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Facing up to the Icesave debacle

So the Icelandic government has been in talks with British and Dutch negotiators for the last couple of days over a solution to the Icesave debacle and today it was announced that a resolution is finally in sight.

The agreement they’re set to sign is for a loan to Landsbanki by British and Dutch authorities for a duration of 15 years with 5.5 percent interest. The principal of the loan is ISK 680 billion, which if my conversions serve is USD 5.5 billion / EUR 3.9 billion. No payments need to be made for the next seven years, but meanwhile the interest, ISK 37 billion a year, will continue to be added on.

The loan will carry a sovereign guarantee. Meaning that if Landsbanki doesn’t have the assets to pay, it will be divided onto the 300,000 or so of us who inhabit this country.

That sucks. Bigtime. Debts that belong to private enterprises, that are being shifted onto people who bear no responsibility.  [And those who owned the banks are living it up down in Cannes.]

Predictably there has been a loud and heated debate today about this issue, in parliament, in the media. Voices crying out that we shouldn’t have to pay, that we should stand up, put our foot down, stand firm, refuse “to pay the debts of heedless men” as Davíð Oddsson put it so memorably in a Kastljós interview back in October.

However, I have not heard one person mention a critical point: how can we expect our government to guarantee the deposits of every single Icelander in full and not do the same for those foreign depositors that had money in Icelandic banks? Which is what Icesave was. In contrast to, say, Kaupthing Edge in the UK, which operated as a British subsidiary.

It sucks. And the fact that we got screwed over by a bunch of incompetent entrepreneurs is too infuriating for words. But we can’t win and lose, both at the same time. We have to treat others like want to be treated ourselves.


Overcast, but mild and calm. This evening, though, it started to rain, softly. It’s currently 9°C [48F]. The sun came up at 3:13 am, sunset will be in about half an hour, at 11.41 pm.

[ps I’m heading out of town this weekend and may not be near a computer, so if your comment isn’t moderated right away I hope you’ll bear with me. And speaking of which, I’ve re-installed the comment guidelines page because I’ve deleted a few comments lately and I think it’s only fair that their owners know why. – Also, I may send the occasional photo to Twitter, via Twitpic, while I’m away – if I see anything worth snapping a picture of, that is. Remember if you’re not on Twitter you can still access those links on my Twitter feed in the sidebar on the right.]



Comments on this entry are closed.

  • Paul H June 5, 2009, 11:39 pm

    Grossly unfair.
    (that’s all I have to say about that)

  • Sigga June 6, 2009, 1:12 am

    Have you checked out the article by Robert Wade in Challenge Magazine. It so tells the realities of politics and public servant in this so beautiful country of ours (thats the only thing that they can´t take away – we can still go out for a walk and enjoy what nature still has to give us here)

  • Lee June 6, 2009, 11:05 am

    I remember Geir Haarde announcing last year that the nation may go bankrupt but, 8 months later, the reality appears worse than if that had actually happened then. A bankrupt typically clears his debts and starts afresh with damaged credit rating. Nations such as Argentina, Russia, etc all defaulted on national debt in order to start afresh. But, by re-confirming Icesave obligations with new sovereign guarantees, it seems that Iceland’s government is re-committing every man, woman and child to a debt of around £11,000 plus interest. And it’s almost inevitable that the repayment schedule will be re-negotiated and extended in several years time when the payments become due. For some reason, I’m reminded of the loan consolidation companies that “help” by converting short-term unsecured loans into long-term secured loans.

    And it’s still surprising that an emergency law hasn’t been passed to part-nationalise the assets of those wealthy bank owners (irrespective of any wrong-doing, eg under the guise of an exceptional one-off wealth tax) to redistribute assets more fairly among the citizens.

  • Guy June 6, 2009, 11:36 am

    I think it’s sad that the only thinkable solution to get us out of debt is to take more loans. It’s contradictory in nature but I guess the rules of economy are different from the rules of reality.

    The ordinary people always pay the price for the stupidities of other. We should be grateful that in Iceland we are only talking about money. In other countries people die in because of the stupidities of the people in charge.

  • Peter - London June 6, 2009, 4:33 pm

    Icesave was guaranteed by the Icelandic central bank. When icesave was failing the UK offer to take over the guarantee for £200million but the finance minister would not take it up.

