In all the furor surrounding the Kaupthing loan book this past week, the following article by Eva Joly – published in several newspapers across Europe – went virtually unnoticed. The only English-language version I know to have been published was in The Telegraph this past weekend, and it was heavily edited. Below is the full version, only slightly edited [i.e. some line breaks and section headings are mine].
LESSONS TO BE LEARNED FROM ECONOMIC MELTDOWN
In the wake of the failure of the Icelandic banks Messrs Brown, Barroso and Strauss-Kahn prove that they have understood nothing.
By Eva Joly
From G8 to G20, many heads of state and government seem to delight in repeating that nothing will ever be the same again. The world is changing, to the point of being turned on its head by the crisis; the way we think and act in terms of financial regulation, international relations and development aid must therefore, according to them, change too.
However, numerous examples contradict all this big talk. The situation in which Iceland now finds itself following the implosion of its banking system and the emergency nationalisation of its three main banks (Kaupthing, Landsbanki and Glitnir) is undoubtedly one of the most significant of these examples. This small country of 320,000 inhabitants is now reeling under the weight of billions of Euros of debt, which has absolutely nothing to do with the vast majority of its population and which Iceland cannot afford to pay.
I became interested in Iceland through my role as an adviser to the criminal investigation into the causes of the failure of its banks, which is at the root of its difficulties. However, I am not going to talk about that investigation, but something that goes far beyond it. In any case, I am by no means a spokesperson for the Icelandic authorities, whose responsibility in all this is clearly not insignificant. The previous government was even dissolved due to public dissent over cronyism and the clannish running of institutions, which were seen as the cause of all of its problems.
Moved by the fate of Iceland’s deserving and likeable people, and the complete absence of discussion in the European media about what the future holds for them, I simply want to draw the attention of public opinion to the issues at stake in this case – major challenges that are not confined to the shores of this island. The irresponsible attitude of certain countries, the EU and the IMF to the collapse of the Icelandic economy demonstrates their inability to learn from the dramatic undermining of the model that it embodied: one of excessive deregulation of markets, particularly financial markets, that the majority of those same key players contributed to shaping.
The UK, Holland, and the IMF
Let us look, first of all, at the demands of the UK and the Netherlands. These countries are concerned by the failure of the Icelandic banks because they had welcomed their subsidiaries and branches with open arms, even though their authorities had been at least partially alerted to the risks hanging over those banks. They are now demanding that Iceland pay them astronomical sums (more than €2.7 billion to the UK and over €1.3 billion to the Netherlands), plus interest at 5.5%. They consider that Iceland was responsible for guaranteeing the funds deposited with Icesave, the internet arm of Landsbanki that was offering unbeatable rates. The British and the Dutch decided to set that guarantee not at around €20,000 per deposit, as provided for in European and Icelandic legislation – which would already have been impossible for the Icelandic government, who quickly announced after nationalising its banks that it could only guarantee deposits made in Iceland itself – but at €50,000 to €100,000 per deposit, or even higher.
Moreover, the measures that they are taking to get their way are scandalous. Indeed, at the very start of October, the UK began with a measure of extreme retaliation: freezing of the assets of not only Landsbanki but also Kaupthing Bank, which was totally unconnected to Icesave, using its anti-terrorism legislation. In doing so, the UK lumped the Icelandic people, their allies in NATO, together with organisations such as al-Qaeda… And since then, it seems to be using all of its influence to ensure that no international aid is really given to Iceland until its demands have been met. Indeed, Gordon Brown told his parliament that he is working “with the IMF” to establish how much it considered the UK was entitled to claim from Iceland.
The IMF itself, meanwhile, not content with putting off making its loans available to Iceland, attached conditions to them that would seem outrageous, even in fiction. One example of this is the objective of bringing Iceland’s public deficit down to zero by 2013, a target that is impossible to achieve but that will nevertheless lead to huge cuts in the most essential areas of spending such as education, public health, social security, etc.
Finally, on the whole, the attitude of the EU and other European countries has hardly been more commendable. The European Commission has clearly sided with the UK, as its President announced in November that there would be no European aid until the Icesave case had been resolved. It is true that Mr [Jose Manuel] Barroso [President of the European Commission] – too busy with his own campaign and terrified of upsetting his main source of support, London – is, as is often the case, in over his head. Even the Scandinavian countries, which heralded international solidarity, are conspicuous by their lack of reaction to the blackmailing of Iceland – which certainly puts the generosity of the loans they have promised into perspective.
