The British government has requested further talks with Iceland’s negotiators over the Icesave issue. The British want to come to a deal that will stop next Saturday’s referendum on the December deal going ahead.
Following the unsuccessful talks which ended on Thursday with the British and Dutch, the Icelandic team intended to travel home on Friday but British authorities wanted them to stay. It was decided that a part of the team, including Lee Buchheit, would stay in London. Negotiators Gudmundur Arnason and Larus Blondal arrived in Iceland on Friday but returned to London again yesterday.
British and Icelandic representatives met yesterday and intend to continue their talks today.
According to Visir.is, the British are making a concerted last minute effort to stop the Icelandic public voting in Saturday’s referendum on a loan deal agreed by parliament in December. Senior civil servants and politicians in London fear the expected ‘No’ vote could prove a dangerous precedent to other countries in financial difficulties. They do not want the general public to be able to decide matters of national debt, Visir reports.
Dutch officials are not at this weekend’s meetings, as the Netherlands is currently being governed by a caretaker administration with little or no real power to negotiate international treaties.
If the Icelanders and British are able to hammer out a deal though, it is considered likely the Dutch would also accept it.
Senior civil servants and politicians in London fear the expected ‘No’ vote could prove a dangerous precedent to other countries in financial difficulties.
What ever happened to “We don’t negotiate with terorists”?
Just kidding, but there’s a serious point there. If (!) Icelanders vote “no”, then this particular debt (or “debt” if you prefer) then continues to be negotiated or goes to court. So the vote doesn’t directly determine the outcome.
If the British roll over and give exceptionally generous terms just to avoid the referendum, then the threat of the referendum will have been seen to directly determine the outcome.
So, back to my original joke. Just as with terrorists, by doing it once the UK will actually increase the likelyhood of other countries allowing the general public to be able to decide matters of national debt.
Negotiation is the best solution to a problem with out force and intimidation but remember that the damaged has been done and the horrendous effect is felt by the population in Iceland . If no agreement can be stipulated then let the people decide through a referendum. Whatever happens at least, the decision was made by the majority who shares the burden of payment. Sufficient time has been given. Also, remember that the delay will increase the risk of default.
Negotiations are always decided at the last possible minute. Otherwise, one side gave way too easily. Expect this to go to the wire.
“If the British roll over and give exceptionally generous terms just to avoid the referendum, then the threat of the referendum will have been seen to directly determine the outcome.”
Generous terms? Iceland is proposing a no win/no gain deal and UK/Holland is proposing a deal that involves a substantial profit to UK/Holland through interest arbitrage.
http://thedutchiceland.com/
greece is in financial difficulties, we don’t see the other euro zone countries coming to her assistance, because if you help one out, the others will jump on the bandwagon, i really do hope the icelanders reject the deal, the british government, whether it’s labour or conservative don’t believe in referendums, because they know how the people would really vote
Generous terms? Iceland is proposing a no win/no gain deal and UK/Holland is proposing a deal that involves a substantial profit to UK/Holland through interest arbitrage.
You’re right. Silly UK, they should offer loans to everyone at zero interest.
Your point might have some validity, but certainly not in the context of my post.
How is this arbitrage? Do you have any idea what interest rate the market would assign to a loan to Iceland?
How is there no gain if Iceland borrows money for X years at zero interest?
Will you please be my bank manager? :D
Dear Karl,
If you know how the British government can finance its budget deficit (currently projected at £178 billion for 2009/10) at the LIBOR rate (currently 0.9% pa), could you please send an email to Robert Stheeman at the UK Debt Management Office; because he’s having difficulty selling gilts at less than 4% pa at present.
Thank you!
Bromley86 says
“If the British roll over and give exceptionally generous terms just to avoid the referendum, then the threat of the referendum will have been seen to directly determine the outcome.”
Roll over might well be your perception, mine would be an acceptance to move towards a more rational settlement, a step back from the position of bully who would soon themselves in the unwelcome spotlight
The Brits would have preferred to hammer home a deal on the quiet with Iceland using all the leverage at its disposal against a country with a good image, on the brink. The referendum was not anticipated.
Already the referendum issue has gathered a deal of publicity outside Iceland and the perception is not favourable to Britain.
The referendum and its predicted result will attract more media attention and put more pressure on Britain and the Dutch to a lesser degree.
Could it be that this is a publicity stunt from UK to be able to say that they were trying to come to a deal untill the last minute, Specially after de liked documents, and that the “Iceland walked out of the talks” lie didnt acctually work.
