Despite some confused reports to the contrary, this weekend’s Icesave referendum result does not mean Iceland will withhold refunds to the British and Dutch governments for the money they lost bailing out Icesave account holders in 2008.
Some international media sources have framed the referendum as a simple question of “should Iceland pay the Icesave money back or not?” In reality, the question was much more complicated and even after Icelandic citizens voted against the repayment contract, the British and Dutch governments will still receive very substantial refunds.
The Icesave accounts in the Netherlands and the UK were operated by Landsbanki, which was based in Iceland. Landsbanki paid into the Icelandic Depositors’ Guarantee Fund in strict accordance with European law. However, no country’s depositors’ guarantee fund holds enough money to refund depositors after a total systemic banking crash of the magnitude which hit Iceland in autumn 2008. In the interest of domestic stability the British and Dutch governments therefore decided to refund Icesave savers directly when Landsbanki collapsed. They then sent the bill to Reykjavik.
Depositors are priority claimants on the bankrupt Landsbanki estate. This means that when Landsbanki’s assets are sold, they are first-in-line to recover their losses. By bailing out Icesave customers, the British and Dutch governments replaced the savers and became priority claimants on their behalf.
What the Icesave referendum was about was essentially whether or not the Icelandic Depositors’ Guarantee Fund should take a loan from Britain and the Netherlands in order to pay them back upfront (albeit with money borrowed from them) and therefore replace both governments as priority claimants on Landsbanki.
Icelandic voters decided on Saturday that it should not. This means that the British and Dutch governments remain priority claimants on Landsbanki.
Landsbanki now says it should be able to retrieve 90-100 percent of lost money for priority claimants over the next few years – including the British and Dutch governments. And furthermore, a third of that amount is due to be paid out this year. The Icesave referendum has no impact on the winding up of Landsbanki or to the payment amounts or time schedule. It only dictates to whom the money will be paid.
In the quite-likely event that the total Landsbanki winding up period returns all lost money to London and The Hague, the trilateral dispute would only be about interest payments during the time spent waiting for the money. The EFTA Surveillance Authority now awaits the response from the government of Iceland before deciding whether to start preparing a legal case against Iceland before the EFTA Court to establish whether or not the Icelandic taxpayer is legally responsible for the debts of Landsbanki – a private bank.
During the long negotiation process between the three countries and the three deals which were struck and then repealed (once by the British and Dutch governments and twice by Icelandic voters) the fundamental question of whether the taxpayer is ultimately responsible was never properly answered. As Minister of Finance Steingrimur J. Sigfusson told reporters this week: “Now it certainly will be”.
CORRECTION: The last sentence was supposed to end with “(200M Euros each)”
To Oystein-Norway,
Yes, you are correct. There were in fact exchange agreements signed with DK/NO/SE on May 16th, 2008, for total of 1.5B Euros (500M each).
There is a detailed description in the investigative report, on how difficult it was for the ICB get these agreements in place. See for example chapters 19.3.8 (p. 172) and 19.8.1 (p. 269-276) in book 6 of the report.
Basically, the Icelandic authorities had by then lost all credibility in the eyes of the other countries, and in the end only the three Scandinavian central banks were willing to sign exchange agreements.
There are some interesting descriptions how Stefan Ingves, the Swedish central bank chair, demanded for example to talk that same evening with the Geir Haarde, the prime minister of Iceland, to extract a promise that the government would force the Icelandic banks to deal with their problems and start shrinking their exposure. Of course, Geir Haarde gave the promise, the agreements were signed, but then, as we found out later, never he delivered on the promise.
It is therefore not surprising, that when the crisis hit in October 2008, the Scandinavian countries were extremely reluctant to release the funds. The ICB was therefore not able to draw on the facilities until October 14th, which was about a week after the crash, when it received foreign exchange assistance from Denmark and Norway (200B Euros each).
To RebelEconomist,
There were several serious mistakes done in the earlier IceSave agreements, that made passing them as laws in Iceland very difficult.
First of all it was all the secrecy involved. First not even the parliament members were allowed to see the agreements, then only some of the agreements were shown in a special locked room. By the time, all the agreements had been published (or leaked), there was a lot of suspicions by the public that turned out be difficult to overcome.
As for the agreements themselves, it was not only the terms, but also several other parts that caused much opposition:
1. Not following Icelandic bankruptcy laws (the Ragnar Hall issue)
2. Doubts whether Iceland would be able to pay back the “loan”
3. All the risks of the agreement to be borne by Icelandic taxpayers
4. Complete waiving of all the sovereign rights for Iceland
If you are interested you can read through the discussion thread of the following Icenews.is story:
https://www.icenews.is/index.php/2009/07/29/more-members-of-parliament-against-the-icesave-deal/
There were of course many other discussion threads, but this one encapsulates much of the discussion during the summer of 2009, when the agreements were published/leaked, and the opposition was forming.
In the end, I think the main thing that caused the agreements to fail, was the general belief in Iceland, that UK/NL were dictating all the agreement terms to their benefit and then basically telling us, take it or leave it. So in the end, we just said “leave it”.
Regarding how Iceland intends to protect deposits in its banks in the future, this is not a big issue yet. All the new banks are now limited to domestic banking only, and no one can move any serious money out of Iceland due to the foreign currency restrictions. This state of affairs is likely to continue unchanged for at least several years.
In the meantime, the Icelandic government provides the deposit guarantee in Icelandic kronas only. The government can also use the emergency laws at any time to stop potential bank runs immediately, by limiting withdrawals. This is unlikely to be needed anyway, since we do not really have any other place to go.
@Bjarni – Iceland got an forex agreement from DK/NO/SE in May 2008. This was at a fixed rate and the sum was 1.5 Billion Euro.
Thanks for your thoughtful response Bjarni. Iceland has cause to be annoyed with any country or international financial institution which promised a credit line to the state of Iceland and withdrew it just when it was needed. But in that case, why did Iceland turn down the loan terms offered by Britain and the Netherlands, which were supposedly modelled on an earlier Nordic loan to Iceland?
You often compare Iceland’s deposit protection scheme with those of other, larger European countries, but it seems to me that Iceland was a special case, because of its small size, especially in relation to its banking system. If the growth of Iceland’s banking system had been conditional on maintaining an adequate deposit protection scheme, I imagine that the banking system’s growth would have been constrained, and the impact on Iceland when it failed commensurately smaller. It would be interesting to know how Iceland intends to protect deposits in its banks in future.
To RebelEconomist,
Clearly the Icelandic government was working on the (incorrect) assumption that it would have access to emergency forex funds, from other countries (Nordic, US, ECB, etc.). They did actually have exchange agreements with other central banks, but those were shut off before the crash.
We can debate whether it was the correct decision or not, to turn down the increasingly desperate requests for help from the Icelandic Authorities during the months leading up to the 2008 crash, but it is clear it severely limited Iceland’s options during the crash. Note that I am not trying to excuse the Icelandic government here. Their ignorant behaviour before the crash definitely played a role in the refusal to help.
As for your specific questions:
(1) The laws 98/1999 were in fact published before the crash on the TIF web site. In there it is very specifically stated that TIF is a private institution funded by the banks themselves. All the annual reports of TIF are public information also, and there anyone can see the size of the fund (about 1% of the eligible deposits).
In case of a shortfall, TIF is allowed, according to the law, to borrow funds as needed. Therefore everything about TIF was known public information. But as often happens, many people decided to believe the “news” and other people’s opinions, rather than go straight to the source.
All deposit guarantee funds are in their nature limited to the size of the standing fund. The only real exception to this limit, is if the fund is allowed to borrow to make up for any shortfall in payments. But TIF was unable to do so in the immediate aftermath of the crash, as no such loans were available from anywhere.
Before the crash, the government in Iceland was simply not aware of the gravity of the danger it faced, and how quickly the situation could change. Therefore the possibility of near total crash of the banking system in just a week, was not prepared for.
