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The Financial Times has its say

The FT slams UK/Holland over their handling of the Icesave affair today:

The British and Dutch governments’ incessant bullying of Iceland over Landsbanki’s Icesave acounts seems motivated by the bully’s usual reason – there is little to fear from picking on those sufficiently smaller than oneself. That premise is about to be tested now that talks between the countries have broken down.

With deplorable success, London and the Hague claim the dispute is about whether Iceland will meet its legal obligations. It is not. European law requires each country to have a deposit insurance scheme; whether it demands that taxpayers fully back the guarantees, as Icelanders are told, is an open matter.

[…]

The broader damage of the grotesque mishandling of this affair will be felt elsewhere. The political effects are both chronic and acute. The focus on Iceland’s responsibility deflects attention from the fact that European cross-border banking rules are powerless to deal with any large-scale bank collapse. The priority is to fix the system so that we can let banks fail without having to bail them out again.

Read the full editorial here.

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  • goupil February 27, 2010, 1:18 pm

    Just found that on http://www.zerohedge.com/
    In a press release earlier the Moody’s experts note “Moody’s Investors Service said today that the breakdown in the talks between the governments of Iceland, the United Kingdom and Netherlands to resolve the Icesave dispute puts the Icelandic government’s Baa3 rating under downward pressure.” In the meantime, we are curious what the new index of Financial Conditions, created by such objective individuals as Goldman’s Hatzius, DB’s Hooper, ex-FRBNY’s “Napoelon” Mishkin, NYU’s Kermit Schoenholtz and Princeton’s Mark Watson, says about availability of credit in Greece.

    Weather report: A large depression centered on the north Atlantic region. Extensive cumulonimbus cover.

    Personnal opinion (IMHO):
    Uk/Holland offer of a variable rate on Icesave is very steep.
    The Icesave saga looks like the icing on the icelanding debt.
    I remember when in June 1998 Malaysia was under a very severe attack on it’s currency (-38%) and refused the IMF bailout.
    After strict exchange controls it bounced back quicker and better than any other asian countries.
    Yours,
    Christian

  • Bromley86 February 27, 2010, 1:31 pm

    After the (very) brief return to the middle ground below, the FT is firmly back on Iceland’s side 🙂 .
    http://www.ft.com/cms/s/0/e61db8be-230d-11df-a25f-00144feab49a.html

  • Michael Lewis February 27, 2010, 1:34 pm

    ” A UK government at the mercy of bond markets should watch its step.”

    A good way to end the editorial. People in the UK (if they are savers) need to be very wary (if they still have all their savings/investments in GBP).

  • kevin oconnor,waterford ireland February 27, 2010, 3:09 pm

    Hey Alda stop stealing my stories, I led with this one on the previous post ha ha ha ,yes sireee 🙂 I beat the Icelandic Blogger in Chief to a news scoop of the century, good news really not going quietly has led you to been “Let Off” 450 mill in interest payments, a no vote would get further brownie points, then a deal will be cut.

  • James February 27, 2010, 3:38 pm

    The FT may be emphasising the “bullying” because of all the news this past week about Gordon Brown bullying his own staff. It’s topical.

  • Joerg February 27, 2010, 4:32 pm

    Apparently, the bullies UK and NL are even sending masses of snow and freezing cold right on your doorstep as a last warning. What an epic drama! 😉

  • Michael Ridpath February 27, 2010, 5:11 pm

    It seems to me that the FT makes a very important point.

    If British negotiators are solely motivated by minimizing their financial losses, then they will push Iceland as hard as they can to extract the highest loan repayment they can. Britain has nearly all the cards, Iceland has very few.

    But the strong taking money off the week, just because they are strong, is bullying. And it is the charge of being a bully which is perhaps the best reason for the British negotiators to ease up a bit. I for on would hate to visit Iceland in three years time and find a country in dire economic straits. Especially if my government put it there.

    The US cut Britain a break in the late 1940s when we couldn’t afford to meet all out debts. Maybe we should do the same for Iceland

  • Karl February 27, 2010, 6:12 pm

    True enough, but Britain had spent six years at the sharp end of the Second World War – and paid every cent of the US loan back, plus interest, after having been in a woeful negotiating position back in 1948. I believe the final installment of the payment was in 2007.
    Iceland, on the other hand, has spent the last decade rolling in a lunatic spending spree under inept (at best) government, not helped by a weak judiciary, a toothless media and innate corruption at almost every level of government.
    There’s a price to be paid for everything and sadly thos eof Iceland’s taxpayers who haven’t fled will be paying for the idiocy of the government they failed to vote out for years to come, while most of the businessmen who ran off with the money will probably live happily ever after.