Brown’s responsibility
Mr Brown is wrong when he says that he and his government have no responsibility in the matter. Firstly, Mr Brown has a moral responsibility, having been one of the main proponents of this model which we can now see has gone up the spout. But he also has a responsibility in the sense that he cannot really hide behind the legal status of Icesave – which made it formally dependent on the Icelandic banking authorities – and say that the UK had neither the means nor the legitimacy to supervise its activities. Could anyone realistically think that a handful of people in Reykjavik could effectively control the activities of a bank in the heart of the City [of London]?
Moreover, it should be noted that the European directives concerning financial conglomerates seem to suggest that EU member states that allow such establishments into their territories from third countries must ensure that they are subject to the same level of control by the authorities of the country of origin as that provided for by European legislation. So, was there perhaps a failure on the part of the British authorities on this point, which would not be particularly surprising considering the “performance” of other English banks (which were in no way related to Iceland) during the financial crisis? If so, Mr Brown’s activism in relation to this small country might be motivated by a wish to appear powerful in the eyes of his electorate and taxpayers, whose own losses cannot be played down.
Of course, the Icelandic institutions have a great deal of responsibility in this matter. But does that necessarily mean that the – also considerable – responsibility of the British authorities should be overlooked, dumping it all on the Icelandic people alone?
Iceland, whose only remaining source of income is its exports, will certainly not be able to pay off those debts. The Icesave agreement, that the Icelandic parliament is expected to vote on soon, would burden Iceland with a debt equivalent to £700 billion for the UK or $5.6 trillion for the US. Nor will Iceland be able to clear its deficit in less than five years, when national deficits are rising more quickly than ever, even for the great powers – with the UK and the US once again providing two very good examples.
Unless a radical new approach is adopted, Europe and the IMF are about to perform a major feat: reducing a country whose HDI had, in just a few decades, reached the highest level in the world, to the rank of a poor country… The consequence of this is that the Icelandic people, the majority of whom are highly qualified and multilingual and have strong work relationships with the Nordic countries where they can assimilate easily, are already starting to emigrate. In the end, neither the IMF, nor England or the Netherlands will be able to be reimbursed. Just a few tens of thousands of retired fishermen will be left in Iceland, along with its natural resources and a key geostrategic position at the mercy of the highest bidder – Russia, for example, might well find it attractive.
Possible alternatives
Even so, there are alternative solutions. Indeed, the countries of the European Union could have devised a mechanism that would allow them to consider their own responsibilities in this situation, to improve the regulation of financial markets and even take on at least part of the debt – which European legislation in no way prohibits – for having failed in their banking supervision role.
They could have offered to help Iceland, which obviously has no experience in the matter, with the investigation that it is seeking to conduct to try to understand what really happened and to thoroughly analyse the causes of this disaster. They could even have taken the opportunity to start their own debate about a European public prosecution service in charge of matters concerning transnational crime, particularly financial crime, which, once again, European legislation in no way precludes. The IMF and its Managing Director could also have taken this opportunity to thoroughly review the nature of the conditions that they attach to their loans. They could have made them more realistic, more focused on the long term, and made it possible to incorporate at least some social considerations. That would have been a first step towards true reform of multilateral institutions of this type and international solidarity procedures – and for Mr [Dominique] Strauss-Kahn [Managing Director of the IMF] himself, a chance to finally make his mark at the head of the IMF.
Engaging in this debate would obviously require a lot of time and energy, and a great deal of vigilance, particularly in the European Parliament, where discussions should be organised over the coming months. However, the Swedish presidency of the EU does not seem to be in a hurry to improve regulation of the financial sectors, and the committees with an economic focus in the Parliament are, more than ever, dominated by liberals, particularly British liberals. Yet the tools and levers for real progress are there; a catastrophe like that in Iceland could finally raise a meaningful international response, instead of the irresponsible and cynical pressures that we can still see today.
Eva Joly is a Norwegian-French investigating magistrate and judge. She was hired by the Icelandic government last spring to act as an advisor to the special investigator into the bank collapse. We ran an interview with her in this space a few weeks ago. This article is published by permission.
{ 60 comments… read them below or add one }
It may be conventional for states to issue debt with a specified repayment date, but why be conventional?
Simply issue redeemable (but undated) Units to the Brits and Dutch instead, carrying a reasonable return.
Then they can flog them off to investors if they like, it’s up to them, and makes no difference to you.
Iceland can then buy back this “Icelandic Equity” at any time which suits you.
It’s not Rocket Science – and it’s not Debt either.
Thanks Alda,
This is the kind of thing that is available nowhere else, unless you can read Icelandic. IWR does a great job of keeping us informed; and your writing style makes it so enjoyable to read.
Thanks again for all you do.