    Serious mistake, probably because he didn’t know what he was doing.

  • Bromley86 June 6, 2009, 5:46 pm

    However, I have not heard one person mention a critical point: how can we expect our government to guarantee the deposits of every single Icelander in full and not do the same for those foreign depositors that had money in Icelandic banks?

    Practicalities aside, that’s a good point. It took me something like five months to actually appreciate the obvious nuance that a branch, rather than a subsidiary, actually meant that people were being discriminated against purely because they were called John and not Jon. BTW, in case it’s not clear, they still are because this Icesave loan means that John gets the EEA guarantee of ~20k euros, whereas Jon gets the full amount guaranteed.

    Not that I’ve ever begrudged that difference.

    And yes, the whole thing is horribly unfair. It’d be more unfair in absolute terms if the debt/loss fell on the UK taxpayer, although the impact would be far less per person. When people quote things like £11,000 per person though, that’s ignoring the worst-case estimates of 75% coverage. Not that £2,750 per person is great, but it may be as low as £500. Regarding interest, if the assets are sold ASAP then the interest payment falls, so it’s just a case of judging the optimum time for Iceland.

  • Ljósmynd DE June 6, 2009, 6:09 pm

    It is definitely unfair on the Icelandic people to be burdened with the debt of private businesses. I hope that it will never get lost, who is responsible for this disaster – reckless businessmen and incompetent politicians failing to supervise those enterprises appropriately.

    I can’t see, that the current Icelandic government had any other choice than to agree on guaranteeing this loan, given the circumstances – there can’t be a different treatment of Icelandic and foreign depositors with Icelandic banks.

    Any other claim seems to be rather populist. I’m afraid that denial of this truth in combination with self-pity might found the build-up of legends and outward directed resentments.

    But I also hope, that at the time, when it becomes clear how much of the outstanding debt of Landsbanki is left with the Icelandic taxpayers, the creditor countries will act responsible according to the financial power of the Icelandic people.

  • idunn June 6, 2009, 8:52 pm

    Presumably the government of Iceland, with the understanding and complicity of Iceland citizens, insured all deposits of Landsbanki in full?

    If not, I see a problem. Near as I can tell 680 billion ISK is roughly half of Iceland’s GDP. This debt probably transferred to Iceland’s citizens in 15 years, INCLUDING the interest of 5.5%. Can anyone afford this? Seriously, might this not make all of Iceland’s citizens indentured servants to international banking, their natural resources then forfeit?

    Maybe I’m missing something, but it seems a lot of people, within and without Iceland, were hurt in this debacle through no fault of their own. That to insure its credibility Iceland should honor all honest debt, but as able and not in destroying the basis of their future. This last should be non-negotiable.

  • Mike June 6, 2009, 9:45 pm

    Hi Alda,

    Any news if Iceland will be able to freeze the foreign assets of the crooks who bankrupted your country.

    One of the suggestions is that Iceland should follow the example of other bankrupted countries and simply default, but there’s a nasty new development about Argentina’s collapse. After Argentina’s economy collapsed in 2001 it came to an agreement with most of its creditors to pay back a fraction of what was owed. As soon as it did so, Argentina’s economy began to grow and a lot of the damage caused by the original loans and the subsequent collapse has been undone. It has a stable government and prospects are looking good. Argentina is now trying to get back into the international credit markets so it can borrow money for economic growth. Sounds like a great model for Iceland – ummmm…

    Some of Argentina’s creditors held out for a better (unpayable) deal and have now sold their debt on to a so called vulture fund based in the Cayman Islands. Vulture funds buy debts that are hard to call in for a few cents in the dollar and then try to get a better settlement usually by being more powerful and better connected than the original creditor.

    Well a bill is now before the US Congress that would demand Argentina pays back the whole of the outstanding debt or be denied access to US credit markets. And until the vulture funds are satisfied, Argentina will find it hard to raise money needed for infrastructure improvements and the like.


    There’s not a huge possibility of this becoming US law, but it does seem that there are people out there who want the proverbial arm and a leg.


  • tom joseph aka tj3 June 7, 2009, 11:03 am

    The Icesave debacle is repeated across the oceans.

    …And people here in the USA are in fact at risk of dying due to the stupidities of the people in charge. There have been millions of jobs lost and many people evicted from their homes. The people who will pay the price for all this are still shut out of decision making.

