Pretty significant piece of news today: a Memorandum of Understanding was made public which reveals that British, Dutch and Icelandic authorities met in 2006 to discuss what would happen if Landsbanki went into default and could not cover the deposits of British and Dutch savers in the Icesave accounts.
The MoU makes clear that the rights and obligations of the Icelandic state were discussed at the time and a stipulation made that the Icelandic deposit insurance fund should cover the rights of Icelandic citizens if push came to shove with regards to Landsbanki. However, no mention was made of a state guarantee in this context.
Those of you who have been following this sorry tale will know that there is currently massive dissent in Icelandic society and in our parliament over a recent agreement between Icelandic, Dutch and British authorities for repayment of those deposits. The deal is that the assets of Landsbanki should go towards paying the Icesave debt, and the Icelandic state should be liable for the rest. These are colossal sums that will place an extraordinarily heavy burden on the 300,000 of us who make up this tiny nation, and the Big Question is this: should the Icelandic state, a.k.a. we the taxpayers, be responsible for repaying the debts incurred by private institutions – the banks? Before the big meltdown, the only stipulation was that we had to have a deposit insurance fund in place – but obviously a deposit insurance fund in tiny little Iceland couldn’t support the collapse of an entire banking system, as British and Dutch authorities were clearly aware. So – is it right to demand that the state guarantee the deposits, since the legal framework was all in place? Or is this a case of force majeure?
There has been an incredible amount of secrecy surrounding the whole Icesave debacle, which of course is insufferable – we who are being made responsible for the debts should have all the documentation and information up on the table, not shut in some big vault with only a select few being granted access. The secrecy being lifted from this MoU today is merely a tiny step in the right direction … and look at the information it contains! British and Dutch authorities were clearly very aware of the risk that was being posed. And even more infuriating is that, in the above-mentioned agreement, there is a clause STIPULATING that this MoU should be considered invalid in the current agreement.
Which raises a whole new set of questions.
In any case, the Icesave agreement has yet to be passed by Althingi [our parliament] and with each new piece of information that surfaces it looks less likely that it will gain majority approval. Meanwhile, Icelandic authorities are getting veiled threats from Dutch authorities – that if the Icesave agreement is not passed, they will not support our application for the EU, Dutch media reports today. Similar rumours have been circulating concerning the British. Delightful.
AND THE WEATHER IS TURNING COLDER
In a couple of days, EPI and I are off on our annual hike with our hiking group, this time up north, near Akureyri. After this looong stretch of exceptionally beautiful weather, guess what? The weather office has issued a COLD WEATHER WARNING. Yep – it’s even supposed to snow tonight up north, and temps to drop as low as 3°C. Right now 14°C [57F]. The sun came up at 4.03 [so late!] and set at 11.03 pm.
More on the delicate subject of Iceslave
On becoming an Iceslave
I get dizzy trying to understand the sums
On the status of the Icesave debacle
Comments on this entry are closed.
The burden should not fall on Icelanders who had nothing to do with this mess.
The people responsible should be the sole bearers of any burden.
The people and their countries who knowingly took risks with their money need to bear responsibility for their speculation.
Iceland deserves to gain the EU membership that it seeks.
I hope and pray for what is right and fair to be the outcome.
It still seems strange that parliament put so much effort into EU discussions while the Icesave discussions were in progress. If parliament rejects the current Icesave agreements and the government (if it survives that defeat) doesn’t quickly negotiate amendments (eg a reduced interest rate acceptable to both sides), then Iceland’s EU vote may inevitably become irrelevant. I still think it’s a pity that UK, NL and Iceland didn’t agree a lower interest rate in the first place. Any idea when parliament will vote on it – I guess sometime after the summer break?
Regarding force majeure: if bank collapse is the specific extreme event that is explicitly being insured against, then it could seem cheeky to argue that bank collapse is the force majeure…
If the European Union won’t have you, please consider joining the US. I think you could bring a lot to the party, and we would love to have you. It might be a better fit, you know.
“The Big Question is this: should the Icelandic state, a.k.a. we the taxpayers, be responsible for repaying the debts incurred by private institutions – the banks?”
No (though of course, we are seeing this in the US with the bailouts). Arguably, the legal framework was not in place (beyond the standard insurance fund in Iceland) if there was no state guarantee. Even if there were a state guarantee, it would be null and void due to the concept of Impossibility, or the inability of the Icelandic people to cover the debt should default occur – at the time of default. A party cannot agree to terms in a contract that it simply cannot fulfill.
