Iceland’s Icesave debt: how much is too much?

icesave1-03923941The only inaccurate thing about The Times’ in-depth Icesave analysis is the headline.

One of Britain’s most respected newspapers, The Times this weekend published a column by Bronwen Maddox explaining the underlying arguments behind the Icesave issue and why Iceland may have a strong case for its reluctance to reimburse the UK and Dutch governments for their Icesave bailouts; although the article is careful not to absolve the Icelandic government and bankers of blame.

The headline, “Iceland says ‘Can’t pay won’t pay’ – and it is right”, is the only major factual inaccuracy, as the country has in fact said neither.

Maddox begins by explaining how ambiguous the European Union passport rules are for cross-border banking. The fact, for example, that UK banks overseas are insured up to GBP 50,000 by the British government is very good; but that Iceland’s banks were only insured by the Depositors’ and Investors Guarantee Fund (owned and operated by the private banks themselves), was no less legal. The fact that the fund contained barely one percent of total deposited funds was also legal, as the EU rules did not foresee a systemic banking crash.

By insisting the Icelandic government reimburse it in full, the UK government is stating that in the event of failure, a privately-run bank deposits insurance scheme becomes the immediate responsibility of that country’s government – but, Maddox points out, the EU rules do not actually say that at all.

The Icelandic government and a majority of its citizens have consistently shown support for paying the Netherlands and the UK back for the embarrassing failure of Icesave; the contention has always arisen from the terms of such a deal.

“The second [point] is that Iceland must pay not the amount set by its own guarantee rules nor even the British £50,000, but the full amount of British savers’ losses, even though the Government chose to pay out more than UK rules obliged,” Maddox says – continuing by saying that the description of this as a ‘loan’ by Britain and Holland is hypocritical because Iceland never asked for or approved the loan, which would amount to GBP 720 billion if the per capita amount is scaled up to the size of the UK population.

Maddox ends by lamenting the fact that the questions the Iceland case raises about EU banking rules have yet to be addressed, and by reaffirming the fact that Iceland’s bankers and previous government were indeed highly reckless and brought the situation upon themselves. But is that reason enough to rob Iceland of foreign aid and investment, potential EU membership, thousands of its citizens and decades of development?

The full article can be read on Times Online, here.

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