  • alda February 27, 2010, 7:05 pm

    I’d like to ask those who wish to comment on posts to please read the comment guidelines:

    http://icelandweatherreport.com/commenting

  • The Fred from the forums February 27, 2010, 10:03 pm

    They’re not the only people to have used the term “bullying”. Buiter and Sibert, economists and (I believe) British citizens, described the asset seizure under the anti-terrorist law as “outrageous bullying” and “thuggish behavior”.

    As the vote comes up, please accept my good wishes. What’s legal, what’s ethical, what’s just, and what’s good for Iceland are four separate questions, none of which I can figure out the answer to. I hope Iceland’s voters are smarter and wiser than I am.

  • idunn February 27, 2010, 11:09 pm

    “The priority is to fix the system so that we can let banks fail without having to bail them out again.”
    – ‘The Financial Times’

    If certain parties are more than culpable in Iceland its national responsibility must still be seen within the broader context of international finance.

    There is plenty of blame to go around. If with valid claims in the Icesave debacle, the British and Dutch might still understand that it wouldn’t even have occurred yet, or perhaps been forestalled, save for imprudent banking practices in New York City, and lax regulation of same in Washington, DC. If that seems too far from home then they might consider their own lack of oversight with banking practices on their own soil. If willing to cry foul after the fact, in fairness they should also accept a measure of the blame and responsibility.

    From a global view Iceland serves as a reminder that any nation is potentially bankrupt, and as a bell weather of what could come unless unsound regulation and banking practices are corrected globally. The United States remains guilty of this, probably Britain, with such economies as Ireland, Portugal, Spain and Greece hardly healthy. If in each case one might cite faults in their domestic affairs, nevertheless each nation exists within the framework of global finance. What affects one can affect all. Moreover, while any given nation might do its best in being prudent, it can still suffer injury from the actions of those without. And it should surprise none that there are more than a few pirates in high finance, complicit with unprincipled politicians who care more for personal gain than the common good.

    Thus the finances and responsibility of Iceland are hardly black and white, if not shades of grey than as multi-hued as the northern lights.

  • kevin oconnor,waterford ireland February 28, 2010, 2:11 am

    Sorry Alda just having a laugh, feel for the Icelanders, gainst my acccursed enemy the britisch who persitantly through the years have failed to supply me with a 100 grand a year job and lots of free champagne and pretty women to match my affore mentioned salary.Not really going against your blog, mirror idunn’s thoughts about the whole thing Iceland is being taken in one Ponzi scheme.

  • James February 28, 2010, 7:49 am

    “The priority is to fix the system so that we can let banks fail without having to bail them out again.”
    – ‘The Financial Times’

    States should always bail-out failed retail banks; that’s the main way that the contagion of systemic collapse can be halted. Remember that retail banks are licenced by the state to perform banking activities on the state’s behalf. The real point is that governments should direct regulators to reduce the risk of retail bank failure by separating investment banking from retail and commercial banking, setting much more conservative limits on raising and lending funds, etc; basically, look at the western world’s regulatory approach in 2004-2008 and do precisely the opposite…

  • Joerg February 28, 2010, 9:26 am

    Apparently, the negotiators are giving it another try:

    http://www.reuters.com/article/idUSTRE61P21D20100227

    I hope, there is is some sense left that finding an agreement would be in the interest of both parties.

  • Peter - London February 28, 2010, 7:41 pm

    “I remember when in June 1998 Malaysia was under a very severe attack on it’s currency (-38%) and refused the IMF bailout.
    After strict exchange controls it bounced back quicker and better than any other asian countries.”

    I think Argentina would be a more appropriate example. Over the next few years there are large loans that Iceland has to refinance, without the IMF money and a solution to the Icesave issue Iceland will default. This will make the currency fall by half again and cause endless problems for many years.