So I’d say no Force Majeur (was there even a clause in their agreement and if so, what did it say?) — more like caveat emptor to the British and Dutch authorities, and shame on them for pulling this crap when they knew full well the risk they were taking and allowing their citizens to take.
I don’t understand why the deposit insurance in force in the country where a bank does business shouldn’t cover the losses. To me, this speaks to a shortcoming in the regulatory structures in Holland and the U.K.; they should have stipulated that in order to do business in their respective countries, Icesave would need to be a charter member of their national insurance scheme. HSBC does business here in Canada, but if it were to fail for some reason, the Canadian Deposit Insurance Corporation would cover any deposit shortfall, up to $100,000; it certainly wouldn’t go back to the taxpayers of Hong Kong. It seems ridiculous that this should come back to the Icelandic taxpayers.
>The people and their countries who knowingly took risks with their money need to bear responsibility for their speculation.
Who would those people be? Everyone, and I do mean every single person, who deposited with Icesave was under the impression that their deposits were guaranteed to a certain level. By a state.
Admittedly, a number would not have known the precise details about whether that guarantee came from their country or from Iceland. Those that did know that it came from Iceland and who were concerned would have been reassured by the statements from Landsbanki that said that the state would back the guarantee.
>The burden should not fall on Icelanders who had nothing to do with this mess.
So where should it fall? Icelandic companies regulated by Icelandic institutions were allowed to place the Icelandic state in jeopardy by the Icelandic government. And that’s without mentioning the corruption that does seem to be a constant in the political and business culture in Iceland. (I know, I’ve gone overboard on the “blame Iceland” point here, but the burden has to fall somewhere and a sovereign state is a sovereign state, no matter how small.)
Regarding the Force Majeure argument, if we accept it, would not the collapse of Landsbanki by itself not have consituted such a situation? In which case, could a deposit guarantee system have been accurately said to have been set up? This appears to be a part of the argument taken by the EU when it clarified that the EU/EEA deposit guarantee system is backed by the state.
When the UK and the Netherlands put pressure on Iceland it may not be delightful, but that’s exactly what governments should be there to do. I doubt many in Iceland had a problem with the government extending the fishing limits back in the 70s. Nor with threatening to pull out of NATO if they didn’t get their way. Personally, I think that it’s a miscalculation to publicly link the Icesave/application issues as Iceland as a whole are hardly keen to join the EU (if anything, some are likely to change their minds on the Icesave agreement just because they don’t want to join the EU 🙂 ). It’s not like the pro-EU MPs won’t have considered that, even ignoring the UK and NL, the EU as a whole would be likely to reject Iceland’s application if the deposit guarantee was avoided.
BTW, anyone have a link to the MoU as I’m unclear as to what it’s actually saying?
Just as bad is the fact that the UK government did not warn our local council authorites that surplus funds that they were depositing were not covered by cast iron guarantees. But then the council execs should have followed the maxim that if something was too good to be true, it probably was. God knows, they’re paid enough.
It seems that over the last 10 years the political/financial elites of our respective countries have been playing fantasy economics, the bonus for them being that the only real losers was us, the public. Your spivs have trousered their millions and headed for the hills; ours are still in place, paid advisors to the government or retired on pensions most couldn’t earn in wages over numerous lifetimes.
Meanwhile our miserable UK government clings to power until the bitter end. They don’t care that they are going to lose at the next election: their MPs have prospered way beyond their wildest dreams and will retire on massive pensions paid for by us, even as the private pensions that we were forced to take on disappear down the crapper.
At least you guys got out and brought down your government by surrounding your parliament until they resigned; we can’t get within a mile of ours thanks to a law Labour passed under anti terrorist legislation. Or could it be they saw the crash coming?
I had the “privilege” of sitting down for coffee and cookies with a Dutch family many years ago. The 1 cup of coffee and the 1 cookie was served and that was it. No refills on the coffee and no more cookies. This wasn´t might first experience with the Dutch but I did make it my last. They are by far the cheapest bunch of bastards on the planet, too bad that the Icelandic negotiators were obviously never exposed to the Dutch culture or they would have known that you need to count your fingers after shaking hands with a Dutchman.
Carl, seems rather hasty to judge all of the Dutch people by your encounter with one family many years ago.
No mention of this in Britpress, for some reason?
Whatever, enjoy your time away in the far north!
>I don’t understand why the deposit insurance in force in the country where a bank does business shouldn’t cover the losses.