Don
Agree with Don of Seattle
But disagree with Eva Joly
I think this is a mistake – to play politics and criminal investigation together. It makes both of them weaker. Cause you either just a pure investigator (and stay away from anything but the matter) or a politician (then anything you do is judged from the point of your political agenda).
So if her previous interview about the investigation shortcomings were right – as it was ABOUT investigation process – these words
sounds like the words of any other politician out there.
Watching the NBC Nightly News tonight , they made a special mention of Soviet submarines sailing very close to the US Eastern seaboard in the past few days.
Back in the Cold War it was a well known fact that the Soviet fleet would need to pass by Iceland in order to get into position to attack the USA. That’s why a PC3 Orion left Keflavik NAS every few hours to drop listening devices to aid Com Sonar in monitoring such activity by the Russians. Not to mention the sophisticated radar station at Rockville.
With no US presence at Keflavik NAS the Russian fleet has demonstrated how easily they can move into position undetected to harm the USA .
If Iceland is ever occupied by the Russians as the author mentions after a complete collapse and mass exodus of young talent (Brain Drain)and the former strategic location of Keflavik NAS slips from NATO , it will be one of the largest military blunders of all time and obviously a very big gain for Russia.
It should clearly be a priority for NATO to ensure that this not EVER happen. If the USA and NATO believe that another such tension with the Russians is not a possibility , think again. Rich with Oil money , they are once again flexing their muscle militarily . And this time the USA has a staggering , breathtaking deficit and mounting debt. How quickly things can change.
I’m sure that this article was a hit in Iceland, but it struck me as especially partial.
Three things that I found interesting.
1. The use of the ATCSA against Kaupthing. I’ve been called pedantic elsewhere for pointing out that this was not the case, but I do find it concerning that an opinion-forming personality like Eva would say this. Still, perhaps it’s important for her work to be seen by Icelanders as entirely on their side.
2. “Could anyone realistically think that a handful of people in Reykjavik could effectively control the activities of a bank in the heart of the City [of London]?”
Whilst a pretty reasonable comment, the real-world result of addressing this would be to ignore the fact that Iceland is a sovereign nation responsible for it’s own business. I suspect that would have been resented
.
3. The EU nations should help with the investigation. I’m pretty surprised at this one. I’m certain that any EU nation or Norway would happily assist Iceland, but like vampires they’d have to be invited in. Given the stuggle she’s witnessed with getting her investigation going, it seems more likely to me that there has been no request for help.
Thank you for this. I have been looking for a proper translation of the whole article for a while.
As far as I remember, only Landsbankinn’s assets were frozen last october, not Kaupthing’s. But the outcome for Kaupthing has been pretty much the same.
She makes a good point by hinting at the responsibility of the European Union in this case to provide help, particularly with the investigation. Apart from the very own responsibility of the Icelandic government, Iceland has certainly become a victim of a flawed European legislation.
But as it seems, Iceland is either too tiny to matter or it is too embarassing for the free market ideologists in the EU, so they prefer to bully or to look the other way.
I wonder what EU laws would need to be passed so that Eva Joly, as a magistrate, had the authority to publicly spank Gordon Brown for being a bully.
Brown is an utter idiot. It makes me ashamed for Scotland to realise that this schizoid,tic-ridden numpty comes from the same country.Although he bangs on about alleviating third world debt, he doesn’t mind pauperizing the citizens of one of our nearer developed neighbours, while as in the UK, letting the real culprits waltz off, their pockets stuffed with cash.I wish our authorities would allow us close enough to our parliament to disrupt their proceedings, as Icelanders did, without being shot.
>Still, perhaps it’s important for her work to be seen by Icelanders as entirely on their side.
For clarity, that “her work” should have been “her in her capacity as Special Advisor”.
cactus zonie, could you be more specific about a connection between Russian submarines and Eva Joly?
I’m not sure either about
from Iceland but I noticed a drain from a particular head
Exactly, Bromley86, exactly. And this makes her position as an investigator rather weak. As an investigator she should be on the sides of the facts only.
Thanks for the comments, everyone.
Don, Alexander – your writing style makes it so enjoyable to read — why thank you very much, but I can’t take credit for any writing in this article – this is entirely from Mme Joly herself.
cactus zonie – excellent input, thank you.
Bromley – actually this article was less of a hit in Iceland than you might think – there was quite a lot of controversy over it, as Alexander’s comment makes clear.
Alda.
I mean the blog in general. Very clear, easy to read, funny-where-needed style.
PS. “Russian subs” is several days old LOL news… at least among those who saw U-boats (and off-topic in this thread so I stop here).
@cactus zombie: I caught that report on NBC Nightly News and thought it was odd how cavalier the anchor was in reporting the story. Thank you for your enlightening comment.
