An analysis by Gylfi Zoega, professor of economics at Birkbeck College, UK and the University of Iceland:
Two years ago, the Icelandic bank Landsbanki, which had nothing to do with the government, introduced internet accounts in Britain under the name Icesave that offered savers a higher rate of interest than local banks were willing to pay. Later Icesave entered The Netherlands and there were plans for further extensions.
The law in the European Economic Area allows banks to set up such accounts outside their home country.
As a result of the bank’s failure one week ago, more than 100 local councils, charities, universities, police authorities and fire services in Britain stand to lose up to £1bn in these savings accounts. While Alistair Darling, chancellor of the exchequer, has guaranteed personal deposits, the British government has not offered such guarantees to these organisations. The possible loss of money by these organisations would be a tragedy.
In spite of the apparent clash between the governments of Iceland and the UK, Iceland’s responsibilities are clear. According to Icelandic law, Iceland is liable to pay the first £16,317 (€20,887) to each account holder from its own deposit guarantee scheme. The rest, up to £50,000, is covered by the financial services compensation scheme in the UK.
The setting up of the Icesave accounts by Landsbanki is a manifestation of a market failure. The bank used the deposits to strengthen its liquidity, while at the same time imposing a very significant risk on the population of Iceland due to the size difference between the two nations. The number of Icesave account holders in the UK is equal to the entire population of Iceland (300,000) and this does not include deposits at the biggest Icelandic bank, Kaupthing (Kaupthing Edge), or internet deposits in other European countries! If the bank had survived, its owners would have reaped the rewards, while its failure last week imposes a burden on Iceland’s current and future generations. This is moral hazard at its worst.
The population of Iceland has suffered immensely from the failure of its banks; pension funds have been hit heavily; the country’s money market funds have been wiped out, thus also the savings of a very large number of people. Thousands of workers are losing their jobs, the foreign exchange markets have collapsed and the country is facing the very real possibility of not having adequate food and fuel in coming weeks.
During this period of crisis the British government decided to attack Icelandic businesses in Britain to protect the interests of Icesave customers by invoking anti-terrorism laws rather than contacting Icelandic authorities to seek clarification and collaboration. This resulted in the loss of assets which makes it more difficult to compensate Icesave account holders fully. This act was followed by formal negotiations in which the British representatives are seeking to make the Icelandic nation repay Icesave deposits beyond the deposit insurance scheme.
The Financial Services Authority could have warned about Icesave, limited its scope or shut it down altogether. They did not do any of these things. The reason that the British government is so enraged is that the government itself, in the form of the local authorities, invested hundreds of millions of pound in Icelandic banks.
The people of Iceland should not have to suffer unnecessarily from the consequences of decisions made by the billionaire owners of Landsbanki nor the rage of the British government.
Copyright The Financial Times Limited 2008
Iceland has been described as a Hedge fund by this very author.
Well, get this 90% of hedge funds have closed down this year.
They are making the biggest losses ever.
The US Treasury secretary has said he wants to close down hedge funds because of the unregulated and highly leveraged damage they do to the worlds economy.
Iceland was doomed to fail the moment it went down this crazy pyramid banking system, it would have failed this week or next month.
I agree. When the Iceland government made clear it’s intention to return all assets from abroad and protect domestic borrowers and savers first (a natural reaction of course) it caused other countries to try to identify and impound those assets (another natural reaction). How else could they prevent Iceland from stiffing everyone. Iceland is not even going to live up to it’s minimum guarante of 16500 under the passport plan.
You can get a good idea about Iceland’s attitude to living up to their guarantee to savers by looking at the banks in the Isle of Mann and Guernsey. Even now, they are not honouring their promise to depositors – many of whom have lost their life savings.
The UK used a law designed to protect the the economic interests of the UK. Iceland made its intentions clear: return all assets from abroad and protect domestic borrowers.
That was a catastrophic mistake by Iceland politicians, do not blame the UK’s response.
The Act that the Government used to impound Icelandic assets was the Anti-Terrorism, Crime and Security Act 2001 (not the Terrorism Act 2006). It is an act that brings together a number of powers, and it is incorrect to call it ‘Anti-Terrorism legislation’ when it covers a range of crimes including corruption and bribery, and crimes against race.
The Act allows the Government, among other things, “to ensure that we can meet our European obligations in the area of police and judicial co-operation and our international obligations to counter bribery and corruption.”
The Government can make an order to freeze assets if the Treasury “reasonably believes that action to the detriment of the United Kingdom’s economy (or part of it) has been or is likely to be taken by a person or persons”. Freezing orders cease to operate after 28 days.
A freezing order was made when the Icelandic Government was (a) not being clear whether it was standing by its legal commitment to fund savers up to the £16k limit, and (b) at a time when it was encouraging companies and pension funds to shed assets abroad and bring home capital. At a time like this it was essential for Iceland’s government to be clear and concise in its intentions.
Of course, there has been a lot of ridiculous nationalism on both shores as a result of this, partly understandable given that many Icelanders feel insulted, many UK savers face uncertainty, and newspaper headlines haven’t been helpful, but look through all the ignorance and name calling. The UK is assisting Iceland when it doesn’t need to, and Iceland is now being very clear in its obligations. Whether there will be the resources there to meet these obligations is another matter.
Oh for Gawd’s sake as we brits say…don’t mention the war!
“But wtf has your rant to do with the issue at hand???”
