UK paid 100% to all the Icesave account holders, despite the fact that the savers were DIRECT savers with Landsbanki Iceland.
- the NL government only repaid up to 100.000 Euro, leaving 469 people with a loss of about 40 mln Euro
- the TIF (the Icelandic Deposit Guarantee Fund) is obliged to cover all deposits up to 20.000 Euro each (European bank regulations of which Iceland is part of via the EFTA). If they don’t have that amount of money they are obliged to loan the money they lack and pay it anyway.
- we are only talking about the total of that first 20.000 in the UK and NL: 3.7 billion Euro (ISK 655 billion, depending on the development of the exchange rates) and NOT the total amount of Icesave money lost
- the fact that Iceland nationalized Landsbanki AND only compensated their own depositors complicates the case. According to European Rules, also applicable to Iceland, they should have compensated every saver. This case of discrimination especially affects the Dutch savers over 100.000, who didn’t get a compensation by the Dutch government.
- the over 100.000 Euro Icesave depositors in the Netherlands will indeed claim full payment based on the European rules and Iceland knows it will have to pay at the end.
- at 3.7 billion Euro at 5.5% you have to pay 203.500.000 Euro a year as interest (636 Euro per inhabitant of Iceland = ISK 114.480, an avareage of ISK 250.000 per family) for 7 years (or less if Landsbanki pays out earlier)
- if managed well (!!!) Landsbanki can pay 100% in 5 to 7 years, with a first payment in the middle of next year (2010). This however depends also on the amount of court cases againts the whole process of nationalization as well as the winding up process.
- if paid for 100% Iceland only pays interest for a limited period..
- again, there is NO WAY to avoid a payment deal with UK and NL
- however it seems that the negotiators on both sides have not been very creative in the process. You could imagine a more business like approach to the problem in stead of a ‘money only’ deal in these circumstances.
- if Iceland wants to enter the EU (and it has its advantages for coverage of the Euro) it also has to clean it’s ship and enter the European harbour free of charge.
- the whole situation calls for authentic statesmanship (sorry this includes women) and a fair amount of (out of the box) business thinking to handle this. Remember: ”if you do what you always did, you will get what you always got”
- not impossible, but Iceland should be aware of its limitations and look for real help in this process, where (transparent) communication to Icelanders and to the BIG outside world is crucial.
I hope I don’t increase your level of gloom any more, but you ought to be aware of this:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5594292/Iceland-at-risk-of-a-junk-credit-rating.html
Iceland at risk of a ‘junk’ credit rating.
Iceland is concerned that its credit rating could soon be downgraded to “junk” status – meaning there is a high risk of the country defaulting on its sovereign debt.
“Finance minister Steingrimur Sigfusson acknowledged that the ratings agencies, including Fitch, Moody’s and Standard & Poor’s, are reviewing their classifications.”
Great article. You’ve done a really great job of summarizing facts and sentiment.
Nil desperandum..
@ino.
>from what i understood of the deal as it stands right now, the loan is to cover the first 100.000 euros
It’s the first 20,887 euros, as per the EEA deposit guarantee. Anything above that has been covered by the UK or Dutch governments themselves.
@Jessie. The EEA directive that allows “passporting” (=opening a branch in another EEA country rather than setting up a subsidiary) requires the home country to regulate the bank and actually prevents the host country from discriminating against the foreign bank.
So, for example, you may have read that the Dutch tried to prevent Landsbanki from taking more deposits, but could only do so with a secret gentleman’s agreement that was subsequently not adhered to.
No laws were violated in the UK & the Netherlands regarding deposit taking. If any lending was illegal (and some of it was at least unethical), that occurred within Icelandic jurisdiction. Regulation was solely the province of the Icelandic authorities.
@Bromley86,
“It’s the first 20,887 euros, as per the EEA deposit guarantee”
the EEA deposit guarantee is indeed the problem here. this would take effect if the bank were bankrupt, which it isn’t. there is a very good chance that a court of law would rule that all depositors of landsbanki are equal. that would mean that the european depositors are entitled to a lot more money than they are now getting. for england and holland this could be as much as 2.5 bn euros that the icelandic tax-payers would be responsible for.
if a court of law ruled that all depositors are equal, it could also mean that the dutch and british governments feel no longer responsible for the 80 grand they now cover under the extended deposit guarantee.
all in all, the future could look a lot bleaker than it already does….
Ahhh…Salzburg, beautiful place. Some of my fondest memories are due to a year of studying photography there. Unless things have changed dramatically , your stepdaughter should have a great time!
Steve
Takk fyrir frábæra samantekt Alda.
Thanks @Bromley86
I was unaware of the gentleman’s agreement with Dutch authorities, but I still don’t understand why the EEA would exonerate a host country from ensuring that a foreign bank is not engaging in illegal conduct in its country. I guess the fact that the conduct wasn’t illegal (merely unethical) is the linchpin.
If you’ve become Iceslaves, then Gordon Brown must be the evil Icemaster – or Johanna Sigurdardottir the merciful Icemistress…
@ Gerard van Vliet
“the NL government only repaid up to 100.000 Euro, leaving 469 people with a loss of about 40 mln Euro”
i do not know where you got this number from. it might be that you are talking about individual depositors. the province of Noord-Holland will try to claim back 78.000.000 euros, the province of groningen is looking to reclaim 10 million, the city of amstelveen lost some 15 million and the nuclear powerplant in borssele deposited some 25mln in icesave. and that is just to name a few. the grand total loss for dutch local authorities (as far as we know) now stands at 200.000.000 euros on top of the deal struck between the netherlands and iceland
“the UK paid 100% to all the Icesave account holders, despite the fact that the savers were DIRECT savers with Landsbanki Iceland”
again, i do not know where you got this information from, but here in the county of kent the council tax is about to go up drastically, to recoup some of the £50 mln that has been lost. and that is one county.
a few years ago the british treasury send out a list to local authorities of banks that had high interest on deposits and were deemed safe. icesave was on that list and a lot of counties and councils opened accounts with them. so far they have lost £1bn, which has not been covered by the British government.
£1bn and that is local authorities only. it is believed that their could be another billion outstanding through hospitals, schools, charities etc
http://www.dutchnews.nl/news/archives/2009/06/noordholland_executive_resigns.php
http://www.fd.nl/artikel/10299874/groningen-dupe-crisis-ijsland
Here’s an interesting report of the Iceland Central Bank. They go out of their way to avoid discussing the whole banking collapse, but with a little bit of imagination you can see for yourself that the debt level of Iceland relative to GDP will end up anywhere between 200% and 300% of GDP, depending on how many assets they will manage to sell at a reasonable price and depending on the evolution of GDP. Of course this will not happen overnight, as guarantees only become liabilities when called upon. Combining a very high public debt with a high interest rate creates a debt snowball that cannot be born by the icelandic population. Unless you imagine that surrendering between 70% and 80% of your gross income to your government to keep (mainly) foreigners happy is something to look forward to.
http://www.lanasysla.is/assets/nyrlanasysla/markenjune09.pdf
I’ve been spamming boards with the following question, but it actually directly relates to ino’s post about UK councils so I’ll re-ask it here as well
.
Thank you for your input, everyone!
Gerard van Vliet – how interesting that you should turn up with a lengthy comment on my website when two separate emails that I sent to you personally about six weeks ago did not even receive the courtesy of an answer.
Bromley86:
Wiltshire Council gave a wise quote last week on that topic: “I won’t believe it all until it’s actually in the bank – another bank.”
Alda,
you are talking about 2 emails… what/when?
Gerard – April 15 to gerard@icesaving.nl; April 20 to info@icesaving.nl.