And Alda, I would like to agree with Don and Alexander and extend congrats for passing your 500,000 visitor.
Thanks Elín.
And just a reminder to anyone who wishes to comment here [and may not have had their comment approved] that direct personal attacks are not condoned on this website – however valuable your comment may be otherwise. Please refer to our comment guidelines for further edification.
As a newly elected member of the European Parliament Eva Joly definitely has her own political agenda. So, being advisor to the special investigator in Iceland is certainly an important but not her exclusive occupation and nobody should expect her to abstain from political statements during this time.
I can’t see a general problem with this. My understanding of Eva Joly’s task as advisor is – to provide advice about to set up the investigation process and not so much to run the investigation by itself.
But, of course, the failure of the Icelandic banks is more or less a model case on her own political agenda and it might be better, to have Iceland’s interests on the European level more prominently represented by an Icelander.
If a reminder is for me – I just wanted to connect dots i.e. Russian submarines, Eva Joly and Kaupthing. Still can’t see how first one is connected to last two “dots”
PS. there is real Russian ship there, right in the heart of Reykjavik. Kruzenshtern, four masted barque and tall ship (former German Padua)
http://en.wikipedia.org/wiki/Kruzenshtern_(ship)
LDE – the problem is that no Icelander can speak with the sort of authority that Eva Joly can – and be listened to.
Alexander – actually my remark was not a jab directed at you [the comment in question was not approved], but if the shoe fits …
Thanks for publishing this Alda – I was concerned that this wasn´t being spread out far enough. Hopefully others will pick this up and run with it as well.
Thanks for posting this, Alda.
Two phrases come to mind…
Do unto others…
and
What goes around comes around.
I am hoping and praying that sense and reason prevail, despite strong evidence to the contrary.
Ljósmynd DE. Of course Eva Joly might say whatever she thinks she should say. My point is – playing on two fields makes her positions weaker. This is what she will be accused of later for sure. Something like “You are using your status as advisor to support your political activity in EU Parliament” or vise versa…
As to the problem
David Oddsson comes to mind. For sure he knows everything and he would be listened with full attention
Either in EU Parliament or in court.
Or…maybe here?
Eva Joly warns “Just a few tens of thousands of retired fishermen will be left in Iceland, along with its natural resources and a key geostrategic position at the mercy of the highest bidder – Russia, for example, might well find it attractive.”
Cactus Zonie gives an example of Iceland’s key geostrategic position, saying that the presence of Russian subs off the US coast shows what can happen when Iceland’s key geostrategic position is abandoned, with the implication that things could get really bad if a Russian presence replaced the now-absent NATO presence.
I think it’s a bad example (and the reasons for that really are off topic), but the comment wasn’t random.
Excellent article Alda, thank you for the translation/editing!! I’ve been looking for more info on this topic but so far I have only found crappy opinion pieces or texts in Icelandic.. so thanx a bunch!!
I find it really hard to disagree with her… sure, no doubt about it, the main culprits are the people in charge of Icesaves and the other banks, but she makes a very good point: didn’t the British and Dutch authorities smell something fishy about these credits? Yeah, these rudeless and greedy bankers might have taken advantage of a loop in their national legislations, but aren’t they – the local authorities- guilty as well of letting that loop to be there in the first place?
Why Europe was so hesitant about helping Iceland is also an interesting topic… it is often said, that in international politics, there aren’t any friends, but interests.. and this seems to be true in this case. This reminded me of the Mexican economic crisis of ’94… Corrupt bankers, a government that either collaborated with them or turned a blind eye to their practices, bad decision making and voilà.. the banks went broke and the economy collapsed. The difference (besides Iceland being a first world country and Mexico a developing nation) is that Mexico had already signed in for the NAFTA, and well, you just can’t have a trade partner without money, so in order to keep the agreement going, both, the US and Canada rushed to lend Mexico some money and save its comatose economy. I wonder if this attitude towards Iceland would have been any different if Iceland had had a more important international standing, like being a member of the EU and the Eurozone. I guess, we’ll never know…
the problem is that no Icelander can speak with the sort of authority that Eva Joly can – and be listened to.
Unfortunately, this seems to be true and is certainly one more reason in favour of a membership in the EU – to provide Iceland with an own voice within Europe, independent of the goodwill of foreigners, however generous they might appear. It would mean an increase in external sovereignty, I think.
Sorry, just one more…
playing on two fields makes her positions weaker. This is what she will be accused of later for sure.
People, who don’t like her work or her attitude might invent whatever reason to criticize her. It happened in the past and will do so in the future. It is always worth looking into the motive of those doing so. But I guess, she is used to this kind of treatment. It’s more difficult for her position as advisor, if her advice is being ignored repeatedly or if the people, who hired her, don’t back her.
