Forbes.com yesterday published an article about the Icelandic economy which reignites the debate over the British government’s treatment of Icelandic banks in the wake of the collapse last October.
The article by economist Arsaell Valfells appears under the title “Iceland: The Land without an Economy”. But the article is no anti-British tirade – also pulling no punches about “[Iceland’s] poisonous mix of FX-linked debt with revenues in local currency; its volatile small national currency; and the unpardonable neglect of the central bank to build up currency reserves”.
In the article the writer argues that the British Prime Minister’s actions were disproportionate and unprecedented – especially the forced sale of Kaupthing Singer & Friedlander (a UK run and FSA regulated bank) to ING-Direct. “Interestingly, two weeks later, ING-Direct got a USD 13.4 billion bailout from the Dutch Government and did not get the same treatment from the UK authorities.”
The writer furthermore argues that the UK government forced Icelandic officials to agree to pay the first EUR 20,000 of each Icesave account in order to access the IMF loan they needed, despite there being no Icelandic or EU law to force them to do so. However, he does not go on to explain the purpose or status of a Deposit Guarantee Scheme if there is no law to enforce it.
Despite this, he points out the UK government does not guarantee deposits held with UK banks operating on the Isle of Man or Guernsey because the government does not charge tax on those savings. Valfells points out that the UK government charged up to 40 percent tax on Icesave accounts, while the Icelandic government got nothing: “The British government collected all the revenue but demanded that the Icelandic taxpayer should absorb the risk,” he writes.
The original article on Forbes can be found here.
>Interestingly, two weeks later, ING-Direct got a USD 13.4 billion bailout from the Dutch Government and did not get the same treatment from the UK authorities
Well, the deposits in ING were not under threat to the extent that those in KE were. I see that he neglects to mention how long it took ING to sort out the panicked transfers out of KE that occurred before KE was transferred to them.
>The writer furthermore argues that the UK government forced Icelandic officials to agree to pay the first EUR 20,000 of each Icesave account in order to access the IMF loan they needed, despite there being no Icelandic or EU law to force them to do so. However, he does not go on to explain the purpose or status of a Deposit Guarantee Scheme if there is no law to enforce it.
He also ignores the fact that the EU apparently believes that there is a government guarantee of deposit guarantee funds, even if it’s possible to read the legislation as not saying that.
It’s also intesting to note that he’s focussing his ire on the UK, when in fact others, for example Holland, were just as assertive regarding blocking the IMF loan.
There’s also a random paragraph about how the UK was getting all the reward (taxes) whilst Iceland took all the risk (deposit insurance). Of course, he doesn’t mention anything about that being a decision made in Iceland which the UK tried to get Iceland to reverse.
I’m sorry he doesn’t understand the complexities of the offshore banking enviroment over here, but in that case he probably shouldn’t try to weave it into his argument.
His article back in October was likewise flawed.
Kaupthing didn’t get a bailout from the Icelandic government! That’s why they crashed. So, the comaprison makes no sense.
And the other “arguments” are nonsense, too:
- Iceland had a legal obligation under EFTA to pay back the insured part of the investments, 30000€. So, the Brits demanding only 20000€ in the first payment is a generous compromise that Iceland sholdn’t complain about. And it has been clear all of the time that the nations backing the IMF wouldn’t support any credits to Iceland as long as the investor problem wasn’t solved. Only fair.
- Isle of Man and Guernsey are not operating under British law, and the Brits have no obligation to bail them out. This has always been clear to the investors.
- The Brits taxed interests from Icesave accounts? D’oh! Since when is the fact that a nation taxes the income of its citizen a scandal? Doesn’t the Icelandic government tax any income form capital investments, too?
No,really, as Bromley said, that hack is either ridiculously uninformed, or deliberately distorting facts. Just a waste of time for everyone who is really interested in understanding the bank collapse.
Alex, why don’t you instead write a story about president Grimssons most recent brouhaha? He declared that Iceland has no obligation to stand by its guarantee of German investors moneys! Once again he hurts Icelands image in the world by making rediculous statements about issues that are absolutely not his business. What is wrong with this guy, does he have some medical issues? After the recent positive developments in Icelandic politics, it would be good if Grimsson would step back, too. This clown obviously isn’t able to adjust to the kind of diplomacy that’s necessary in this dfficult times. Get rid of him, too!
“The British government collected all the revenue but demanded that the Icelandic taxpayer should absorb the risk,” he writes.”
Why did Iceland use the Passport scheme and refuse to take advantage of the UK deposit protection scheme when it was offered to the – retrospectively – for a mere $200million?
Because its was to Iceland’s economic benifit – or so they thought. Borrow them money and don’t pay it back was the plan.