Well you started it! not by invading Poland I mean :) But by bringing up fishing territories :)
But still Nazi-germany blew up the Tuborg breweries, as you know good beer is priceless how are going to reimburse that :D
GreatDane: March 11, 1961, German Bundestag enacted a bill to pay 60 million DM to the victims of nationalsocialism in Norway. I’m quite sure the money was really delievered, we Germans are a bit finicky with our laws, you know.
But wtf has your rant to do with the issue at hand???
Gray, Germany: After the 2. world war you didn’t pay a single d-mark in reparaturen to Norway. The Norwegians starved because of you, and in Denmark you blew up Tuborg breweries!!! We shall never forget that!
To Gray, Germany,
Thanks god that Iceland unilaterally expanded their
fishery zone (and harming other nations) as you so well express this. This action has helped preserving the fishing stocks from the greedy overfishing performed by the German and British fishing fleet..(together with the rest of the EU fleet)
Gylfi omits to mention that the Bank of England will lend £100m to Landsbanki in order to progress this situation. I also wish to point out that there was no opportunity of earning big money with Icesave. Yes, it did offer good interest rates, but these were only marginally higher than what was available elsewhere. In other words, it was principally down to marketing and the widely held believe that in the worst case scenario the Icelandic deposit guarantee scheme would be honored, which attracted the large number of savers to Icesave.
But what baffles me, regardless of the magnitude of other recent seismic events such as the collapse of Lehman Brothers, surely Iceland’s Financial Supervisory Authority must have had a clear comprehension that there was c. 300,000 investors at Icesave well before what has now occurred, so why didn’t it act sooner?
One other point: A nation that is most prominently known for breaking international law when unilaterally expanding its fishery zone (harming other nations by doing so) doesn’t really have a strong standing to complain about another nation bending its national laws. Especially if it owes the citizen of that nation billions of Euros.
So, for every Icelander who suffers, there’s a foreign investor who will lose at least part of their money, many of them average folks whose life savings are in jeopardy now. And it’s far form clear if Iceland will be able to live up to its guarantees soon. Hell, the nation is bankrupt and has problems borrowing even 4 billions right now. In such a situation it’s only natural that representatives of the lenders move fast to secure all valuable assets within their reach to prevent them from moving down the drain. It’s the debtors’ task to come to an understanding with the creditors. Obviously, the Haard administration failed miserably in those early negotiations and wasted what little confidence may have been left. Imho it takes some, uh, creative logic to argue in such a situation that the Brits are at fault.
It has also to be pointed out that the people of Iceland elected the governments who are largely responsible for this mess. And they profitted from this bubble for years. So, of course, they aren’t totally innocent, just like a receiver of stolen goods isn’t innocent, or someone knowingly participating in a Ponzi scheme. Gylfi Zoega himself warned about the looming desaster last April: http://www.voxeu.org/index.php?q=node/1043
But where are his proposals to secure the investments of hundreds of thousands trustful investors? All he cared for was the future of the Icelandic people.
Really, under such circumstances, it takes a lot of chuzpe to blame the victims.
GreatDane said “According to Icelandic law, Iceland is liable to pay the first £16,317 (€20,887) to each account holder from its own deposit guarantee scheme.”
It is true that many people are not familiar with Icelandic law but My point is that to opperate in the UK, under UK Law it is supposed to be the first £50,000 to each account holder from its own deposit guarantee scheme.
I know of someone who invested his entire personal fortune after assurances from the parent bank and the credit scoring companies that the Icesave accounts and the Icelandic Banks and Government were safe havens for their money.
I am talking about over £500,000 pounds which has now vanished…
And the Icelanders are annoyed with the Brits…Come on
This is outrageous
Thanks a bunch.. where is the justice in that attitude hardly one to kindle friendship.
As regards the terrorism laws they were used because the Icelandic government used the ultimate threat not to pay! Quite right it is in fact an act of larceny on a grand national scale,, so the law was justly applied.
As regards going to Iceland the only trip I would venture is to go and capture our money back ,perhaps certainly not for a holiday.
So grow up guys and get a life you are totally to blame and should pay for your greed and sinful behaviour.
If sombody think that it is only the Iclanders or British communities that tried to earn big money – here is a story from New Tork Times last year, about some Norwegian communities trying to get the big money in the subprime marked in the US.
Some of the comunities did not play with the money the already had, but playeed with future income…
http://query.nytimes.com/gst/fullpage.html?res=9D03E7D81038F931A35751C1A9619C8B63&sec=&spon=&pagewanted=all
I can promise all of you that this was in the Norwegian news last year, but it seems to be forgotten now – the life must go on.
“According to Icelandic law, Iceland is liable to pay the first £16,317 (€20,887) to each account holder from its own deposit guarantee scheme.”
It sounds like many people aren’t really aware of this fact.
On another note – I don’t believe the authors reason for the government being so enraged – there is a distinction in the UK between local and national government – most of the councils that had money invested belong to the opposition parties and therefore there is political advantage in this situtation – bad jugement etc. The national government is under no obligation to pay these councils (local government) anything to make up for this short fall. The main reason they are so enraged is to make sure they look tough and give the perception that they are on top of the credit crush crisis because Gordon Brown Built his career as Chancellor.
I can tell you that there are many people in Britian who are not so chuffed that the government was able to use anti terrorism legislation to freeze the assets of Icelandic companies, I do not think that anyone would of considered this as the proper use of this law. Having said that Many British people are amazed at our regulator, the FSA and the Icelandic banks. It was publicly understood that your money is guaranteed upto a certain level (now £50,000) but that there is an exception for the Icelandic bank is a Joke.
Now you tell us.
I get it. The british chosen to put their money into Icelandic banks bec of the higher intrest.
More money!!!