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Icesave: the hour is nigh

Tomorrow at 10 am, Iceland’s parliament will vote on whether to accept a sovereign guarantee for the Icesave debt.

For anyone who does not know, Icesave were online savings accounts opened in the UK and Holland, that collected colossal sums in deposits from regular depositors. The Icelandic regulators, including many people who are still in highly influential positions in this country, failed to contain the growth of the Icesave accounts, and even went on tour to promote them. The bank collapsed, and now the debate is whether the Icelandic public – all 300,000 of us – should be responsible for covering the debts of a private banking institution – a debt that could amount to what it costs to run the entire Reykjavík police force for 130 years.

As everyone who has been following this blog will know, the matter of Icesave is the most serious political issue in recent memory in this country – perhaps even the most serious in the history of the Republic. The debate has raged on and on and on, agreements have been reached and backed out of, it has brought the government to the verge of collapse more than once, and one cabinet ministers has resigned. The nation is profoundly divided on the issue, and every Icelander I know is ready to throw up at the mention of the name. It’s an issue that has a lot of gray areas, and it is very difficult to know what is right and wrong in this matter.

There are two options, both of them bad. One, we accept the debt and the ensuing burden, or we reject it and become isolated from the global community, including having our loans cut off by the IMF and related parties.

Parliament convened for these three days between Christmas and New Year’s expressly for the purpose of finishing the matter. As I write this, at 11 pm, it’s still in the third round of debates. Tomorrow at 10 am, they’ll start voting.

Watch this space.

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  • Paul H December 29, 2009, 11:47 pm

    Whatever the outcome our thoughts and prayers are with Iceland/Icelanders.
    Hoping that all is not lost and that the day can be saved (to use a couple of cliches, and here’s another…).
    Talk about being caught between a rock and hard place.

  • Simon Brooke December 30, 2009, 12:35 am

    In truth I doubt that Iceland would in practice be blackballed from the club of nations if it refused to underwrite the Icesave debt. There would be loud diplomatic rumblings, I’ve no doubt, and public gestures would be made. But fundamentally everyone can see that in equity it simply isn’t reasonable to expect a nation with a population smaller than an average UK local government area to underwrite losses made by a private bank whose business was almost exclusively overseas.

    And the people with whom Iceland chiefly interfaces have, on the whole, a fairly warm sympathy towards Iceland. There would be a lot of huffing and puffing but there would be no gunships in Holmasund. I think you, as a nation, probably can afford to say ‘no’.

    Either way, however, I fear Iceland is going to be a lot poorer for a while. The difference is that if you say ‘yes’ it could be a very, very long while.

  • Lissa December 30, 2009, 12:38 am

    It might be easier to swallow taking on sovereign debt if the bastards responsible were in jail.

  • Bromley86 December 30, 2009, 12:40 am

    Don’t hold your breath. From what I can see via Google’s Icenglish, MBL is saying that it’s already delayed.

  • Allan Risk December 30, 2009, 3:34 am

    My hope would be that Iceland could weather the 2nd option you’ve outlined: “become isolated from the global community, including having our loans cut off by the IMF and related parties.”. Being naive in all this, it nevertheless strikes me that this option, while painful, would be less awful than than the other …

  • Eliza December 30, 2009, 9:18 am

    The entire Reykjavík police force ? Sounds scary 🙂

  • Michael Lewis December 30, 2009, 1:38 pm

    Ultimate moral hazard. A country has a duty to protect the savings of its citizens and thats it: people in the UK who invested (that’s what it was not saving) in Icesave shouldn’t expect someone else to bail them out.

    On a grander scale, we have in the UK money printing, so the prudent, savers, pensions, etc… all bail out the people who took out 125% interest only mortgages etc…

    All done, because Gordon Brown wants to buy votes. Socialism at its worst.

    There is a silver lining: at least Iceland isn’t in the EU. That would be terrible. Despite everything, Iceland is 100% better off by not being stuck with socialists from Europe ensuring a structural rundown of the economy and passing of economic power East.

  • James December 30, 2009, 8:50 pm

    Exciting times 😉

  • Mike (UK Nordic analyst) December 30, 2009, 9:11 pm

    I am finally moved to post here …

    Micheal Lewis writes:

    “A country has a duty to protect the savings of its citizens and thats it: people in the UK who invested (that’s what it was not saving) in Icesave shouldn’t expect someone else to bail them out. ”

    Absolutely wrong. Icesave was a deposit-taking operation not an investment instrument. The legal difference between a deposit and an investment is profound. A deposit does not change its characteristics. The money remains the property of the depositor and does not change its characteristics, especially its risk characteristics. That is why deposits are legally guaranteed (up to some limit). If you want the letter of the law within Iceland then the precise reference is Law Act 161/2002 on Financial Undertakings. The English translation of the relevant clause is as follows:

    “Article 3 Activities subject to operating licences

    The following activities shall be subject to operating licences pursuant to this Act:

    1. Receipt of repayable funds from the public:

    a. Deposits.”