There have been a couple of posts in this vein. EU regulations allow for the sort of situation that you described with HSBC in Canada, namely the creation of a subsidiary that is then regulated (and insured) by the host country. This is what Kaupthing did in the UK (but not Germany).
So far, so good. But what the EU (and EEA) regs also allowed for was the setting up of a branch (i.e. not a subsidiary) in another country – often called passporting. In these circumstances, the home and not the host country is responsible for regulating the bank. Likewise, the home country and not the host is responsible for the minimum deposit guarantee. (In both the UK and NL’s cases, the total guarantee was higher. The UK and NL governments have paid the difference out of their own compensation schemes.)
Now, that may be a “bad” rule. More likely it’s a rule that works fine normally but which was never designed with a micro-country’s oversized banking sector in mind. Bad rule or not, it’s not for the EU to tell Iceland how large it’s banking sector can be. That’s a decision for Iceland to make.
Likewise, in response to Frank’s point, whenever anyone suggested that there might be problems with the Icelandic compensation fund, Landsbanki either threatened to sue, issued a statement saying that the guarantee was government backed, or both. So no official UK, Dutch or German body could publically warn against Icelandic banks. That’s not to say that the councils/charities acted correctly – even forgetting that they might be expected to be more savvy than a retail depositor (which is why the UK government isn’t bailing them out), the bottom line is that they were depositing millions and the guarantee was for ~£16k.
Regardless of all the legal stuff I could understand every Icelander, who is not willing to pay for the debts incurred by those crooks.
But not to have the agreement passed by parliament is not yet a solution. Is there any alternative plan on the table? Like a referendum as proposed by some – with a ‘No’ as very likely result – and then a request for renegotiations? Hopefully this wouldn’t bring those back to power, who are responsible for the mess. And I hope, Iceland has cared for more new best friends than just Russia to withstand the pressure after such a decision.
The Banks were not private businesses, they are guaranteed by the state. The profits were privatised.
Besides, liability for the depositors fell to Iceland becuase it allowed the bank to operate protected by Iceland’s protection scheme and it allowed the bank to take far more deposits than its protection scheme could cover. Its the responsibility of the Icelandic regulator to ensure banks borrow to the limit of the protection, not decide the limit of cover that they provide. If the fund was short they should have increase the fund or preventing any more deposits.
All these actions are the responsibility of the democratically elected Iceland Government.
Another thing that ensure that Iceland is liable – Icelandic depositors were protected 100% which automatically extends that protection to EU depositors.
Peter – London:
But the actions were also undertaken by the British and Dutch governments by meeting with Icelandic authorities and Landsbanki and entering into an agreement knowing full well that if a default occurred, the insurance fund could not possibly cover all of the losses. They were essentially hedging bets that default would not occur, and they lost. Their own regulatory framework didn’t protect their citizens by requiring that sufficient reserves were in place before they allowed Icesave to operate in their country.
Jessie. No insurance fund in the world can cover the losses by itself. They all have to borrow from the government and then pay that back with a levy on the remaining banks over a number of years. Of course, Iceland effectively has no remaining banks, but the point that I made about the force majeure argument is that even if only Landsbanki had failed, the remaining Icelandic banks wouldn’t be able to cover the guarantee anyway. So therefore the Icelandic government/regulators had failed in their duty to ensure that the deposit guarantee system was correctly set up.
The FSA & NL equivalent had no choice. They could not have stopped Icelandic banks even if they wanted to (which they did). Even when they managed to arrange a gentlemans’ agreement, as the NL did, that Landsbanki would not take more than X, Landsbanki exceeded that and just thumbed their nose at the NL regulators.
Another request for a link to the MoU. Icelandic is fine as I’ve not been able to find it in English. Failing that, the term “Memorandum of Understanding” in Icelandic (not anglicised) would be a help 🙂 .
Oh, and it looks like your politicians haven’t heard that there’s a crisis on 🙂 :
Bromley: Even when they managed to arrange a gentlemans’ agreement, as the NL did, that Landsbanki would not take more than X, Landsbanki exceeded that and just thumbed their nose at the NL regulators. — I’d be interested to know your source for this.
As far as I’m aware, the MoU is not available online. Icelandic: “minnisblað”.
Oh, and it looks like your politicians haven’t heard that there’s a crisis on — what makes you arrive at that conclusion? Because they’ve decided to take a break instead of remaining in parliament until September without a resolution to the Icesave dispute? The opposition has announced it will employ obstructionism tactics until September.
Hi Alda. I’m having trouble locating an English language source, but I heard it from Niels over on IceNews and he links to Dutch sources.