All the Icesave agreements were actually structured as “loan” agreements to TIF, but the main sticking point was always whether the Icelandic government, as a separate entity, would be required to provide a “guarantee” for those loans, which is not provided for in the 98/1999 laws.
As for the current situation, the 2008 emergency laws did provide for a TOTAL guarantee by the Icelandic government of all ISK deposits located in Iceland. But as everyone here knows, this guarantee is kind of an empty promise, since if there is another complete crash, they would never be able to pay everyone out. But, with the currency restrictions, we really have nowhere else to go with our money anyway, so we are stuck within the current system, and no advice is therefore needed. :-)
(2) Where the EC Directive Article 3. forbidding state guarantee on the DIGF’s had relevance, was that Iceland implemented laws 98/1999 accordingly. Due to this article TIF was designed to be private institution, funded by the banks, exactly as stated in the Directive.
You say, that there are “other ways of ensuring that the deposit protection scheme is able to provide the required standard of compensation. As was demonstrated in the EU report referred earlier, high impact crash with only 3.24% payout is enough, to break the funds in all of the EU countries.
Iceland was faced with 85% payout, which neither private sector funding nor government support would EVER be able to cover. There is simply NO WAY you will ever be able to “ensure” the compensation in those circumstances (near complete crash) in any country, no matter what the Directive says.
The only way you can avoid this kind of disaster, is to step in immediately and stop the crash before it happens through bailouts and takeovers. Iceland, due to its small size and financial isolation, just didn’t have access to those options at the time.
You are not answering two points I am making Bjarni:
(1) Why did Iceland fail to explain to depositors in Icelandic banks before the failure of Landsbanki that in their view the timely payment of deposit insurance was limited to the size of the standing fund, and, given that the DIGF seems if anything to have even less money now, what advice are the Icelandic authorities giving to present depositors in Icelandic banks?
(2) It is irrelevant whether EU law requires or forbids a state guarantee for deposit protection scheme borrowing, because there are other ways of ensuring that the deposit protection scheme is able to provide the required standard of compensation, but, anyway, Iceland’s behaviour (neither pre-arranging adequate private sector funding for the DIGF nor giving it government support) was not consistent with either interpretation of EU law.
I suspect that the honest answer is simply that these issues were never seriously considered by anyone in Iceland (unlike in Britain and the Netherlands), because the country has not allocated enough resources to deposit protection.
*Their actions do form important part of the coming EFTA Court case also.
What I did mean to say was :
” But in the time when it really mattered most back in 2008–2009 UK Brown and Darling were horrible in piublic, Dutch and Germans etc gentlemanly in public — ”
( I did post a correction post after I posted but that was not moderated up. We do need here something more like ‘realtime posting enabled’ – moderation was very slow yesterday. )
Just to be clear I judge people on they actions or lack of actions, and Brown and Darling’s action are not going to be forgottten.
They form important part of the coming EFTA Court case also.
To RebelEconomist,
Well we will all unfortunately be forced to some nit-picking of the letter of the law, since the EC Directive in question was purposely left very vague on several important issues.
If they wanted to make it clear that there should always be a government guarantee behind each country’s DIGF, then they should have done so clearly when writing the Directive. And then it would always apply to every EU/EFTA country, not just Iceland.
The only way to resolve this issue, will now be in court. And the courts are required to follow the law, so it does matter what the law says and what previous legal precedences are.
If you are unhappy with this turn of events, then you and your countrymen should have pressured your government to negotiate agreements that were actually agreeable to everyone involved, including Iceland.
To Bromley86,
Its a little more complicated than that. This only becomes an issue, if at some point in the next 1-2 years, the EFTA court decides that the Icelandic government implementation of laws 98/1999 and 125/2008 somehow breached the rights of the depositors, as provided for by the EC Directive.
Then we move on to the next phase in the Icelandic courts, of determining any potential damages, Iceland will be required to pay. Even if Iceland is determine to have somehow breached the EC Directive, it is not legally automatic that damages will have to be paid, and how much they should be.
All I was saying is that the unilateral actions taken by the UK government in October 2008, could very well be determined to have some effect on this issue at that point.
I only really brought this up, since you were asking me to explain what the significance of the “unilateral” issue. As I mentioned earlier, this issue is a long way off yet. First we will have to finish the EFTA Court proceedings, then the lower court proceedings in Iceland, and then if the case is still ongoing, we can start debating about the issue of damages.
@Bjarni.
Ah, I see now. Obviously I couldn’t follow the Icelandic video link, but I’m generally wary of anything that JVJ & Altice are associated with. But the idea appears to be that the Icelandic government are responsible to the UK depositors and that responsibility is not transferable to anyone else. I.e. the UK covering the minimum guarantee means that Iceland has discharged its duty and, if the UK didn’t think to get Iceland’s okay first, then tough. Extremely slippery argument, IMO, but worth a try.
I do disagree with this:
“The Icelandic government can only be held accountable for its own actions. If it was prevented to search for and implement its own solution, by the direct action of the UK government, then it will be more difficult to show that Iceland should have to pay damages for any inaction.”
As I’ve said before, that the UK temporarily covered the Icesave deposits in no way prevented Iceland from resolving the situation within the allowed period. Presumably this argument might find a little more traction if it’s used with the freezing order in mind, but even then it’d be a tough one to argue.
Amid this tortuous nit-picking of the letter of the law, the spirit of the law should not be overlooked. I would remind readers that, whatever Icelanders’ defensive view of EU law now, they did not question it when Iceland’s banks appeared to be doing well, and I doubt that they will be warning Icelandic bank depositors in future about Iceland’s view of the very limited extent of deposit protection. Whatever the outcome of the court case, this dispute cannot be good for Iceland’s reputation – it is making Iceland look like a nation of either incompetent naifs or slippery customers.
To Peter London/Krakow,
As I have mentioned few times before, if you are for any reason unhappy with how any financial matters are handled in UK, including requiring insurance payers to pay for banker’s failures, you will have to take it up with your own government.
The UK government ultimately answers to the UK voters, while the Icelandic government answers to the Icelandic voters.
To Bromley86,
The basic legal thinking goes like this. Not only is it necessary to show that the Iceland’s law 98/1999 implementation of the EC Directive was defective, but also that there were serious losses suffered by the depositors as a direct result of this breach by Iceland. “There must be a causal link between the breach of the State’s obligation and the loss and damage suffered by the injured parties.”
By stepping into the process unilaterally and implementing its own “solution”, the UK government may have lessened its own chances of showing that it is entitled to damages as a result.
It might be rather difficult for UK/NL to show that the depositors suffered any serious damage, by any direct action of the Icelandic government, since it was clearly the UK government that had unilaterally taken control over the process at that time.
The Icelandic government can only be held accountable for its own actions. If it was prevented to search for and implement its own solution, by the direct action of the UK government, then it will be more difficult to show that Iceland should have to pay damages for any inaction.
As a side note, there was of course one unilateral action that was clearly to the direct benefit of the depositors. The emergency laws 125/2008 passed by the Icelandic government on October 6th, were actually highly beneficial for the depositors, as it increased their rank in the priority order of the LBI claimants. It actually increased the potential payout for most of the depositors, to the detriment of other claimants (as anonymous1 can attest to).
These relatively arcane aspects of the EFTA legal process were heavily discussed and analysed in Iceland, when the pros and cons of the “legal” vs. “negotiated” options were being weighed. There were actually several talks and shows, were legal scholars presented their analysis of the EFTA legal process, in layman terms for the public.
Here is one example, by Reimar Pétursson Hrl.:
http://www.kjosum.is/margmidlunarefni/myndskeid/56-reimar-petursson-icesave-hafnae
In any case, we are at least 1-2 years away from this possibly coming to a head. A lot of things can happen in the meantime, as the different legal cases go forward. But we wanted to be well prepared, just in case it became relevant later. :-)
>Here at this stage it clearly could matter, in what context the alleged violation occurred. The “unilateral” actions taken by the UK Government in 2008, may very well prove to be relevant, and therefore affect any potential damages payable by the Icelandic government.