What a terribly long article of utter nonsense. The Icelandic population has just as much to do with landesbanki as the Dutch with Fortis, The British with Barclay and the Americans with AIG. Is that fair? Not it isn’t but the world isn’t fair. And you can use all these words to say things about moral resposibility and how all the controls in the countries themselves failed,witch they did, at the end of the day it is an Icelandic bank and Iceland will have to bear the responsibility for it afterall wenn everything went well the icelandic economy profited hugely from these banks. you can’t have the good things and shove the bad things on others. The Dutch will have to pay for some generations for Fortis/ABN Amro and we don’t like it but that’s the way it is.
oh and LOL @ the geopolitically completely infeasible idea that Russia is going to get influence in Iceland
I’d like to comment on the post by cactus zonie, in respect to her comments on Russian submarines off the coast of the US, and how that can impact Iceland.
First, let me say that I flew P-3s from NAS Keflavik in 1976 and know exactly what you are talking about. But the nature of the world has changed dramatically in the past 30 years. The days of the using Icelandic soil as a means of maintaining survalence of Russian submarine traffic has long since past. If Russia does have an interest in Iceland, it is not to occupy that land.
In my estimation, if the Russians have an interest in Iceland, it would be to establish economic ties there and establish a base ( an economic base, not a military base, such as NAS Keflavik) to begin exploitation of arctic resources. Iceland needs money, and the Russians have it. Iceland has a great infrastructure and easy access to the natural resources of the arctic; things I sense Russia wants.
Just as the Russian submarines had to pass thru the Greenland-Iceland-UK gap to get to the open Atlantic because of the arctic weather at their only northern sea port, they face the same environmental problem with exploitation of arctic resources. They have no suitable ports to enable this.
Having a base of operations in Iceland, would be a significant advantage. Iceland needs the money and the jobs, Russia wants the easy access to the arctic.
I really do feel that the financial situation in Iceland today, with respect to Icesave, is a lot like Germany after WWI. Where the victors of the war required Germany to pay an insurmountable sum in terms of reperations. A sum that could never ever be paid. The people of Iceland now face a bill for Icesave that is not payable, it is beyond the means of a country of 320,000 to pay, yet they may have to pay it. If forced to pay this, they may look for other means to do this.
This, I do believe, is a way for the Russians to get to the arctic natural resources, thru Iceland.
Iceland needs a way out of the Icesave mess without inflicting massive debt upon the population. Russia needs a foothold in Iceland to expand their drive into the arctic, and exploit the natural resources available there.
Above all, the Icelandic people must do what is best in their own economic interest. Things have changed. Physical control of a country is not that important, it is all about the money, and how it flows. If you have the money, you can control a country without ever having to invade.
I do believe that if there is a WWIII, it will be economic, and not the type of war as we have known in the past.
My thoughts, anyway.
Don
Fred…
If I were to ask why you think my statement is a bad example , we would likely need a whole new thread.
When I read that part , I knew I was veering off topic , but she has a very valid point (aside from banks).
So do I…. We all know that Iceland has a colossal strategic advantage from a military point of view. Let’s hope it does not fall into the wrong hands.
Nuff ‘ said. Sorry for not staying on “Bank” topic. I currently keep my funds in my mattress
Thieves !
“I do believe that if there is a WWIII, it will be economic, and not the type of war as we have known in the past”
I suspect that the current European war is actually creeping federalism as individual states lose more and more of their sovereignty (ie the main war is political rather than economic). For example, if Iceland joins the EU, then much of Icelanders’ lives will be governed by EU laws, they’ll pay dues to the EU (ie Iceland will be a net contributor), etc; all very similar to surrender conditions after a war defeat. For centuries, citizens used to mobilise and fight to the death to protect their national sovereignty, but nowadays those citizens are oblivious as more of it is given away each day in Belgium. I doubt Eva Joly would agree with this view!
Alda, thanks for the article, another time that you and IWR have kept us properly informed about things.
Personally i think that Iceland should be on the hook for at maximum the legal insured amount for each account. And that should cover Icelander depositors. My understanding was that ice save was run as a UK bank under UK laws. Therefore the UK depositor insurance should pay out the depositors.
I also think if you dig deep enough there are UK businesses that had allot on deposit with Icesave and they had the political clout to demand full reimbursement. If icesave was to not pay out they would be in trouble and that just can’t happen. But this is just the conspericy paranoid part of my brain typing.