    Is that clear enough? A deposit, by definition, is the receipt of **repayable** funds from the public. It is NOT an investment, it is merely the receipt of money by the bank for the prime purpose of safe-keeping. People do not want to keep their money at home since that is not secure, they use banks as a place of safe storage and the bank equally acts as “deposit-taking organisation” (that is one of the definitions of a bank). Equally, governments do not want individuals to keep money “under the mattress” because the economic activity of a country would grind to a halt with money remaining hidden.

    The definition of a “deposit” is almost identical in every country. This explains why the EU can issue directives concerning the handling and guarantee of deposits – because they are the same irrespective of whichever country they are held in. The tragedy for Iceland is that the Icelandic banks – with the support of the FME (but not the Sedlabanki) – treated deposits in the way that Michael Lewis suggests, namely, as investments. But to _everyone_ else they were legally deposits – repayable on demand (sometimes with a time delay – but still repayable).

    I do get annoyed at glib, incorrect comments such as this. You hear them all the time in Iceland, or voiced in support of Iceland.

    On a different point all this arguing about Icesave is beside the point. Icelanders assume that the debt incurred by the Icesave guarantee is crushing or unrepayable in some shape or form. Nothing could be further from the truth. If you go to this document:

    http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=7392

    and look up Chart V-7 you will see that the vast majority of the Icelandic national debt in the coming years has absoutely nothing to do with Icesave. In round numbers the entire national debt will peak at around 130-150% of GDP – that is a high, indeed a painful number, but it can be repaid. Icesave amounts to 20% of GDP. So the majority of the debt is the result of actions of the ordinary Icelanders themselves. Do we have any websites complaining about the actions of those 300,000 Icelanders who voted with their credit cards? Do we hear the politicians drawing attention to those revealing numbers? No – far better to focus on a small part of the national debt that is attributable to foreigners. Politically and nationally much more palatable. Meanwhile the entire reconstruction of the Icelandic economic system (from a spending culture to an earning culture) is suspended. The endless postings on this blog highlight the obsession Icelanders have with the wrong target.

    (The debt is repayable. The UK in 1946-7 had a national debt of 250% of GDP. See

    http://www.ukpublicspending.co.uk/debt_brief.php

    It took 60 years to pay that off. Rationing remained in place for a decade after the war ended (sweets were the last to be rationed, up to 1954). Shops were empty. Cars could only be bought by registering on a list and waiting many years. All the national economy was nationalised so that any foreign income was channelled into paying that debt. The motto we had was “Export or die”. Nothing went for home consumption. Foreign currency was rationed until 1979 – 34 years after the war ended, and the last restrictions were only removed in 1982. The debt was taken over by the chidren of the war generation, and then by their children. No one batted an eyelid. It was a tremendous national and collective effort. One of the reasons why the UK is trusted as a financial party is because of that effort – the UK paid back all its war debt even when it caused 15 years of severe austerity. And consider this: the UK debt had been incurred fighting a war against an evil and genocidal tyranny. Nobody banged pots-and-pans after the war saying “This debt was incurred by a group of useless politicians who tried to appease Hitler. It was the result of a failed foreign policy. I didn’t vote for the war, so why should I pay?” The Icelandic debt by comparison has been incurred by ordinary Icelanders indulging in trips overseas (football to Manchester, cultural to Prague etc), decking, musical instruments for the children, new kitchens, multi-car families, 4x4s, houses, flatscreen TVs, iPods, Gucci sunglasses, grills (BBQs to outsiders), smart suits, buying UK football clubs, building new “culture” houses, over-resourced health and education services, fashionable evening classes (from music lessons to Pilates), Apple Macs (one on every table in Kaffibarinn), etc etc all paid for by debt or by inflated state-supplied wages pumped up by the debt flowing through the country.)

  • alda December 30, 2009, 10:02 pm

    I am finally moved to post here …

    — We’re not worthy, I’m sure.

    So you’ve decided to speak to us directly, as opposed to complaining about this site on other websites. Lucky us.

    Incidentally, for future reference, a comment that is 935 words in length is a post, not a comment, and belongs on your own blog.

    However, since you’re here, I’d be most curious to have you elaborate on this:

    The endless postings on this blog highlight the obsession Icelanders have with the wrong target.

    Which endless postings are you referring to?

  • Bromley86 December 31, 2009, 12:14 am

    >Which endless postings are you referring to?

    I suspect all of them. I took from Mike’s post that Icelanders in general (and not just yourself) are concentrating on the wrong issue when they look at Icesave to the exclusion of the other debts.

    Certainly, it is a reasonable position to advance that governments and politicians from all countries like to convince the people that the real enemies are (a) from the other party and/or (b) from another country.

    You just have to look at Geir Haarde’s reaction to the Landsbanki freezing order. Did he call Brown (or hop on the first flight over – it was kinda important after all) and sort it out or did he emphasise the “terrorist” nature of the legislation? Which would have been a better route for Iceland? (Although, of course, his hands were somewhat tied as there was no way he was going to confirm the Icesave guarantee.)

  • alda December 31, 2009, 10:29 am

    Bromley – I don’t think the handful of posts on this site that mention Icesave constitute “endless postings”.

    I agree that there has been a lot of manipulation of the Icesave issue. I have said as much myself.