  • Great Eastern February 28, 2010, 8:32 pm

    “There’s a price to be paid for everything and sadly thos eof Iceland’s taxpayers who haven’t fled will be paying for the idiocy of the government they failed to vote out for years to come, while most of the businessmen who ran off with the money will probably live happily ever after.”

    hehe, you are calling onto the Great October Revolution like Soviet Russia called it :))) BTW, the Soviet Russie dumped all tzar debts, France suffered most.
    If history teaches us something then there is a limit one can bully until all goes crazy.

  • sylvia hikins February 28, 2010, 8:56 pm

    Reuters 27th Feb: ‘The IceSave debt amounts to more than $15,000 for every one of Iceland’s 320,000 people though most of the money is likely to be covered by the sale of assets of the bank which offered the IceSave accounts.’
    In 2009 your economy shrunk by 7.7%. This year it could be even more. You need investment and money flowing again, but this time with a clearer sense of purpose and strategy about what economic development you want in order to rebuild the future. You are between a rock and a hard place and I feel angry when I think how you got to this position and its aweful consequences. But you need to cut a deal and put this behind you. Rebuilding your society in a new and different way(after all, you are the gateway to the arctic) will restore national pride and purpose. If the referendum happens on March 6th, of course you will reject it- if I was voting, I would kick it out too. But a compromise will be found from the centre ground and it’s about time the politicians from all 3 countries but especially the UK and the Dutch, left the posturing behind and found a fair solution. It can’t happen a moment too soon for the future of Niceland.
    sylvia from viking wirral

  • Peter - London February 28, 2010, 9:06 pm

    The articles argument is ridiculous.
    How exactly are any countries supposed to get repayment for debts if the debtor nation is small? And are small nations except from paying their dues to bigger nations , becuase the bigger country won’t really notice it?
    A few billion here or there, British voters won’t notice, will they? just another couple of extra closed hospitals.

    Try taking £60 out of the pocket of every man, woman and child and see how they react.

  • Michael Lewis February 28, 2010, 10:04 pm

    Peter the FT make an excellent point. As for taking £60 out of the pocket of ever man, woman and child, what do you think QE has done – devalued money to default on our debt in all but name. As for paying dues – it should be those that took the risk on Icesave accounts that pay their dues.

  • Marc February 28, 2010, 11:50 pm

    Alda,

    The newspapers in the low countries are reporting a resumption of the negotiations. Apparently not all lines were closed after the breakup of the negotiations. It seems Gordon Brown could do with some good news to boost his reelection campaign. The Dutch are reluctant and are denying the resumption.

    My guess is that Iceland is about to take centre stage next week in the british election campaigns.

  • jo6pac March 1, 2010, 1:06 am

    I think Argentina would be a more appropriate example.

    Peter
    The above problems were caused by dictator signing on to the Milton Freidman money plan for weak nations. That’s strip the money from the working classes hands. If Iceland thinks it has problems now by allowing an IMF take over you will become just like South America in the late 60s to early 80s. If you need more IMF proof just look at the Baltic States right now. If you haven’t read Shock Doctrine please do, this is coming to America soon and when it does the citizen of my nation think things are bad now well we haven’t seen anything yet. Sad because none of us should to pay for what went wrong with some one elses investment. Good Luck to us all in the future we will need it.

  • Andrew (the other one) March 1, 2010, 1:07 am

    Yes, some form of discussion seems to be going on. Hooray.

    http://www.ft.com/cms/s/0/f2cfeab2-249f-11df-8be0-00144feab49a.html

    @Michael Lewis

    “As for paying dues – it should be those that took the risk on Icesave accounts that pay their dues.”.

    Most of those investors also assumed that there was a deposit insurance scheme in place to cover at least part of their deposit in the event of a problem with the bank. For small depositors, there should have been no risk.

  • Peter - London March 1, 2010, 7:40 am

    “Peter the FT make an excellent point. As for taking £60 out of the pocket of ever man, woman and child, what do you think QE has done – devalued money to default on our debt in all but name. As for paying dues – it should be those that took the risk on Icesave accounts that pay their dues.”

    On the point of QE, that’s for the British people and Government to deal with. It doesn’t give Iceland the right to help themselves to the pocket of British Citizens.

    On the second point, bank depositors being risk takers, I’ll quote Mike(Nordic Analyst) verbatim as its an excellent explanation of exactly who and what depositors are

    ” On Jul 6, 2009, Mike (UK Nordic analyst) said:

    You seem to think a bank has nothing to do with the government. Wrong! A bank is a legal classification of entity created by governments through acts of parliament. In simple terms they are organisations licenced and regulated by the state. Banks thus carry both implicit and explicit guarantees provided by the government they are licenced by. The banks are controlled by the state and have priviledged access to funds and support from the Central Bank.