    In a literal sense the people who caused this mess economic are still in charge and perhaps growing in wealth and power. A few “leaders” have been removed but have been replaced seamlessly by others of the same type. The bills still yet to be paid by us all.

    Iceland may in fact be lucky to have some measure of sanity by being able to simply identify Icesave. Here the banks are too numerous to really have names. I see why I read the Iceland Weather Report as Iceland’s story has clarity because the names are knowable. It is educational!

    The narrative in the USA is a jumble. The mantra here is “it is nobody’s fault, no one is to blame”. The relevant thing is that this is not true.

    The people who obeyed the rules, did the work were betrayed, with intention or without intention. It was in truth somebody’s fault.

  • Mondrian June 7, 2009, 7:04 pm

    A complete mess all around, and with not many good choices. Even bringing the perpetrators more directly to account will not help the fact that they money has to be paid back by someone, sometime. I agree though that it’s ridiculous to spread so much debt to so few people, especially when so few were at fault!

  • Bromley86 June 8, 2009, 6:05 am

    The strange thing is not that two very different governments in Iceland have agreed to this in order to also secure the IMF/Nordics/Poland loan. After all, for all its evils, debt is merely a way of spreading the pain to make it more manageable. And zero inward investment at the same time as pissing off your main trading partner would always be pretty painful.

    The strange thing is that Iceland is seeking more money from, you guessed it, Russia.

    Anybody know why this is? My pet theory is that more debt is better, as long as it’s less than 5.5% because then you can pay off the first loan.

  • Magnús Birgisson June 8, 2009, 10:15 am

    On the point regarding “how can we expect our government to guarantee the deposits of every single Icelander in full and not do the same for those foreign depositors that had money in Icelandic banks?”

    We, as Icelandic citizens, enjoy all kinds of benefits by living, working and paying our taxes in Iceland. Example: maternity and paternity leave, unemployment benefits, free schools through university etc. When the Icelandic government sees fit to increase those benefits it is under no obligation to see to it that every citizen in Europe enjoys similar benefits.

    I see no difference with the deposit guarantee. If the government sees fit to use our tax payments to guarantee our deposits it is entirely within their power to do so. After all, Iceland is in full compliance with the EU directive on deposit guarantee schemes as has been verified by EU itself and if it chooses to go further in the geographic area that it’s laws apply to then it is within their discretion to do so.

    I also see no discrimination here. If John Johnsson had deposited his savings in Iceland, as Jon Jonsson did, he would also be guaranteed by the Icelandic law. John would however have seen his savings cut by up to 60% because of the devaluation of the Icelandic krona, a chance he was never willing to take but a risk that icelanders have to take. The Icelandic protection scheme is not for deposits made by Icelanders but for deposits in Iceland, a subtle but important difference.

    The reverse is also true. Icelanders with deposits in Icesave accounts get no extra protection by the legislation.

    Also, let us not forget that the desicion to protect deposits in Iceland in no way changes the protection that depositors in the UK or elsewhere could expect on their deposits when they made them.

    Having said that, I feel horrible that ordinary citizens in other countries have seen their savings evaporate because of the folly of a few Icelanders.

    I however, as most other Icelanders, is in the position that not only have I lost my job, lost a part of my savings, had my loans doubled and the value of my assets halved, I now have become indebted to those foreign depositors and will be paying for the next fifteen years. There is no protection scheme in place to save me or my children from poverty, discrimination or not.

  • Bromley86 June 8, 2009, 10:44 am

    Totally agree Magnus. As long as the Icelandic deposit guarantee fund pays (or effectively pays) 20k euros to Icelanders and foreigners alike, then if the Icelandic government wants to borrow from future Icelanders to guarantee the deposits of present Icelanders, then that’s their right. After all, it’s also what countries around the world have been doing, as it’s the only way to avoid a very unpleasant shock to the economy.

    The argument that the relevant EU/EEA law requires equal treatment is flawed, as AFAIK it only requires equal treatment by the deposit guarantee fund. There may be a bigger issue with the non-discrimination laws in Iceland, but the simple fact is that Iceland cannot afford for any case to succeed.

    And I’m sorry to hear about your personal circumstances.