Thanks Bjarni, but I still don’t get it. Sure, if we are talking about the Landsbanki freezing order, I get it. But given that the freezing order was in place, I just can’t see how the UK unilaterally deciding to cover the minimum guarantee (and the rest) affects anything.
To Bromley86,
The where and how the “unilateral” issue potentially comes into play, is only relevant considerably later in the legal process. First we will have to go through the ESA opinion process, which is now ongoing. If ESA now determines they have a good case for showing violation, based on some incorrect implementation of the EC Directive in the 98/1999 laws, their next step will be to submit a case to the EFTA court for a ruling.
If Iceland the 98/1999 laws are determined to be somehow in violation of the EC Directive, then there are several possibilities what can happen next, based on the severity of the violation. If the UK/NL governments feel they have a good case, they can decide to file a lawsuit to the Icelandic District Court (IDC) against the Icelandic government and claim damages.
That lawsuit will almost certainly be sent up to the Icelandic Supreme Court (ISC), and quite likely a guiding opinion will be requested from the EFTA Court again. Lets assume now, for the sake of argument, that Iceland looses at this stage too, and it is determined to be liable. Now finally, we come to the point were the “unilateral” issue could come into play.
One of the issues the Courts would have to determine, is whether the three conditions, which I mentioned in an earlier post (April 14, 9:13pm), are fulfilled in regards to allowing positive ruling on damages:
“1. The directive in question must be intended to confer rights on individuals, the content of which can be identified on the basis of the provisions of the Directive.
2. The breach on the part of the State concerned must be sufficiently serious.
3. There must be a causal link between the breach of the State’s obligation and the loss and damage suffered by the injured parties.”
Furthermore, it states:
“The factors which the competent court may take into consideration include the clarity and precision of the rule breached, the measure of discretion left by that rule to the national authorities, whether the infringement and the damage caused was intentional or involuntary, whether any error of law was excusable or inexcusable, the fact that the position taken by an EEA or Community institution may have contributed towards the omission, and the adoption or retention of national measures or practices contrary to the EEA Agreement.”
Here at this stage it clearly could matter, in what context the alleged violation occurred. The “unilateral” actions taken by the UK Government in 2008, may very well prove to be relevant, and therefore affect any potential damages payable by the Icelandic government.
Even by your low standards of argumenting, your last post makes no sense Peter.
” This is how the UK is bailing out your criminal banking system and government, innocent people in the UK paying more insurance on their house to cover the actions of your government. “
I’ll explain it for you.
The UK government merely lends the money to the protection scheme for a short amount of time, after which industry is leeved to refund the government.
The UK government takes payment from ALL financial companies to refund the repayment to depositors, not just banks as Bjarni referred to. This includes insurance companies, pension fund mangers and financial advisor’s and any other sort.
So UK citizens who don’t even have a bank account and simply pay for car insurance, take out a mortgage or get a pension will be paying off the debt in surcharges.
Before I do dig into the interesting but slightly misdirecting EU Commission reports that Mike and Rebeleconomist did post here I do want to emphasise some thing about this EFTA Court case :
http://www.voxeu.org/index.php?q=node/6391
” The outcome is inconvenient to European [ Union member state ] governments since if the UK and the Netherlands prevail in a court case, it might eliminate the constructive ambiguity the EU prefers on deposit insurance and integrated financial markets.
Similarly, a loss in court, or alternatively not taking this to court would help establish the principle that a European country does not have to honour some obligations expected of them by the EU. It also might encourage those seeking to default on sovereign debt in Europe.
Indeed we suspect that the UK and the Netherlands along with the EU will find both winning and losing the court case almost equally unpalatable. The failure to find a negotiated settlement is therefore surprising, especially given the small amounts involved. ”
The political masters that did drive IceSave I and II negotiations basically thought that bullying would work.
It almost did abecause of our weak use less politicians and they appointees of Red Green colation that did . But the peacock president did the right thing and those who pay for all this — taxpayers of Iceland did get they say.
There was a lost opportunity for EU Commission to put its own pressure on UK and Dutch to avoid this out come.
But by rejecting IceSave I as ameneded by our parliament that was signed by the President the British and Dutch political masters of that time sealed the fate of this.
It’s a shame to see the good work of Lee Buichet and heis team go to waste. But not UK, Dutch and EU Commission must reap what they did sow.
Anyone in the Iceland government starting to have sleepless nights?
Getting more complicated?
See you in the EFTA court.
The EFTA court will tell you what to do next.
I love Iceland.
To RebelEconomist,
It did not really matter whether Iceland’s case whether we had ex-ante or ex-post funding.
When you have the “near complete collapse” scenario with 85% payouts, no entity in Iceland could even potentially cover the losses, not the TIF, not the government, no one.
The ONLY realistic option left on the table was, wait for the Landsbanki bankruptcy proceedings to collect on the foreign assets, and use the money to cover the deposit insurance.
To Bromley86,
Yes, I agree legally its definitely not a real “loan” agreement. That is why I still put it in quotes. I actually like better the definition you mentioned: “UK/NL have taken over the liability”. That is accurate.
And, yes 1000 years sounds about right :-)
In the above comment, I should have of course written “ex-post” not “ex-ante”.
Responses to several earlier comments:
Bjarni Kristjansson on May 2, 2011 at 7:57 pm: I don’t deny the gravity of the crisis that hit Iceland, but Icelanders should understand that that is a hazard of being a small and therefore relatively undiversified country, and prepare accordingly – eg by discouraging foreign currency borrowing. Nevertheless, note that Britain did indeed face problems with the dollar liabilities of its banks during the financial crisis, and borrowed dollars from the Fed (via its foreign currency swap lines) without parliamentary approval.
Bjarni Kristjansson in several comments: Regarding state aid, there is a distinction between the state LOANS to banks and GRANTS. Central banks routinely lend to individual banks. Several of the European countries surveyed before the financial crisis by the EFDI, including both Britain and the Netherlands, had declared arrangements in place for their deposit protection scheme to borrow from the government or central bank, and neither their competitor countries nor the commission raised any objection. If Iceland’s financial system is so small that it can never repay the state the loan needed to provide deposit insurance payments generated by the failure of one of its main banks, then Iceland should not have (I suspect blindly) copied the ex-ante funding used in many European countries. Note that by definition, an ex-ante funding mechanism always involves the innocent institutions paying for the sins of the departed, but they accept that because they prefer ex-ante funding. It is not sufficient to rely on the liquidation of a failed bank’s assets, as that process is typically too slow, and may fail to raise enough money, to meet the minimum standards for deposit protection.
>think you could at least potentially call it a “loan” from UK/NL to the Icelandic TIF.
Not legally though. What are the terms? Where is the agreement?
Sure, the UK/NL have taken over a liability that no one disputes exists between the TIF and the depositors. But they have not loaned the TIF anything, they’ve just bought that liability.
What happens if the case goes against the UK/NL and if the estate pays out only 90% of the liability. Does that mean that every year for the next 1,000 years the TIF collects its regular levy and immediately pays it out to the UK/NL?
@Bjarni
>I think Fisy was probably referring to were the various statements made by Gordon Brown and Alistair Darling DURING the crisis itself in October 2008.
Perhaps. Certainly in this context, but I’m pretty sure he’s previously applied it to the subsequent period. Indeed his reply above says that, with his emphasis on the change in governments in the UK.
>Dutch counterparts have made various public comments that were damaging to the process and often counter-productive
Yep. I like the way officials would trot out the we-won’t-let-them-join-the-EU line. I wonder if that guarantee alone was enough to sway 5% of voters in the last referendum :) .