Not so Rob. Icesave was an Icelandic bank (Landsbanki) regulated by the Icelandic authorities. No one has argued that the Icelandic deposit guarantee fund (as opposed to the UK FSCS) should not pay out for the first 20,887 euros per depositor. The argument is whether that guarantee is required by EEA/EU law to be backed by the Icelandic government, although that argument has in reality been circumvented because Iceland needs to borrow other funds (IMF/Nordics) and the EU has managed to link the two matters.
Also they are just on the hook for at maximum the legal insured amount. (Actually, that might not strictly be true, but that’s a detailed technicality.)
Kaupthing Edge in the UK (KSF) was run as a UK bank and there’s no come-back on the Icelandic government or guarantee fund for it’s collapse in the UK. It was run as an Icelandic bank in Germany, but luckily for Iceland Kaupthing seems to have enough assets to cover 100% of the deposits.
Regarding UK businesses, they’re pretty-much irrelevant to the discussion. Although the UK FSCS has stepped in to cover everything above 20,887 euros, they’ve only done so for retail depositors (i.e. you and me). So businesses, councils and charities will get their 20k euros each from the Icelandic guarantee fund and then the rest from the liquidation of Landsbanki – probably to the tune of 75% recovery.
Perhaps you’re thinking of the Wheelan case. He’s a rich UK businessman who did get a load of money in KSF back from the FSCS. But, as far as I am aware, although it was a lot, it was his personal money deposited as a (very large) retail depositor.
So it really doesn’t matter to most businessmen who had deposits with Landsbanki whether or not the Icesave agreements are signed.
@rob: icesave was an icelandic bank trading in the UK, with an FSA licence. It wasn’t a British bank.
Had it have been, and had the icelandic government insisted that it had opened a proper self-contained British bank, the liability would have been on the British financial system and not the Icelandic one. But they didn’t – all the better for the owners to fleece them with.
I’m afraid I find this entire article fallacious. The argument seems to be, “Its all (particularly) Britain’s fault for being in support of free market economics and having open trade borders.”
I don’t buy it. Ultimately countries are responsible for their citizens (real or corporate). If BAE started selling cruise missiles to North Korea, it wouldn’t just be allowed to because its an independent entity.
Countries have governments, and in democracies the populations vote for the governments. So, finally, the population is responsible for the government. You voted for them, they’re your fault.
But, separate from the, “Its all the big boy’s fault” argument presented in this article, I accept that there’s no way iceland’s population could (and arguable should) be presented with a debt they can’t feasible pay. Dragging someone in to affective debt bondage is one of the great evils of history.
What I don’t understand is why the owners of the banks are still walking around. Shouldn’t there international assets have been frozen and shouldn’t they be sitting in prison waiting to be extradited for massive corporate fraud?
Unfortunately this Icesave-national debt issue is marred by excessive literalism and a concentration on the terms of this and that regulation (the 94 EC law, the 1998 adoption of 94 law, a 2006 Icelandic acknowledgment, and so on.)
If you follow the regulations literally then it is pretty clear that Iceland owes at least the minimum of 17k and the 4 billion “compensation”.
But let us go back to 2006 when Iceland acknowledged its responsibility to guarantee the Icesave deposits. At that time the three banks still had value and it looked like there was enough cash on hand to cover any British and Dutch deposits. The ISK was still relatively strong, at maybe 60-80 ISK to the pound and the banks had market capitalizations of tens of billions and enough cash at hand. So it looked like the banks could cover the deposits and the Icelandic government could guarantee any shortfall, based on the value of the ISK.
We all know what happened since: the ISK crashed and the bank stocks became worthless and their assets became more or less worthless, with no cash reserves. The ISK now trades at something like 240 to the pound.
A big part of the reason that the current debt figure of 4 billion plus is unpayable and unreasonable is because the currency has crashed. As Eva has suggested, the US would be basically wiped out if it had to pay 5 trillion dollars, in foreign currency.
Now let us look at an old example of how debt has been treated following a currency crash. In the 1920s Germany amassed a large foreign debt and continued to pile up astronomical amounts of foreign debt until after WWII, due to the hyperinflation and almost total crash of the German mark.
So how was this debt treated? In 1948 the mark was revalued at a 10:1 ratio, and the national debt was likewise reduced by 90%. And who made this decision? The Allied powers – including Britain – based on a recognition that debts incurred at a time when the currency was strong should not be treated the same after a currency has crashed.
So it we follow this historical example then it is clear that the value of the ISK must be taken into account. If nothing else, the British and Dutch should at least admit that the “debt” they are owed should be valued in terms of the value of money when the Icelandic government supposedly gave its guarantee or the banks took in the deposits, whether in 1998 or 2006, which would mean a two-thirds reduction of the amount demanded. (By the way, the government guarantee in 1998 stated that the deposits could be paid back in ISK. Not to mention the British-Dutch argument that Icesave depositors were essentially making deposits directly into an Icelandic bank – why is it that Icelandic depositors have seen the real value of their deposits decline by two-thirds, whereas British-Dutch depositors get the full real value of their deposits?)