  • vikingisson June 8, 2009, 3:20 pm

    Magnus puts this into a clear but painful perspective. I’m in the last bastion of so called stability, Canada. That doesn’t mean that all of us are sitting pretty. Circumstances as they are have already caused me to loose my job (dependant on off shore bank contracts), my house, and most of my savings. I almost wish I had invested and ultimately lost those savings in Icesave, I might have a glimmer of hope of getting that money back. But it is hard to tell a Brit that his money is gone yet Icelanders might get theirs back. Doesn’t matter, that money will go right back into the coffers to pay off other loans and loans they had nothing to do with.

    Bottom line is that a healthy economy is the only hope of paying back any of the mess. A populace gone back to sod huts and rotten shark can’t pay back anybody. Hard choices ahead but I hope that the natural resources aren’t sold off as what happened to so many debtor nations.

    Even with having lost so much myself the thing that I might be most upset about right now is that I can’t make the trip to Iceland I had planned for the solstice. I could drive and train ride north right from here but I’ll still only be at ~51 degrees north to a place not nearly as exciting. Anything farther is way out of the budget. Maybe next year….

  • Dean June 9, 2009, 7:16 am

    Given that the British and Dutch financial regulators should have acted with more due diligence before allowing someone from a jacuzzi to set up shop in their country, does not the ultimate responsibility for the depositors lie with the British and Dutch governments?

    They’re not entirely blameless for not scrutinizing Landsbanki back in the boom years.

  • Dean June 9, 2009, 7:19 am

    Another thing: are the authorities considering freezing the Cayman Islands accounts of the billionaires during the investigation into the bank practices?

  • alda June 9, 2009, 10:28 am

    Lee – you’re right. There is much talk these days about Iceland going “bankrupt” but the fact is that a nation cannot go bankrupt. And in some ways it would be better for us if it could.

    Peter – London – the British authorities deny that there was any such offer. and it had nothing to do with the finance minister.

    Magnús – what you are describing is a hypothetical scenario, it is not the law as it is today. Perhaps the greatest tragedy of Icesave is that it happened so fast that regulators did not have time to catch up and create a framework around it that would adequately protect those at risk. It was “above borders” – yet it was an Icelandic bank. As soon as the Icelandic government decided to cover the deposits of all Icelanders in Landsbanki, it had to do the same for foreign nationals with money in that bank. The EEA directive is very clear – you cannot discriminate against people on the basis of nationality. The other option (which is moot now) would have been to not guarantee any deposits – not even those of Icelanders. That would have meant instant collapse of the economy here – and by that I mean TOTAL collapse. So we’re f*cked either way.

    Dean – Iceland is part of the European Economic Area and our banks had the right to set up shop anywhere within that area. it was not up to British or Dutch regulators to approve or not. As to your second question, I don’t believe Icelandic authorities can freeze assets in other countries.

  • Magnús Birgisson June 9, 2009, 11:47 am

    Hi Alda.

    Actually it is not hypothetical at all but totally real.

    My point is that the Icelandic law did not discriminate on the basis of nationality but on the basis of geography.

    All countries do that to some degree. Take the UK for instance. Their law is such that if you do not live in Britain then you are not allowed to have a bank account in Britain. They maintain that it is because if money laundering precautions but everyone knows that the real reason is to limit their exposure to deposit insurance. This explains the popularity of of accounts in the Isle of Man, because if a British old age pensioner wishes to spend their golden years in Spain, and move their address over there, they also have to open up account in Spain and move their assets there or open up an off shore account, on the Isle of Man for instance.

    Try to pay with your Icelandic credit card in a Danish restaurant…in all likelyhood you will be forced to pay an additional 5% on top of your bill(an actual story). Discrimination ?

    I congratulate you on your sense of fairness but alas, in times of crisis, fairness, truth and justice are often the first things forgotten. Or does anyone think that Iceland has been treated fairly by being denied the chance to have the matter of our exposure settled in court? Or is it fair that the UK used their leverage within the IMF to delay the loans until we accepted to become Iceslaves?

    And actually Dean has a point. Please read article 34 in the icelandic laws on financial undertakings.
    See: http://www.althingi.is/lagas/nuna/2002161.html

    Similar articles are in laws in each state across the EEA.

    In other words, if the financial authorites in the UK or Holland as much as suspected that there were irregularities in the operations of the Icelandic banks, such as not being able to meet their obligations to depositors, then they were allowed to take action.