@Fisy
>Of course they are refering to the post May 2010 Cameron / Clegg colaition in the UK . . . But in the time when it really mattered most back in 2008–2010 UK Brown and Darling were horrible in piublic, Dutch and Germans etc gentlemanly in public
No they are not (and clearly so). After Iceland chose to ignore the MoU that it signed with the NL, the gloves came off. This happened in Nov 2008, after which point the Dutch were by far more vocal than the British.
http://www.ft.com/cms/s/0/ed069984-b022-11dd-a795-0000779fd18c.html
Anyway, just read what they said:
“because ***at no stage*** have any of [the UK’s] politicians or civil servants made public statements about Icesave.”
And read the context, which makes it clear that they were considering the negotiations prior to Icesave I when they wrote that paragraph as they talk about an inexperienced & politicised Icelandic team.
Now, admittedly, they seem to be stating the period that they considered when they made that statement as ~Nov 2008, because clearly the UK in early Oct 2008 was far more inflammatory that the NL.
Even by your low standards of argumenting, your last post makes no sense Peter.
” This is how the UK is bailing out your criminal banking system and government, innocent people in the UK paying more insurance on their house to cover the actions of your government. “
>The second option mentioned, was exactly what the UK government later decided to do. This decision was done unilaterally, without any agreement acquired first from the Icelandic government.
Agreed. However, as I said, I’ve seen the “unilateral” argument made (but not fleshed out) **as a reason why Iceland is not liable**. To me, Iceland is either liable or it is not and I can’t see how the UK taking a unilateral decision affects that.
Funnily enough, Fisy just tried a mild form of this insinuation argument over in the response to ESA thread:
https://www.icenews.is/index.php/2011/05/02/icelandic-authorities-respond-to-esa-over-icesave-dispute/#comment-550818
An interesting aside on the unilateral issue is that technically the NL didn’t unilaterally cover the minimum guarantee. They have a MoU that says the Icelandic government will borrow X euros at Y% for Z years.
To Bromley86,
I think you could at least potentially call it a “loan” from UK/NL to the Icelandic TIF. Although no agreement was made in advance, clearly the UK/NL governments have a valid legal claim against the TIF for up to 20K Euros per depositor.
The real problem is of course, as everyone already knows, that TIF will only able to pay back a small fraction of those claims, until at least LBI starts paying out to priority claimants.
If the LBI proceedings are not enough to pay out all the priority claims, the TIF will have very little ability to cover the difference or the interest. Hence, the subsequent heavy pressure for a “guarantee” by the Icelandic government.
Brumley wrote :
>”I especially liked this bit that directly contradicts Fisy’s oft stated and inaccurate
>point that the Netherlands behaved in a “more gentlemanly manner” and were >somehow not as bad as the evil (Labour) Brits:”
” Of the three countries, the only government that has publicly handled the situation sensibly is the UK, because at no stage have any of its politicians or civil servants made public statements about Icesave. All negotiations there have been handled quietly. ”
Of course they are refering to the post May 2010 Cameron / Clegg colaition in the UK. The horrible lies of Brown and Darling were not quiet or sensible+.
Recently the new Dutch finance minister has made some very strange public statements.
But in the time when it really mattered most back in 2008–2010 UK Brown and Darling were horrible in piublic, Dutch and Germans etc gentlemanly in public — despite what they might have been saying in private and inside EU council discussions, etc etc and to the IMF.
+https://www.icenews.is/index.php/2009/07/29/more-members-of-parliament-against-the-icesave-deal/#comment-89416 Starting with Darling’s taking situation and truth and bending it but by the time Brown starts speaking the truth of what is going on, what little truth comes comes out his mouth becoems like light entering a black hole — it bends incredibly far seemingly against the laws of everyday physics and them disappears.
To Bromley86,
I think Fisy was probably referring to were the various statements made by Gordon Brown and Alistair Darling DURING the crisis itself in October 2008. Those statements were incredibly hurtful and damaging, and certainly inflamed the opposition here in Iceland.
After the crash, during the ups and downs of passing the Icesave agreements I, II, and III into law in Iceland, the UK government officials have on the other hand been quite well behaved, while their Dutch counterparts have made various public comments that were damaging to the process and often counter-productive.
To Peter – London/Krakow,
Wrong! The only entity in Iceland that is financially required (and able) to pay back the Icesave deposits, is the bankruptcy proceedings of the old Landsbanki (LBI). The Icelandic TIF will also participate on a relatively small level, as much as it is able to.
The insurance and pension companies, as well as the taxpayers in Iceland, since they had absolutely nothing to do with this. You may wish they do, but unless the UK/NL governments can prove their case in court and claim damages from the Icelandic government, there is no legal requirement for anyone else to pay anything.
To Terry,
Whoever at Landsbanki which wrote the original comment quoted on the moneysavingexpert.com web site, was clearly was not very competent or knowledgeable and way too optimistic. Almost everything he stated in the quoted comment, was later proven to be wrong.
The web site mentions that “below is its [Icesave] response, which was backed up by a document from the Icelandic Financial Services Association; confirming the legal strength of the info”.
It would be interesting to see this legal document from FSA, they are referring to, so we can determine exactly how much of the original comment was just optimistic embellishment from the Landsbanki Icesave people, and how much was based official information.
My recommendation is that whenever you see something quoted without a direct reference, that you look up the original document in question. Unfortunately, quite often you will find out they simply do not match.
“Providing a government loan to any private DIGF, that will NEVER be paid back, is DEFINITELY a state aid. There is no chance the contributions from the remaining banks, will ever be enough to cover the losses of a large bank failure.”
It would be paid back, so it not state aid. It is not just banks that can be tapped for the repayment, its the entire financial industry. Insurance, pension companies, everything. Given that the money will be repaid by the tax payer, its more logical to make the users of those services pay it back instead. In reality that maybe be 80% the same people, however thats still a better deal for the 20%.
This is how the UK scheme works BTW. The repayment is delayed for several years then payments begin.
This is how the UK is bailing out your criminal banking system and government, innocent people in the UK paying more insurance on their house to cover the actions of your government.
To Bromlay86,
In the ESA response letter from the Icelandic government there are two interesting quotes on page 6:
http://www.efnahagsraduneyti.is/media/Acrobat/Government-Response-to-ESA-020511.pdf
that can shed further light on the unilateral nature of the UK government decisions.
The first quote is from Alistair Darling in a letter dated October 8th to the permanent secretary of the UK Treasury:
“…Today I have taken the action freeze the funds and financial assets held by Landsbanki in the UK. This action is proportionate, ***will prevent detriment to the UK economy through maintaining depositor confidence in the wider banking system*** [emphasis added].”
The second quote is from a written advice to the Chancellor from the permanent secretary of the UK Treasury contemplating how UK could provide full guarantees or pay-outs to Icesave depositors:
“At present, the responsibility for this [the EUR 20,887] lies with the Icelandic scheme. This would involve, in effect, a loan to the Icelandic authorities, either directly or more likely by simply making the payments and then ***pressing those authorities*** for the repayment to the Government [emphasis added].”
The second option mentioned, was exactly what the UK government later decided to do. This decision was done unilaterally, without any agreement acquired first from the Icelandic government.
>The question isn’t really whether the Icelandic government could have done anything different. They certainly could not, at least without any help from other countries.
Bjarni – that’s what we were told would happen : )
In the extremely unlikely event that the Icelandic government wasn’t in a position to meet all claims, all the Nordic countries have an arrangement where they will step in and help any one of the participating countries that are in trouble so there is an additional layer of reassurance and cover.
http://blog.moneysavingexpert.com/2008/04/01/icesave-how-safe-are-your-savings-facts-and-myths/
“The question is instead, whether this unilateral “loan” from the UK/NL governments, to cover the deposit guarantee payments on behalf of the private TIF, can be forcefully changed after the fact, to automatically require guarantee by the Icelandic government. “As the
Icelandic government did not offer any alternative (such as promising to guarantee the accounts) its irrelevant.