The general point is that the British and Dutch are not calculating the Icesave deposits value in terms of the real value of money AT THE TIME WHEN THE GUARANTEES WERE MADE. Of course we know why are doing this – because they can. Iceland is a small country, with no friends, so the British and Dutch can basically demand what they like and get away with it. What if the allied powers had insisted that the Germans pay back the full nominal value of their debt in the old Reichsmark? The debt would have been unpayable, and debts that can’t be paid, won’t be paid.
At the time the guarantees were made, the value of the ISK was massively inflated. Which is why the hedge funds who started Iceland’s decline focused on it. So, should they focus on the fake value at the time, who try an value the currency properly?
I’m not sure I see a parallel between Iceland today and Germany in the 30s. If only because Germany had more than 70 million people. So, Germany’s response to financial ruin was to roll tanks across Europe.
Unfortunately, Iceland would probably just starve (well until the European media notice. The population of Europe can’t cope with the idea of starving white children – its too close to home).
A more accurate comparison is an African country which has just voted democratically for the first time after it’s former dictator had spent huge amounts of government debt on airports in the middle of nowhere and sculptures of himself.
The country creeps along, stagnating under its inability to invest for decades until the “donor countries” agree to cancel their debts.
Iceland can’t service this debt. So really its just posturing on the part of Britain and the Netherlands. At some point it will have to write the debt off.
I’ll probably be a bribe to get the population to vote to join the EU.
Thanks for the input, everyone. There are some great points in this thread – really enjoyed your comments.
Don, Alexander … IWR does a great job of keeping us informed; and your writing style makes it so enjoyable to read. Aw, thank you. Always a pleasure to get complements like those. And I wouldn’t bother to write unless there was someone to read, so ….
On the question of how much responsibility the UK’s FSA bears for the mess, here’s a Briton’s perspective:
Tony Shearer discusses what the FSA knew and what they could have done.
The author knows both Kaupþing and the FSA firsthand. He was chief executive at a UK bank that Kaupþing bought.
Hvernig segi ég “You deserve better” á íslensku?
“freezing of the assets of not only Landsbanki but also Kaupthing Bank”
Actually this was British policy even in Britain. The Brown government forced LLyods TSB(positive net worth) to combine with HBOS(negative net worth). Destroying LLoyds, and the retirements of they silly people who invested in it thinking a solid well run bank, which it was, was a good investment. Much of the so called anti terror laws were really tax enforcement and revenue laws.
“already starting to emigrate”
Isn’t that the point of the exercise? The British and Dutch want to convert Iceland into a resource (hand over your fish to the Chippy) and remittance nation (Icelandics living abroad send euros home that are then sent to London). Young Icelandics will be supporting British government pensioners. If Britain needs foreigners to do jobs Icelandic people are better than the alternative. You see it is not about money, what they want is to in essence collect taxes from Iceland to support their own deficits.
The only hope of repaying the debt is if the value of sterling and euro collapses. Perhaps Iceland can instead pay a % of GDP or something like that.
So what happens if Iceland refuses? Iceland becomes a remittance and resource nation, but at least gets to keep the fruits of it’s labor. One fear would be threats to confiscate other assets belonging to Iceland.
Are these loans that the icelandic banks made collateralized with any real assets like icelandic fishing rights or geothermal power rights in iceland?
Can Iceland credibly defend its fishing rights if the UK decides it will take control of them in lieu of the 2.7B euros?
Tiny Iceland with its tiny population of 350,000 was not in a position to verify the accuracy of international credit rating agencies. Acting on the information available the country’s banks loaded up on toxic debt which the American and European authorities knew or should have known was worthless. Iceland is a victim of organized crime and should now declare bankruptcy and let the Americans and Europeans deal with their worthless paper. Icelandic taxpayers have no obligation to pay one red cent to the reckless governments or citizens of countries that ripped them off. The last use of gunboat diplomacy was in Tunisia where a British warship fired warning shots as the Tunisian parliament was debating whether to default on bonds sold to Brits. The world would be outraged if the British or Dutch were to indulge in such bully boy tactics today. As for trade the Scandinavian countries, Canada and Ireland would continue to trade with Iceland.
couldn´t agree more!… Mr Brown should be asheme!…
The money he lost for the british people selling their gold in the bottom; is what he is trying to get back..