The relevent link googlated (sorry, still haven’t worked out how to copy the translated text without the original Dutch):
Regarding the politicians and the Agreements, I’ve not seen anything that would indicate a delay is helpful to Iceland. It may still get the next tranche of IMF/Nordics funding, but it may not and that will presumably affect the recapitalisation of the banks that’s finally been agreed. The EU application may stall, although I assume that along with embarrassing the government is the aim of the opposition’s threat to obstruct.
I suppose it all boils down to what benefit is there to Iceland to delay. Either accept it or throw it back for renegotiation, but delaying the signing agreement just wipes out what little good will there is left with the foreign negotiatiors. It’s already been nine months since the MoU with the Dutch at 6.7%.
Thanks for the “minnisblað”. As InterTrans machine translation of Icelandic is miserable (unless politicians do “snuggle up” 🙂 ), I’m still confused as to what this MoU said. Was your source the mbl article?
I did scan the Agreements though and couldn’t see a clause stipulating that the MoU should be considered invalid, although that’s likely just because I didn’t know exactly what I was looking for.
Sometimes it good to dispense with the legal niceties and look at it in terms of power. This is what the Brits and Dutch are doing – they think they can bully Iceland(I don’t know what legal standing the Brit “anti-terror” legislation is meant to have.) The Brits especially are on shaky ground: they are hardly model Europeans,( more like an Atlanticist Trojan horse) and their own economy is imploding and there is no bottom in sight. I hope the Icelandic parliament calls their bluff and rejects the Icesave deal, and pushes ahead with the EU negotiations regardless. The EU proper obviously wants Iceland in and it has no interest in seeing its economy wrecked by City usurers who are sabotaging Europe anyway. Iceland with its instinctive social democratic outlook represents the future in an independent Europe; Britain represents its neo-liberal lunatic fringe in a past under US tutelage.
Bromley has some pretty good points. But as he stated, deposit insurance in no way is designed to cover such a masive collapse as this, which is why it does fall back to the regulators and eventually the government and the people.
Gloria does bring up an interesting option – how about becoming our 51st state (before Puerto Rico does) and letting the US government pick all that up?
On the question of deposit insurance it’s well known that these can never cover banking collapse. This article gives you the case of the US FDIC with typically 50 billion to cover total bankig deposits of 8.8 trillion. Iceland is being singled out to do what no one else can do. Reject Icesave deal!
Alda I was thinking about something regarding Icesave and the way that Icelanders have responded to the whole thing.
When you sign a long term loan in Iceland, once its paid up you will have paid about 4-5 times the initial amount you lent, given the high interest rates, the inflation index (verðtrygging) and all the additional fees that Icelandic banks slap on.
Im not aware of how things are in the rest of Europe, but here in the US you can expect to have paid back about double the initial amount of the loan. At least I know this to be true for auto financing, Im not a home owner yet so I dont have an experience with this.
So I wonder, if and how this changes the perception or rather maybe the negative expectations. I mean, at least the terms of the dutch and the brits arent indexed to inflation. I havent studied this but Im sure terms arent the same as individuals, home owners and those who have personal loans for whatever reason, are used to.
Just thinking out loud 😉
I vaguely remember from my brain washing sessions at university that in classical capitalism bank deposits are really loans, and that if a bank were to fail, the depositors and other debtors are entitled to the remaining assets of the bank and nothing more.
It also seems the wealthiest Icelandics have fled the country. It would seem any agreement should require them to cough up some cash.
Anyway, I have a genius solution. Instead of sending all your fish to chippies in UK, send them somewhere where they will be useful to you: North Korea. North Korea is short on food, and especially good food, but has more nuclear weapons and missiles than they need. If Iceland were to exchange fish for nukes that would certainly change the UKs (barely nuclear with Trident cancelled) and Netherlands (non nuclear) attitude. Think about what nominally nuclear powers like Pakistan, Israel, and North Korea get away with and I believe you will agree one or two nuclear armed missiles will change everything. In the worst case scenario NATO will be forced to occupy Iceland, but that would be just like joining the EU except you would get a coveted NATO base too. Not a bad deal either way, and Iceland is a lot nicer than Helmand or even Kosovo, so it is totally win – win.
For additional genius ideas please see “The Mouse that Roared”: https://en.wikipedia.org/wiki/The_Mouse_That_Roared
Jeepers it’s so complicated, isn’t it? There is a lot of calling for Iceland to take all the responsibility for the actions of a few of their elite, imagine if the same was asked of Britain, the Netherlands and the US.