>The question is instead, whether this unilateral “loan” from the UK/NL governments, to cover the deposit guarantee payments on behalf of the private TIF, can be forcefully changed after the fact, to automatically require guarantee by the Icelandic government.
I’d agree that such a loan cannot be forced through. Whenever various (official) people have referred to a loan, they don’t really mean that a loan has been made. After all, it’s impossible to make a loan in the absence of agreement by both (or, in this case, all 3 – the UK/NL, the TIF & the Icelandic government) parties. So whenever someone refers to loan, they just mean that they’re expecting it to become a loan.
Obviously, now the negotiated route has been closed down, it’s not about forcing Iceland to do anything. It’s a legal (and possibly political) process now that Iceland, including Grimsson, has said it will comply with.
Thanks for that article Bjarni. It fleshes out nicely the point that Lee Buchheit made about there possibly being a political dimension to the court process.
I especially liked this bit that directly contradicts Fisy’s oft stated and inaccurate point that the Netherlands behaved in a “more gentlemanly manner” and were somehow not as bad as the evil (Labour) Brits:
“Of the three countries, the only government that has publically handled the situation sensibly is the UK, because at no stage have any of its politicians or civil servants made public statements about Icesave. All negotiations there have been handled quietly.
In contrast, senior political leaders in the Netherlands have repeatedly made threatening comments inflaming the opposition to the agreement in Iceland.”
Here is an interesting article by two leading Icelandic economists, Jon Danielsson at LSE and Gylfi Zoega at Birberk, on what we should learn from the Icesave rejection in the referendum:
http://www.voxeu.org/index.php?q=node/6391
In their view, EVERYONE looses by not having reached an agreement early enough, that was acceptable to ALL the countries involved.
To Bromley86,
Yes, you are correct. Thanks for pointing out my mistake.
The Landsbanki Icesave accounts were indeed not handed over to ING, only the Kaupthing Edge and Landsbanki Heritable Bank (different from Icesave) accounts. The Icesave accounts were instead paid out directly from FSCS. Probably by borrowing from the “National Loans Fund” mentioned earlier in RebelEconomic post. :-)
The question isn’t really whether the Icelandic government could have done anything different. They certainly could not, at least without any help from other countries.
The question is instead, whether this unilateral “loan” from the UK/NL governments, to cover the deposit guarantee payments on behalf of the private TIF, can be forcefully changed after the fact, to automatically require guarantee by the Icelandic government.
This “loan” was never officially agreed by the Icelandic government, which as everyone knows by now, has very specific constitutional rules regarding how such guarantee can be authorized.
>Which if any of the three actions by the UK government I mentioned, were officially agreed to in advance by the Icelandic government, in your view?
My point was that you mixed up Landsbanki and Kaupthing :P . It should have read:
“When the UK government “decided” to freeze the Landsbanki assets, hand over all the KAUPTHING EDGE accounts to ING, and start paying out all the depositors, this was a unilateral decision.”
It’s a key difference obviously.
As I said, it doesn’t really affect the rest of your post. I still fail to see how the unilateral nature (I agree that it was not collaborative) of the decision to cover the minimum guarantee affects anything. Once the Icelandic Central Bank took the decision to let Landsbanki fail in an (ultimately futile) attempt to save Kaupthing, once Landsbanki closed its doors to UK depositors and once the UK government applied the freezing order to Landsbanki assets in the UK, what could the Icelandic government have done that the decision by the UK to cover the deposits prevented?
I forgot to include the “medium” impact scenario, which affects 0.85% of the eligible deposits.
According to the report, for only 7 member states, the DGS would be able to provide enough coverage from their ex-ante funds.
It was interesting when reading the EU DGS investigative report provided by Bromley86 earlier
http://ec.europa.eu/internal_market/bank/docs/guarantee/deposit/report_en.pdf
that it confirmed what I have been saying all along. Almost all of the European DGS’s have only funding for less than 1% of the total eligible deposits.
The report defines “low impact” scenario as affecting 0.035% of eligible deposits, and “high impact” scenario as affecting 3.24% of eligible deposits. The report goes on to show, that while all the DGS would be able to handle the low impact scenario, NONE of them would be able to handle the high impact scenario from their existing ex-ante funds.
For comparison, the “near complete collapse” scenario in Iceland affected about 85% of all eligible deposits.
To Peter – London/Krakow,
Providing a government loan to any private DIGF, that will NEVER be paid back, is DEFINITELY a state aid. There is no chance the contributions from the remaining banks, will ever be enough to cover the losses of a large bank failure.
“I do agree, that even though state aid is generally considered illegal by the EU, in real practice the case is much more muddled,”
Its not state aid when you protect both your own banks and foreign banks that are part of your depositor protection scheme. Icelandic banks could have joined the UK scheme by paying the necessary fee, the same as many other nationalities banks did and continue to do.
The same could have been said about the Icelandic scheme as it would have been open to EU banks.
So your argument about state aid being illegal is moot, its not state aid if its available to all nations banks and its not considered to be state aid by the EU regulations.
“This long and detailed response by the Economic ministry of Iceland, I was glad to see, covers many of the same points I have been raising here in my comments.”
Unbelievable that the feeble arguments you have presented here would be used as a legal defence. I won’t waste a ‘good luck’ on you.
To Bromley86,
Which if any of the three actions by the UK government I mentioned, were officially agreed to in advance by the Icelandic government, in your view?
>When the UK government “decided” to freeze the Landsbanki assets, hand over all the Icesave accounts to ING, and start paying out all the depositors, this was a unilateral decision.
This isn’t the case, as I’m sure you know. Not that that challenges the rest of your post.
BTW, the Icelandic government has sent in their detailed response to the ESA Letter of Formal Notice (LFN):
http://www.efnahagsraduneyti.is/media/Acrobat/Government-Response-to-ESA-020511.pdf
This long and detailed response by the Economic ministry of Iceland, I was glad to see, covers many of the same points I have been raising here in my comments.
Now that both sides (ESA vs. Iceland) have submitted their legal opinions, we will have to see how the EFTA/IDC/ISC courts will rule on the various issues raised in the next 1-2 years.
To Mike (UK Nordic analyst),
I do agree, that even though state aid is generally considered illegal by the EU, in real practice the case is much more muddled, especially in cases of difficult economic situations or crisis circumstances. For example, the actions of many governments in October 2008, to bailout and rescue their respective local banks, were in my view clear instances of state aid.
But the question of illegal state aid, must also be looked at in the context of the current situation at each time. Before the banking crisis in 2008, almost everyone was oblivious to the coming danger and were worried about other things.
Most of the governments (including the Icelandic) were especially oblivious to this, and most implemented their DIGF laws accordingly as private entities, funded only by the finance industry itself.
They were perfectly correct in assuming, based on the wording of Article 3 in the EC Directive, that state guarantees of the DIGF system were NOT allowed.
As I mentioned in earlier comments, the EC Directive was for some reason written in such a way, that it requires each DIGF to be privately funded by the financial institutions themselves.
But as anyone with some ability to think logically already knows, ANY DIGF in ANY country, with only 1/2 to 1% coverage, has absolutely NO ability financially to cover all the deposit payments, in case of a LARGE financial institution failure. This has always been a known fact!
So when the crisis hit in 2008, the governments were faced with two choices: Either provide the state aid, irrespective of whether it was allowed, or suffer the potential consequences of a complete banking crash.
Almost every country, choose to provide the state aid, as deemed necessary by their respective governments. So basically overnight, we all went from the official position of banning it, to realizing it had to be allowed in special crisis situations.
But now we have to deal with the aftermath. And one of the main questions we have to answer legally, is state aid still only “allowed” in special circumstances, or is it actually “required”, when large enough financial crisis hits.