    Banks are NOT financial investment companies – they are licenced deposit-takers.

    And that brings me to the second point. When an individual deposits his or her money in a bank it is a deposit, it is NOT an investment. Two things characterise this difference. First, the deposit remains as money, it is not transformed from one financial asset into another. The money does not assume a new risk/return profile (even though a bank may offer a return). Secondly, the money remains the property of the depositor – it is not the property of the bank. The bank holds the money as a custodian and the money must be repaid on demand (even if a time delay is involved in term deposits).

    This explains why governments are ultimately resposnible for the operation of banks, and why they put in place deposit guarantee schemes. Such schemes act as a form of reassurance to the ordinary Joe – he doesn’t have to start worrying whether a particular bank is safe or not – and they also limit the operation of what a bank can do with the money it holds. (Capital adequacy ratios acheive the same effect.)

    Icelandic banks hold licences from the Icelandic government to act as deposit-takers. The fact that the Icelandic government acted as guarantor to the banks but then failed to control their operations does not relieve the government of the responsibilities taken on when it issued the licences.
    63.

    On Jul 6, 2009, Mike (UK Nordic analyst) said:

    I asked someone in the office to look up the Icelandic legislation. Here it is:

    http://eng.vidskiptaraduneyti.is/laws-and-regulations//nr/2826

    It’s all there as I expected it would be.

    Look at Article 3. It says at the start:

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

    1. Receipt of repayable funds from the public:

    a. Deposits.”

    So there you see that a bank must have a licence to do certain things. A licence issued by the government (or agents acting on its behalf).

    Also we have a neat definition of a deposit: it is a “receipt of repayable funds from the public”. Can’t get much clearer than that. A deposit is NOT a loan, and it is NOT an investment, it is a repayable receipt. The key word is “repayable”. This implies the two things I mentioned: the nature of the funds do not change with the receipt by the bank, and also the funds remain in the ownership of the depositor. The bank acts as a secure holding place of storage for the money, and has to give it back if asked. It is legally mandated that the bank has to give the money back on demand. End of story.

    But to go further – most developed countries want their citizens to feel that their money is safe in a bank. The one thing a bank cannot withstand is a “run” – when everyone decides to demand their moeny at the same time. So various guarantees are made. That is where the deposit guarantee comes from. The Icelandic government licenced Landsbanki to act as a deposit-taker and is the only competent body to act as guarantor of the deposits. “

  • snowball March 1, 2010, 10:39 am

    just a small remark for great eastern,

    the tzar debt was repaid by russia in the 90s. some investors made the “investment of their lifes” when they bought old tzar bonds and assumed correctly -with the rise of gorbatschow- that a nation will pay its debts if it wants to be taken seriously. even if its >70 years old bonds issued by the tzar in 191X. a similar story will happen here in iceland….in the near future one or more defaults but in the end repayment due to promising resources.

  • Bromley86 March 1, 2010, 11:57 am

    the tzar debt was repaid by russia in the 90s.

    Not sure that that is the case:

    French holders of Tsarist bonds who say they are owed 100 billion euros
    http://www.xe.com/news/2010-02-12%2008:48:00.0/954057.htm?c=3&t=103

    But still, it does look like a token was honoured:
    http://www.independent.co.uk/news/world/france-closes-golden-deal-on-tsarist-bonds-1354466.html

    “When you are in debt, you have to pay up. It is a matter of honour,” he said. “Russia will pay, and we will always pay what we owe.”

    Sound familiar? 🙂

    Apparently Russian honour was worth 1.25p in the pound (2bn francs out of 160bn francs). Hence, presumably, the first link.

  • snowball March 1, 2010, 1:25 pm

    …the tzar bonds were traded at french flea markets as some kind of decorative souvenir 🙂 for 5 francs/bond. the russian reimbursement for the bonds was in the range of ~500 francs/bond -> factor 100.

    a similar story is germany after world war II when the government under adenauer reimbursed all bond holders in france, us and uk -probably to their surprise- to restore its financial accountability.