Oh my God! If England wants to let someone in their country hang a sign that says “BANK” outside their door they damn well better regulate it. If they choose not to regulate it they damn well better let their citizens know it is NOT regulated. Something like: Should you put your deposits in this bank be aware they are covered solely by a tiny country in the Atlantic which could decide at any moment to skip country with your funds. Don’t come in after the fact and play tough. Remember you let them hang the sign outside their door. Would you let Zimbabwe open a branch in Britain. (Sorry Zimbabwe)
Would Iceland be interested in a deal where the USA steps in and resolves the debt issue in exchange for moving all US forces currently in the UK and Continental countries to bases in Iceland and shutting down the bases in UK and the Continent? Seems like a win-win to me, as a US citizen.
I think the UK’s handling of this is inexcusable.
MelB – not so simple, actually. Iceland is part of the EEA and as such has permission to set up a bank branch anywhere within that area. The host country is not responsible for regulating that – the home country is.
The matter is different if a subsidiary is opened, however – then the host country IS effectively the home country. With Icesave, however, that wasn’t the case – it was a branch of an Icelandic bank.
Carl.
Effectively yes, although not the way that you describe. There is, in the case of default, a clause that allows the UK & NL to go after Icelandic government assets in any jurisdiction that they can.
Mickey Hickey.
Iceland is a sovereign nation and, as such, no one disagreed with it being treated the same as France, Germany, the UK, etc. when it came to access to markets. With the benefit of hindsight, that was a mistake. Even if there was an attempt to correctit back in say 2004 would have been heavily resisted by the Icelandic government.
Regarding trade, if Iceland was kicked out of the EEA then that would affect trade with it largest markets, including all of the Scandinavians.
Bromley86
Iceland was not the author of its own misfortune it played the game according to the rules laid down by the laisser faire governments of the casinos on the Thames and the Hudson. Having been well governed for centuries the Icelandic government and the Icelandic people made the reasonable assumption that governments in Washington and London were not corrupt and incompetent. It follows that it was also reasonable to assume that retail, commercial and investment banking along with brokerages, hedge and insurance companies were reasonably well regulated. Where is the fraud, embezzlement, misrepresentation, theft, incompetence ? Not on the tiny island in the northeast Atlantic. Iceland should declare bankruptcy after making itself judgment proof and let the real culprits absorb the losses. When you have morality on your side you cannot go wrong.
Excellent Mdm Joly! At least someone is telling the story like it is! The IMF has a disastrous record in Africa of economic policies that were enforced to terrorise the population (as an EU “controlled” entity) and assuage its terror with Aid. Africans were somehow to blame for the failure of the free market system – but now we see that financialised monopoly capitalism (as different from competitive productive capitalism) is a failure in its own terms. The theories of Paul Samuelson on Factor Price Equalisation exist but only in textbooks! And this is the theory that the IMF and World Bank rely on. If it is not a real theory but academic fiction and hubris, why is the IMF so gung-ho about it all? Perhaps Iceland should look at the African experience to get to know better what Africans have experienced. It can get much much worse. Peace, and hope that a solution that is humane is worked out – and perhaps reforming the IMF completely (not just paper promises as the EU is wont to do)… and have a debt restructuring mechanism for states… because even just making the interests payments results in exponential debt growth – look at Africa!
>Having been well governed for centuries
If we’re talking centuries, then that’s because they weren’t ruling themselves. The one thing that has come out of this whole mess is just how corrupt/nepotistic the ruling class in Iceland is.
Anyway, just because it’s small doesn’t make it any less a country. Therefore, Iceland is just as responsible as everyone else is for their own personal misfortunes.
National bankruptcy isn’t really an option, as the vast majority of the banks’ debts are private and so are not falling on Iceland. Defaulting on all international commitments is not desirable in an import-dependent country with low foreign reserves and a large current account deficit.
That is, of course, a separate issue from whether they should back the Icesave guarantee or not.
Not sure where morality comes into it. Ignoring for the moment any ability to pay, it seems to me pretty immoral to allow a corrupt political and business culture off the hook at the expense of taxpayers in another country.
@Bashar. I’ve not seen the terms of the IMF loan to Iceland, but a pretty knowledgeable Icelander has said that it’s likely 1%-2%. If true then whatever else the IMF may be, it’s not trying to trap Iceland in a debt spiral.
@Bromley
“There is, in the case of default, a clause that allows the UK & NL to go after Icelandic government assets in any jurisdiction that they can.”
A clause in what contract?
My question is will the international community go along with NL and the UK forcibly taking Iceland’s fishing rights as debt service? Defaulting would suck, but Iceland won’t starve as long as they can fish (Though, those that can will likely emigrate).
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