Thanks for that useful information, Mike. Actually, on following it up, I find that Iceland was even more negligent than your comment implies. The consultation you mention, as part of a review of 94/19/EC, led to a “communication” on deposit guarantee schemes which called for more investigation of particular issues, one of which was funding. This research, done in cooperation with the European Forum of Deposit Insurers (EFDI), of which Iceland is a member, led to a May 2008 report on “the efficiency of deposit guarantee schemes” ( http://ec.europa.eu/internal_market/bank/docs/guarantee/deposit/report_en.pdf ). According to page 11 of this report, EEA countries were invited to contribute to the research, but Iceland did not reply to the invitation. Presumably, with just one employee, apparently working part-time out of the central bank of Iceland, the DIGF simply lacked the capacity to give the topic of deposit guarantees the attention it required.
To Bromley86,
In my understanding, unilateral decision is when one party makes a certain decision, without obtaining a agreement first from other parties it involves or affects.
When the UK government “decided” to freeze the Landsbanki assets, hand over all the Icesave accounts to ING, and start paying out all the depositors, this was a unilateral decision. This decision was made without any official agreement being signed first with the Icelandic government.
As I said before, the UK government is perfectly within its rights to make any unilateral decisions it chooses, so long as they adhere to the UK rule of law, and are accepted by the UK population. Neither the Icelandic government nor its people, have any vote in UK government decisions, although they can certainly have their opinions.
But the UK government must also realize they will have to bear their own full responsibility for those unilateral decisions, and any potential consequences they have. Apparently they thought, by just applying enough pressure, they could force the Icelandic government to sign the “loan” agreements after the fact.
But, they were wrong! The agreements, after a long and extensively detailed debate, were subsequently rejected in the two national referendums in Iceland. Now the UK/NL must prove their case in front of the EFTA/IDC/ISC courts instead, and try to claim their “repayment” through the official legal process, as it always should have been.
To RebelEconomist,
You say that UK would have been better off by just nationalizing the HSBC, rather than selling 600B GBP in gilts, and therefore avoid paying out to the depositors. Lets assume this is possible, but now lets up the ante a bit more.
Lets say as result of HSBC going under and being nationalized, there is great fear in the markets all around the world, especially in regards to the survivability of the banks. All UK banks are now in grave danger, with massive outflow of deposits.
Furthermore, since HSBC is heavily geared towards international customer-base also, other governments around the world start taking defensive measures to protect their financial systems and local depositors. This includes closing down local UK banking branches, freezing UK banking assets, even threatening to freeze ALL UK assets, wherever they can find them.
At the same time, the FTSE 100 drops down to just 500, with large number of UK companies going bankrupt, and the UK bond market suffers total collapse. The housing market completely freezes up, with majority of the population unable to make their mortgage payments. Unemployment rises by additional 10% over their current levels. Bank of England completely runs out of their Euro and dollar currency reserves.
Now finally, the other European governments, instead of helping out and try to stop the damage, decide to activate their local deposit guarantee schemes to the tunes of 100’s of billions of Euros. They furthermore demand that FSCS immediately make good on the 20K Euro guarantee per each depositor as per the EC Directive. Since FSCS is unable to do so, they demand that the UK government sign “loan” agreements totalling around 600B Euros with interest on top, to cover all those guarantee payments they have already made on FSCS behalf.
– Do you still believe that the UK government would be able to handle this crisis?
– Do you believe that the UK government would just sign the “load” agreements, without even allowing the parliament to see their contents first, or give them a chance to vote on it?
– Do you believe that the population of UK, would just roll over and accept this outcome, without even been given the ability to voice their opinion, or control their destiny?
In Iceland, the government failed to handle the situation, and our parliament gave in way to easily to the outside pressure. But the people of Iceland finally stood up, and took matters into their own hands, according to their constitutional rights. As a result of the referendum outcome, this matter will now finally be sent to independent court, where it should be ultimately resolved.
http://uti.is/2011/05/an-icelandic-reply-to-esa/
Let us hope that the ones writing Icelandic response to EFTA Suivellance Authority opinion had more access to this information on Directive 94/19/EC than citizens of EU do from EU parliment website.
And let Icelanders pray that Árni Páll Árnason’s ” Plan B ” was better than Stalina’s Plan B, and at least involved paying some money to some one with a clue like Matthew Collings QC and not one of EUphile lawyer friends with the expensive suits.
Welcome back Mike.
“Of course, if the crisis is system-wide, taxpayers may also be required to supplement the funds of the guarantee scheme.”
This is the problem I have in trying to get to the bottom of the intents of the Directive 94/19/EC and how it was intended to be implemented from 1994 until 2008 –when the changes were made because of what Ireland did in giving its blanket insurance for the 18 months from September 2008.
ie to understand the intents of the directive we need to see:
i) the discussions in EU parliament and council around the time leading up to acceptance of the directive
ii) cases that reached EFTA court, and also to the EU court for EU member states in cases touching on the deposit insurances directive.
Bear in mind that from the EFTA point view, between 1999 and 2008 there was no infringement proceedings on Iceland about the implementation of the scheme in the Icelandic law of 98/1999.
EFTA suivellance authority is perfectly competent, and they are experts on the EU laws of this as well as Icelandic laws. There were no infrigement proceedings.
What is NOT going to be good and reasonable is IF the British and Dutch and EU commission idea is claiming expost facto after what the Irish government did in September 2008 that this is ALWAYS how it was meant to be 1994-2008 — when in fact things were intended differently.
Now if we can’t find the original proceedings of Directive 94/19/EC going through EU parliment and council because the EU parliment has hidden it this is very suspicious indeed.
https://www.icenews.is/index.php/2010/01/07/bbc-newsnight-interview-with-the-icelandic-president/#comment-109657
Rebeleconmist did write :
>But Iceland did not; it only kept the ISK part of the bank going, and thereby effectively discriminated against foreign depositors.
This one of the question for EFTA court case — what will this old new split of banks that came from JP Morgan advisors mean to the judges. EFTA Suivellance authority did not yet rule on this issue+
If foreigner had the Icelandic bank account not in the branch then his savings in Iceland was protected. But yes it defacto discriminated against non Icelandic depositors —
..but..
bear in mind though that before the Icelandic policy could be made clear about what was to be done with the liability of the old banks and IceSave money — Brown and Darling acted and cut off us off from knowing what the Icelandic government would be able to arrange.
Thry did not give any time for Icelandic state represenetatives to show what would be done in IceSave — because Darling needed to stop the ” country run ” on the UK and the GBP++ that was happening that DAY.
This paying out IceSave immediatelly was not done in any way for benefit of Icelanidc taxpayer or Icelandic TIF but purely to save the skin on the UK banking system.
Here is the lies that Darling and Brown did tell during that time to cover them selves : https://www.icenews.is/index.php/2009/07/29/more-members-of-parliament-against-the-icesave-deal/#comment-89416
( The Dutch after did follow the hard work of Brown and Darling although acting in more gentlemely fashion. )
+https://www.icenews.is/index.php/2010/05/27/efta-iceland-must-pay-icesave/#comment-170782
++sic.althingi.is/pdf/RNAvefKafli18Enska.pdf Chapter 18 Deposits in Financial Institutions in Branches Abroad.
and
https://www.icenews.is/index.php/2010/02/18/uk-moves-to-soften-icesave-deal/#comment-117521 City Minister Paul Miners did reveal this in early 2009 interviews :
“Britain was ‘three hours from going bust’
.. “on Friday, 10 October the [ UK ] was ‘very close’ to a complete banking collapse after ‘major depositors’ attempted to withdraw their money en masse. .. the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.”
http://www.thisismoney.co.uk/news/article.html?in_article_id=470349&in_page_id=2“City Minister Paul Myners disclosed
and
http://www.spiegel.de/international/europe/0,1518,746939,00.html
“SPIEGEL: We’re talking about Wednesday, Oct. 8, 2008. Lehman Brothers had just filed for bankruptcy. In your new book “Beyond the Crash,” you write: “I sensed that if no one acted, total collapse was imminent.” What exactly were you expecting?