  • sylvia hikins March 1, 2010, 1:44 pm

    My grandmother, a working class woman who, like so many others during the 20th century, worked from home sewing men’s waistcoats. She well remembered the Wall Street Crash, banks that collapsed, and the subsequent depression that put millions on the dole. Consequently, she had no faith or trust in banks. When my grandmother died, my mother discovered her life’s savings -£200- in the dust bag of the vacuum cleaner! So thank you Peter of London for your explanation that a cash deposit is a repayable receipt. That’s exactly why vacuum cleaner bags are no longer the object of choice for cash deposits!
    sylvia from viking wirral

  • Andrew (the other one) March 1, 2010, 2:00 pm

    They are still talking, or at least talking about talking (March 1st, 8 am in Saskatchewan, GMT-6).

    More importantly, it’s our wedding anniversary today.

    http://in.mobile.reuters.com/mobile/m/AnyArticle/p.rdt?URL=http://in.reuters.com/article/bankingfinancial-SP/idINLDE62010Z20100301

    I got this from the Reuters India news feed. The UK one doesn’t mention the story!

  • alda March 1, 2010, 2:23 pm

    Yes, they’ve been talking about talking all weekend!

    And – here’s wishing you a very happy anniversary. Oh, and big congrats on the hockey game last night. 🙂

  • Great Eastern March 1, 2010, 3:20 pm

    “the tzar debt was repaid by russia in the 90s. ”

    Haven’t heard that. Please be more specific. What I’ve heard is Russia devaluating ruble just cause it was unable to repay debts taken by Yeltsin. Tzar dug deeply into creditors pockets to finance WWI, battle crusers including. I find it hard to believe this amount was repaid. If would cost a battle fleet today.

    Anyway, ordinary people is one thing. They are ordinary because they decide nothing. Now when banks play their schemes then both creditor and debtor share the risk.

    Yes, Icelandic government and business elite managed to dug deeply into pockets of ordinary british, dutch and, surprise, surprise, fellow ordinary icelanders.

    Ordinary Icelanders taking down corrupt government in democratic elections for the reason of mismanagement until it’s too late – that would have been funny…

    The responsibility of nation for it’s government is in practice zero. Because in practice it can do nothing until it’s too late. Nation is a hostage actually.

    Responsibility of fat and rich Icelandic elite is another issue but it seems that powerfull allways can deal with powerfull. Haven’t heard british or dutch attacking individuals responsible for this spectacular Icesave crash. In fact, heroes of that crash managed to hide under the collective responsibility of the nation.
    That’s ugly.

  • Bromley86 March 1, 2010, 5:41 pm

    snowball
    the tzar bonds were traded at french flea markets as some kind of decorative souvenir

    Ah, in that case it’s very different to what you said.

    i.e. this . . .
    “the tzar debt was repaid by russia in the 90s”
    . . . is not true.

    Face value, not to mention accrued interest, was written off and a token amount paid. Great Eastern looks to have been right in that I’m sure that one could buy a pretty nice fleet for 100bn euros.

    It’s very similar to the investors (hedge funds?) that bought up debt in the Icelandic banks after the crash. They paid almost nothing for it, the creditors got a guaranteed but miniscule amount back & wrote off the rest and the hedge funds then gamble that they can recover more than the market expected.

    GE
    The responsibility of nation for it’s government is in practice zero.

    Actually, it’s the other way around. In practice it is entirely responsible for its government.

    Zimbabwe, Iran, China, US, UK, anywhere-else-you-might-name. The people might not even have a direct say in who rules them (excepting that the people choose not overthrow their rulers), but they’re ultimately responsible, if only because no one else will take that responsibility.

  • Andrew (the other one) March 2, 2010, 3:11 am

    @Alda

    “And – here’s wishing you a very happy anniversary. Oh, and big congrats on the hockey game last night. :)”

    Thank you. We couldn’t go out, as our eldest son goes to Beaver Scouts on Monday evenings! Maybe tomorrow…

    The (ice) hockey match was pretty exciting, and seemed to be scripted perfectly as Sid the Kid got the golden goal in overtime. Of course, I’m British, so I don’t understand the rules.

    The New York Times is pessimistic about talks at the moment:

    http://www.nytimes.com/reuters/2010/03/01/business/business-uk-iceland-referendum.html

    And so is the Globe and Mail in Toronto:

    http://www.theglobeandmail.com/report-on-business/iceland-stares-into-icesave-abyss/article1482629/

    One of the suggestions in the comments to this article is that Iceland should become a province of Canada 🙂