The EU (for it was they, not the IMF who forced the issue) didn’t agree.
Another point that has not been mentioned – it was the ECB who shut down Iceland’s banks by demand repayment of loans and making this knowledge public.
Read this
http://sedlabanki.is/lisalib/getfile.aspx?itemid=6795
Gray, I’ve seen someone else mention Grimsson’s comments on German Kaupthing deposits, but I couldn’t find anything in English on it. Do you have a link (even German would be fine)?
Regarding the EEA guarantee, it isn’t 30k euros but 20k euros. Funnily enough, the Icelandic cover is meant to be 20,887 euros, not that that makes much difference.
Here is the US Gov’s view on Icleand’s collapse
http://mirror.wikileaks.morphium.info/wikileaks-crs-reports/RS22988.pdf
@Gray, Germany
>This clown obviously isn’t able to adjust to the kind of diplomacy that’s necessary in this dfficult times. Get rid of him, too.
Fine idea… The protesters now have a new target; Bessastaðir.
That’s an interesting point about the UK obtaining tax on the deposits’ income, but Iceland taking all the risk. I had never thought of it in those terms before.
Here is quite a good article in English about the german perception of Grímssons remarks regarding the German Kaupthing customers:
http://www.dw-world.de/dw/article/0,,4015885,00.html
@Gray, Bromley
I fully agree with you. Comparing ING with KE makes no sense:
-Holland bailed out ING; Iceland was unable to do anything similar (I do not believe the fairy tale stories that Kaupthing would be able to inject enough capital into the icelandic banking system to avoid collapse)
-The dutch authorities never gave the impression that obligations (towards foreign customers of the bank) in case of bankruptcy would not be honoured
-there was no sign of massive capital outflows from ING to the Caymans as apparently has been the case with the icelandic banks in the UK in the chaotic final days before the ‘freezing order’.
@Gray, it is really unbelievable how this Grimmsson behaves. I think in this time of crisis he is just proving to be extremely incompetent. AFAIK Germany is by far the biggest creditor to Iceland . Iceland is really lucky that the german gov is less assertive than the UK and Holland since otherwise things for Iceland would be really desperate.
Now that he is also managing to antagonize the germans he certainly does not help Iceland very much.
Add to this Grimmssons ridiculous attempt to ‘sell’ keflavik base to the russians (while at the same time unjustly criticizing scandinavian diplomats for the fact that their govs did not pay enough to Iceland) and one can only conclude that he is incompetent.
on a lighter note, please read the boastfull speech (which is becoming legendary) that Grimmsson delivered in London in 2006:
http://www.grapevine.is/Home/ReadArticle/How-to-Succeed-in-modern-business-Olafur-Ragnar-Grimsson-at-the-walbrook-club
why should Iceland be able to tax UK based citizens i.e have their tax receipts. Iceland was able to tax the bank that made money from holding UK deposits. It cold also tax UK citizens based in Iceland.
>That’s an interesting point about the UK obtaining tax on the deposits’ income, but Iceland taking all the risk. I had never thought of it in those terms before.
It really isn’t. It’s the equivalent of a drunk in a station saying “Why are you reading a newspaper? It’s all yesterday’s news.”
i.e. factually correct, it makes you think “good point”, but as soon as you reflect on it you realise it’s bullshit. No one forced Icelandic banks to open up abroad and Landsbanki could have eliminated the risk by structuring its overseas operations as Kaupthing did in the UK.
Thanks Berit. As usual he has the diplomatic grace of a pissed rhino, but in fairness he doesn’t say anything new.
>Grimsson said he opposes full compensation for Germans who had savings in the troubled Kaupthing Bank, saying that Icelandic taxpayers should not be held responsible
No one has said that the Icelandic state should compensate depositors 100%. Well, there’s been some comment on the 100% guarantee for Icelandic deposits, but I don’t think anyone really expects that to be extended to everyone, so Grimsson isn’t being unfair here.
@Berit
Within the link Grimsson is quoted -
“It would be “unfair” for foreign investors to expect Iceland to bear the burden for the financial crisis, Grimsson told the FDT.”
He still doesn’t understand the difference between investors and depositors!
Hi Bromley, did find an article at Deutsche Welle World Services, which is usually a good source for German news in English, together with the English edition of Der Spiegel:
“Iceland’s President Cold to German Money Worries
Iceland’s president opposes compensating Germans caught up in the country’s banking collapse. But Germany responded by saying it still expects the money to be paid back.”
http://www.dw-world.de/dw/article/0,,4015885,00.html
Oh, and thx for correcting me, of course the guarantee is for 20,887 euros, not 30000. My mistake.