Brown: The Royal Bank of Scotland would have collapsed within hours. HBOS was not far behind, and in that case, other European and American banks would have followed. I think people still misunderstand, in retrospect, the scale of the collapse that we were facing: It would have been absolutely catastrophic.”
RebelEconomist did write :
>Better to just nationalise the bank. And I am sure that the British and Dutch >would have been delighted if Iceland had nationalised Landsbanki so that it had
>been able to continue in business without closure;
Allthough it was make clear that the Independence Party / Social Democratrs coalition of 2008 would have liked to have had the resources to keep this source of tax monies going ( 2005 to 2007 tax paid from the three banks 2.5% average total Icelandic government revenue+ )
— as Geir Haarde said at time, it would have been highly irresponsibel to throw more tax payer money once the intial attempts to save Kauthpgin had been made++.
It was enough that Icelandic central bank did have to deal with loss from the ” love letters ” that was given as collateral in late 2008 when Sedlabanki did lossen up collateral requiremewnts to be similiar to what the ECB accepted.
The insanity of bailing out depositors, bond holders, share holders ( and in many cases the actual managers that did act heedlessly ) is becoming clear as the huge losses of the nationalised banks in UK, Ireland and US come to light. Not just liquidity problems there — but huge insane lending, as well as in the US printing out those CDOs 2005 to 2007 that they knew was go loss when only a few of the loans in them did go into default starting in 2007 and causing the melt down.
Despite what people say about need for new ‘ Glass Stegal Act’ and the good idea of this limited purpose banking, the problem is the bail out culture started by this idea of this deposit insurance.
Moral hazard not only — it is about that those who caused the trouble getting off shot fee and this banks that should have been allowed to fail becomgin zombies — continuing to suck life blood out of tax payers.
We do not need a new regulations like ‘ Glass Stegal ‘ what we need to have is not MORE deposit insurance but LESS of it.
That will give all the right things — to stop people from blindly putting money into banks just because of guarantee and relying on flawed regulations ( and regulating supervisors ) to keep bankers in check, and making sure that when they fail that the shareholders and banker directors at last DO SUFFER A LOSS.
If some one does make a loss then they become more careful. With they own money and also the money of others.
Is that not obvious ?
+https://www.icenews.is/index.php/2011/03/15/nearly-500-questioned-by-iceland-bank-crash-investigators/#comment-547758
++The collateral taken for the EUR 500 million loan by Icelandic Central Bank to Kautphing was all the shares in of Denmark bank owned by Kaupthing called FIH Erhvervsbank A/S.
This bank was sold in end of September 2010 for a deal worth 670 million EURos.
http://www.pfa.dk/news/press+releases/fih?lang=en
” A consortium consisting of ATP, PFA Pension, Folksam and CPDyvig (the “Consortium”) has agreed to acquire FIH Erhvervsbank A/S (“FIH”) for DKK 5.0 billion [ 670 million euros ]. The purchase price for Sedlabanki as pledgee has been structured as a cash payment of DKK 1.9 billion plus an earn- out payment of DKK 3.1 billion that shall be adjusted for losses incurred until 31 December 2014 originating from the balance sheet as of 30 June 2010, as well as adjusted for FIH’s potential gain on its holding in the Axcel III fund, plus an additional earn-out payment dependent on the Consortium’s realised gain on its investment in FIH at latest on 31 December 2015. “
Mike’s reference:
http://ec.europa.eu/internal_market/bank/docs/guarantee/consultationpaper_en.pdf
Just dropping by.
Bjarni writes:
“even though such state aid is expressly prohibited in the Article 3 of the EC Directive?”
This last part is incorrect. Article 3 (amongst other parts) forbids a state guarantee to a credit institution. This is not what this case about. As far as I’m aware no one is talking about a state guarantee to a credit institution. The issue is whether there is a state guarantee to a deposit guarantee scheme. This is NOT forbidden. In fact quite the opposite. In the 2005 consultation on these schemes the original document (from July 2005) setting out the questions and issues surrounding these schemes states:
“Of course, if the crisis is system-wide, taxpayers may also be required to supplement the funds of the guarantee scheme.”
Although only a consultation document this sets out quite clearly what would happen if there was a system-wide failure. The part that says “taxpayers may” refers to the case where the guarantee scheme cannot raise the necessary funds from its member banks or the capital markets. In such a case the government of the Member State concerned would need to step in.
The Icelandic government of the day was a part of that consultation process, so they cannot claim ignorance of how their own scheme was designed to operate.
>But this “guaranteeing” option was never really available for the Icesave accounts, since the UK/NL governments unilaterally decided, they would actually PAY OUT all the deposits immediately.
Not quite correct. The UK (& I would assume the NL) asked Iceland what it was doing about UK/NL depositors. They were told “we don’t know” at the same time that they were told that Icelandic depositors were covered 100%.
I’ve never understood what Icelanders mean when they refer to th3e “unilateral” action of the UK/NL in covering the minimum guarantee. It’s quite clear from the context (in most cases, although I would initially presume not in your case Bjarni) that the “unilateral” decision is somehow an argument that Iceland is not responsible, but I just don’t get how it changes anything.
I’m not silly enough to pretend that a euro and an ISK guarantee are in any way as easy to offer for Iceland. But how did the UK/NL’s “unilateral” decision reduce the options available to the Icelandic government? Landsbanki had already closed its doors to foreign-based depositors and Haarde was quite determined to not answer the direct question put to him by a BBC journo about what was going to happen to UK depositors.
The actions of the Icelandic Central Bank and Landsbanki were the direct cause of the freezing of the Landsbanki assets in the UK and the subsequent failure of Landsbanki. Once that happened, the FSCS would have to trigger for the top-up amount anyway, so there would already have been a state owned block claimant on Landsbanki. What matter then if there was also a block claim for the minimum amount?
As to the legal argument (which is when the “unilateral” comment is often made), I can’t see any case that the UK covering the minimum guarantee affects Iceland’s liability one way or the other. Either Iceland is liable or it is not.
Yes, Bjarni, I do think that Britain could handle the failure of HSBC, although it would obviously be a huge national crisis. But it would be silly for the British government to sell £600bn (or euros or dollars) in gilts, to lend to the FSCS to pay individuals who would deposit most of the money in other British banks, which would then buy gilts as a liquid and safe asset in which to place the massive inflow of funds, and subsequently for the FSCS to liquidate HSBC’s assets to repay the British government to redeem the gilts. Better to just nationalise the bank. And I am sure that the British and Dutch would have been delighted if Iceland had nationalised Landsbanki so that it had been able to continue in business without closure; they could have saved themselves the need to make the top-up deposit insurance payments (which they are not asking the state of Iceland to repay). But Iceland did not; it only kept the ISK part of the bank going, and thereby effectively discriminated against foreign depositors.
And no, there is no legal requirement for a country to allow its deposit protection scheme to borrow from its government in the event of a shortfall in its assets (and, logically, if Iceland believed that such an arrangement represented illegal state aid, it should have taken Britain to the EFTA court for hindering the growth of the Icelandic banks before 2008). But there is a legal requirement for the government to ensure that its country’s deposit protection scheme is in a position to pay at least the minimum level of compensation, and if the government does not feel able to lend to its country’s deposit protection scheme, it must find other ways of ensuring the required capacity of that scheme, such as ex-ante funding or a non-government credit line. No doubt, if Iceland had done this, its banking system would have never been able to grow large enough to generate such a big problem.