@easy
Or just maybe they actually want a solution too!
Roll over might well be your perception, mine would be an acceptance to move towards a more rational settlement, a step back from the position of bully who would soon themselves in the unwelcome spotlight
Well, that apparently wasn’t what Visir was reporting as the motive. Not that they’ve necessarily got it right.
To rene (nl):
I like the idea of the http://thedutchiceland.com/ url you supplied, but I see two problems:
1. “DutchIceland” is cumbersome. Can we make it “DiceLand”? Then dot the island with casinos…
2. The UK might object to being shouldered out. To solve this we might make the new outpost “Netherlands United Kingdom of Iceland” (it will fool them because they use an apostrophe for the possessive). The long name is cumbersome, too, so we might shorten it to “NUK-Iceland”, or “NUKI”.
Though then Gerry Brown might put it on a list with Iran and North Korea…….
Hej Icelanders, if you think UK/NL offer such a bad deal why not borrow the money elsewhere (Russia?, Norway?) at better terms and pay off UK/NL? I am sure Russia doesn’t mind offering interest discounts and a two year grace period as wel…
@Bromley86
“by doing it once the UK will actually increase the likelyhood of other countries allowing the general public to be able to decide matters of national debt.”
I know it is bad for the UK banksters but i think the general public
in all the countries of the world would have a better live because of it
>I know it is bad for the UK banksters but i think the general public
in all the countries of the world would have a better live because of it
What do you base that conclusion on? In Iceland’s case (which is a very unusual one), allowing public choice would lead to automatic sovereign default in 2011.
Bad for their creditors, certainly. But also likely extemely bad for Iceland. After all, if sovereign default wasn’t a big deal then Iceland would have done it already and we wouldn’t be discussing a loan to cover the guarantee.
@Ralph,
Actually there have been rumours of Norway being prepared to give Iceland a loan to cover its icesave debt at a rate of 3,5%
But I have nothing seen about it recently. Perhaps anybody knows about it?
A loan from Russia has been discussed in the past. In fact, the Icelandic goverment gave the impreassion that it was certain (they were wrong, as usual)….but Russia made it clear that it was not interested.
“What do you base that conclusion on? In Iceland’s case (which is a very unusual one), allowing public choice would lead to automatic sovereign default in 2011.
If the public of Iceland choose to say no in the referendum and the
country defaults in 2011 (which is doubtful) then it is the will of the people and i am sure they know the risks of a no vote
And further more if the bill is voted down then the only way for the
Brits ans Dutch to get money from Iceland is to go to court
In court the case is lost for UK and Netherlands
“But I have nothing seen about it recently. Perhaps anybody knows about it?”
The rate was exactly the same as the Icesave loan but without a interest free period of course. The Norwegians have stated that its dependant on the Icesave debt being sorted out first.
“Norwegians have stated that its dependant on the Icesave debt being sorted out first.”
Silly me.
Yes, the British Ambassador was trying to persuade the Norwegians to lend, but the British/NL loan is better value and that’s not acceptable so a Norwegian Icesave loan would be pointless.
If the public of Iceland choose to say no in the referendum and the country defaults in 2011 (which is doubtful) then it is the will of the people and i am sure they know the risks of a no vote
Actually I wasn’t talking about Icesave, but rather the effect of allowing people to vote on the renewal of debt necessary in 2011, which is presumably the sort of thing that you were talking about.
California is a perfect example of what can happen when you give Joe Sixpack a say, and they haven’t had a proper crisis.
In court the case is lost for UK and Netherlands
Another unsupported and optimistic opinion. Good luck :) .
Actually I wasn’t talking about Icesave, but rather the effect of allowing people to vote on the renewal of debt necessary in 2011, which is presumably the sort of thing that you were talking about.
If the sword of no repayment hangs over the heads of creditors
they would be more reluctant to lend huge amount of money to “states governments” on the presumption that the public is willing to go to taxpayers hell to repay it
But that of course would blunt the wepons of the IMF and WB witch
thrive on over leveraging nations in need
But actually i was talking about Icesave
That is what the referendum is about in Iceland not renewal of debt 2011 but a “loan debt” (never got the idea behind those definitions that the Brits and NL chose call it since the people and the government of Iceland have no obligation to back up failed banks in UK and NL according to EU laws and therefore need no loan)
In a nutshell the Icesave dispute is not important per se but the implications that the public can have a say is disastrous
for the money sharks
“implications that the public can have a say is disastrous
for the money sharks”
Its disastrous for a country that is running a 15% deficit and needs to borrow to cover that and future roll-over of debts.