I am beginning to believe that some form of madness has taken hold at high levels of the Icelandic establishment. The Fisheries Minister issues massive whale-hunt quotas at the very time that Iceland is seeking the good will of anti-whaling nations on the financial front, Grimsson issues gratuitous opinions on matters that don’t concern him but that will antagonise one of Iceland’s major creditors, and Oddsson insults the Prime Minister and the intelligence of every neutral, but sympathetic, observer — and this is just THIS week. One begins to wonder where the serious, competent persons of responsibilty are hiding; Lost In Iceland? The government must get a firm grip, or Iceland will become a laughingstock.
> or Iceland will become a laughingstock
The Central Bank is already a laughing-stock and the challenge is to restore its reputation, but that can’t possibly start until after Oddsson leaves. Such a mess…
@Gray, Germany …
Q. “Since when is the fact that a nation taxes the income of its citizen a scandal?”
A. When the income tax is unconstitutional and 65% of our politicians do not pay income tax, and when the income tax is payed to off-shore bankers (federal reserve), so that they can “loan” us back OUR MONEY in the form of criminal bailouts, so that we can ALSO pay them back interest as well… thats when Income Tax is a scandal…. you can even hear the sheeple cry out for justice…. baaaahhh baaaaahh baaaaahh
“the income tax is unconstitutional”
Uh, sry, Michael, but your real name doesn’t happen to be “Wesley Snipes”, no?
:D
So here we see the other side of coin which is aspects underplayed and significance reversed in Jón Daniellson and Gylfi Zoëga article.
Of course that makes many poster boil and bring up other things. But actions against Kuapthing and effects of anti-terrorism Act on banking connections to Icelander it is all part of facts of case.
>Why did Iceland use the Passport scheme and refuse to take advantage of the UK deposit protection scheme when it was offered to the – retrospectively – for a mere $200million?
Only Landsbanki take it. Kaupthing took full subsidiary so had UK bank under authrity of UK FSA etc. KSF was UK bank.
Dont think such offer is what is presented as. Evidence would be nice of these offers made and turned down for Pound 200 MILLION. Jón Daniellson and Gylfi Zoëga mention and not seen actual refernces to verify. If exist someone has publushed.
>Well, the deposits in ING were not under threat to the extent that those in KE were.
From seizure by Brown Darling. Question of course is why were they not. All should be treated equal. ING branch.
>I see that he neglects to mention how long it took ING to sort out the panicked transfers out of KE that occurred before KE was transferred to them.
I hear you say this couple of times Brumley86 wear is that taken from?
@Fisy
++++++++++++
>Well, the deposits in ING were not under threat to the extent that those in KE were.
From seizure by Brown Darling. Question of course is why were they not. All should be treated equal. ING branch.
+++++++++++++++++++++++
Why?
Please have a look at my post above, that’s why.
Hi Fisy.
From the font of all knowledge, Wiki!
“The scale of the run on Kaupthing Edge deposits had been such that many transactions were not completed until 17 October.”
http://en.wikipedia.org/wiki/2008_Icelandic_financial_crisis
Just kidding. It was actually from personal experience. I have (had) a KE account, so I got to watch the transfer in person (I was watching a UK board called Money Saving Expert, so I saw that it wasn’t just me). It was not smooth and that was not primarily, in my opinion, to do with ING being incompetent.
The huge number of transactions that occurred after the transfer (and which were backlogged for weeks) would, in my opinion, have likely occurred even if KE was not transferred to ING.
People were just absorbing the effect of the Icesave collapse and were desperate to get their money into banks covered by the UK compensation scheme.
Regarding the 200m offer, it’s been reported on Icenews. I’m not sure what the final he-said-she-said determination was on who was lying (or lying more :) ), but in the absence of any other info it’s fair to assume that the offer existed.
http://www.icenews.is/index.php/2008/10/31/british-offer-to-guarantee-icesave-declined-by-iceland-central-bank/
@Ólafur
The commercial banks paid almost 12bn krónur in corporate tax to the Icelandic government in 2007. This is money which would have been lost to Iceland had the banks moved their headquarters overseas. Who was taking the taxes without wishing to take the risks?
>People were just absorbing the effect of the Icesave collapse and were desperate to get their money into banks covered by the UK compensation scheme.
Apologies, of course KE was in the FSCS. However people were so jumpy at the time as the realisation dawned that Iceland was not a “proper” country, banking wise (i.e. no credible lender of last resort or tax base to support their banks).
I was amazed and horrified to see that the population was just 300k. I hadn’t thought about it at all when I opened the account. I knrew Iceland was small, but nothing like that.