Iceland’s economy looks so very good at present becuase its borrowing money from those ‘sharks’. Once you cannot borrow, you will go down for a long time.
” the people and the government of Iceland have no obligation to back up failed banks in UK and NL according to EU laws and therefore need no loan”
That is precisely the dispute. The British and Dutch governments contend that an Icelandic bank, operating under the Icelandic Financial Supervising Authority does have to be covered by the Icelandic government, if the financial insurance scheme is inadequate to cover losses.
Legal opinions on this differ. The directives are ambiguous. But that is the dispute.
I’m going to repost this as its pretty specific.
” 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. End of postscript.”
“Its disastrous for a country that is running a 15% deficit and needs to borrow to cover that and future roll-over of debts.”
In fact the import export ratio is positive for Iceland
The deficit you talk about is in the money sector and traces back
to when European banks (manly German) issued so called glacier bonds
These bonds carried high interest rates (over 10%) and were very popular
How it worked was that you bought these glacier bonds which were in facto Krona (Iceland currency) and let them sit for a fixed time period then sold them and pocketed the interest
Then the crisis hit and Iceland implemented currency flow restrictions and the bonds could not be exchanged for non
Icelandic currency
So there is a huge mountain of Kronas owned by European eking to
leave and cant This mountain is added to the deficit and is a big part but of cause not all
What the Icelanders should do is to abolish the currency restrictions inflation would skyrocket and the Krona would be
heavily devalued so it would be much easier to get rid of this mountain of Krona (Let the market fix it self)
It will be painful but only for a short time
Iceland’s economy looks so very good at present becuase its borrowing money from those ’sharks’. Once you cannot borrow, you will go down for a long time”
It is borrowing money from the IMF to keep up the value of the Krona
as instructed by the IMF so the money sharks which own Kronas get
a better exchange rate
Iceland does not need loans to survive
In realty they dont need loans period
“This explains why governments are ultimately resposnible for the operation of banks, ”
Does this also apply to the Inter-Alpha Group?
To Peter London/Krakow:
As usual you fail to see the real issue. It is NOT about whether the private Icelandic banks were licenses do take deposits, of course they were!
The issue is when a private bank fails, whether the people from the home country are REQUIRED to pay for a deposit guarantee, even if it is AGAINST the laws of their own country.
The purpose of the Icesave agreement laws is to change the laws in Iceland to authorize this deposit guarantee. If those laws are voted down in the referendum on Saturday (if it goes ahead), there is NO LEGAL WAY for the Icelandic government to pay anything to UK/NL or accept any debt regarding this. This is why the June 5th agreements specifically state that they have to be ratified by Althingi, BEFORE the loans can become effective.
If UK/NL governments think they can somehow force payments from the Icelandic government, irrespective of having a signed agreement that has been legally ratified in Iceland, according to the constitution, they are welcome to try.
“The issue is when a private bank fails, whether the people from the home country are REQUIRED to pay for a deposit guarantee, even if it is AGAINST the laws of their own country.”
Whether the people of Iceland are required to pay by Icelandic law can only be answered by an Icelandic legal expert. However, they certainly are required to pay by international treaty obligations that their democratically elected Government freely entered into on their behalf.
So basically, the people of Iceland are voting on whether to commit a sovereign default, using the potential conflict with internal Icelandic laws as a justification. Considering that these laws are written by the same democratically elected authorities that entered into the treaty obligations, it is no excuse whatsoever. It will be viewed, quite rightly, as a deliberate default.
The very fact that they are voting on it is already doing massive damage to Iceland’s international reputation and credit-worthiness. Who would want to lend money to people who may later deny responsibility and hold a vote on whether to repay it?
Welching on international treaty obligations is the act of a de facto failed state.
@bjarni
“If UK/NL governments think they can somehow force payments from the Icelandic government, irrespective of having a signed agreement that has been legally ratified in Iceland, according to the constitution, they are welcome to try.
”
I don’t think that is in their minds. Remember that that the British and Dutch wanted an all party consensus from parliament, so that any agreement reached would get ratified. Of course, there is then the presidential veto scenario.
Would it be a fair comment that the interest rate issue is really less important than the other terms in the proposed agreement?