The bottom line is that the nation of Iceland screwed up. I dare say that such accidents are a natural hazard of going it alone as a small country in a sophisticated world. Icelanders can have an internal argument about who is to blame, but Icelanders have been collectively responsible for such national failures since they asserted their independence from Denmark. And, frankly, given that Iceland’s independence allowed it to become one of the per capita richest countries in the world before the crisis, Icelanders should not expect much sympathy from the rest of the world when that independence throws up some disadvantages.
To RebelEconomist,
So you are saying, if HSBC had in fact gone completely bankrupt, and FSCS would have been forced to PAY OUT to all the depositors, they would somehow have been able to borrow the approximately 600B GBP that were needed, from this “National Loans Fund”?
My understanding of the National Loans Fund, is that it is a government fund, where all the tax revenues are received. According to recent budgets the total receipts of the UK government is about 5-600B GBP per year. Without otherwise completely shutting down the government, how would they have been able to lend anything but a fraction of this total amount?
You said in earlier comment that the FSCS would have been able instead to either borrow “from its own banks” or just “nationalize the bank”. In both cases you are assuming that the FSCS would therefore avoid actually paying out the depositors, by having them keep their money in the system.
BTW, this is almost exactly the same as what happened with the Icelandic government when it “guaranteed” the ISK deposits. So you could say, that in this case the system actually worked ok. Of course, if this gambit had failed, then the Icelandic government would have been in serious bind, since it really didn’t have enough ISK for honoring the guarantee.
But this “guaranteeing” option was never really available for the Icesave accounts, since the UK/NL governments unilaterally decided, they would actually PAY OUT all the deposits immediately.
We do not really have any argument against TIF borrowing the funds necessary to pay out the depositors, so long as it is not from the Icelandic taxpayers. But everyone knows that TIF will never have any capacity to pay any loans back, unless the Landsbanki bankruptcy proceedings will be able to cover it. Therefore, any bank whether its Citybank or other, would be crazy to offer such a credit line.
So it always comes back to the main question:
Is there a LEGAL REQUIREMENT, that if any country’s DIGF comes up short on the 20K Euro guarantee payment, that the respective government THEN HAS TO step in and provide the necessary funding, even though such state aid is expressly prohibited in the Article 3 of the EC Directive?
I think that the issue is more subtle than whether there is supposed to be state guarantee or not, Bjarni.
Two principles in 94/19/EC are that the deposit protection scheme should be adequate and that it should be financed by the banks themselves. If the scheme is ex-post funded, to be adequate it must have the ability to borrow enough in the event of a bank failure to make the required compensation payments before recovering the money from the surviving banks later. In theory, any dependable credit line will do, but, for schemes covering very large banks, the safest solution is to have access to the deep pockets of the state. Note that the legislation establishing the British Financial Services Compensation Scheme empowers the scheme to borrow from the “National Loans Fund”, a kind of collective pool for British local authorities, nationalised industries etc – see paragraph 223B of the Financial Services and Markets Act 2000 ( http://www.legislation.gov.uk/ukpga/2000/8/part/XV ). Evidently, such contingent, temporary government support for deposit protection schemes is acceptable, but, given the general disapproval of state aid in European legislation, is certainly not mandatory.
As far as the European legislation was concerned, if Iceland’s deposit protection scheme had been either ex-ante funded, or had arranged a credit line to, say Citibank, that would have been ideal, but the priority was that the scheme should be in a position to pay compensation, however this was organised. In practice, given that it was unrealistic to expect the surviving Icelandic banks to pay off such a loan in a reasonable period, probably only the Icelandic state could have provided the necessary credit. But the TIF was apparently not sufficiently well-developed to have prepared a solution to this problem (perhaps not surprisingly; according to the Icelandic Special Investigation Commission report – p.60 of Chapter 17 – the DIGF was run by one part-time employee).
>>Fisy is correct, the designers of the EC Directive should come forward and explain their reasons for making it so vague on this important issue.
Well said Fisi and Bjarmi!! I am wiht you 100,000% on this Vague and Important Issue!
Nor should we let them dodge that Important Issue with the insolent queries with which they assail us (yet, for the record, bear repeating):
1.When will the ICESAVE (…sic) Chief Promoter/Whore, Commander-in-Pimp, Grifter/Spokesman, and Convincingly Life-Like Mannequin, (President Olafur Ragnar Grimsson), be tried, convicted, and imprisoned for Prostitution?
2.When will he publicly numerate Gifts Received from his Bloated Masters?
3.Does he propose to cleanse his Good Name (sic, sic) by repaying said Gifts? If so, in Euros or Crowns, and at what rate of exchange?
4.When he is gang raped in the prison showers by Lithuanians, will we, (his friends and supporters), be allowed to send conciliatory cartons of Marlborough Lights?
Afram!
Gummi
>” This issue is too complicated to be decided by public opinion in any of the countries involved. ”
Fisy says:
March 7, 2010 at 6:57 pm
https://www.icenews.is/index.php/2010/03/07/1-5-voted-yes-in-icesave-referendum/
Like I said before in November 2009 :?https://www.icenews.is/index.php/2009/11/28/icelandic-president-urged-to-say-no-to-icesave/#comment-103681
” This Icesave dispute should be going to court for judgement, not to the court of the public opinion .
Of course a referdum will cause it to be rejected. But that is not the same as a judge making a ruling — and appeal to EFTA Court. It is merely ( like this nonsense Anthill ideas ) meaning that it is unpopular.
This referendum does not have any legal power over actual legallyity of icesave monies that EU regulations did burden Icelandic tax payer with.
Decision on paymnts needs to be in front of impartial court and then appeals process to have legitimacy. ”
But it is exactly right for the tax payers that will pay for this to have a decision on the deal acceptance. This right of referendum, and coming to us Icelanders soon, the right of initiative for 5% of voters ( not this 15% Jóhanna has in her tiny Stalin mind )
I was for to court with Ice Save I and II as any reader of this IceNews will know. That is because those deals were so horrible and unequitible that it would have been true slavery.
Then I was one those that did vote YES for IceSave III because it was reasonable deal.
But I am not upset that now we will get this through finally an impartial court process. As I say before what I worry about is that the EU commission may decide to ignore the ruling of the EFTA Court — if the EFTA Court does rule differently than the EU comission would like.
They are different ” courts “the EFTA Court and the EU’s one, both ruling on same body of law ( the EU directives and acquis communautaire ) as applied to the pillars that EFTA has vs ones that EU has.
So as peers, if they disagree the EU might ignore it.
If fear that if EFTA Court rules and EU does not like it, EU will try and ignore it.
Just like EU commission did over the no votes Holland and French on the EU constitution and then just passed Lisbon the same constitution with minor changes. And how the EU commission ignored the No vote in Ireland to Lisbon.
To Oystein-Norway,
There is no problem having an EC directive aimed at protecting depositors money. What we are having trouble with, is that its wording is so vague, and in some ways contradictory on the all important subject of government guarantee.
In various places, the directive states directly that DIGF’s should be privated, funded by the finance industry only, and state aid by the respective government is not allowed. But then it includes also the “ensure” preample, which many people are reading its reverse as saying, that if the DIGF does not have enough money (which it never can anyway in case of a large crash), then there is a potential for requiring a government liability.
If designers of the EC Directive wanted to require governmental guarantee, then they should have stated so explicitly in there.
My thinking is, that they decided ON PURPOSE to require the DIGF’s to be privately funded, for competitive reasons. That is, not allowing richer larger countries to give their banks advantage, through offering stronger guarantee, which would amount to an illegal state aid.
It is possible though, that they then added the “ensure” preample reverse to provide some kind of backdoor towards a state guarantee. We will have to wait until all the court have ruled (EFTA Court, Iceland District Court, and Iceland Supreme Court), to find out which interpretation of the EC Directive is legally correct.
But Fisy is correct, the designers of the EC Directive should come forward and explain their reasons for making it so vague on this important issue.
>don’t find it problematic that they at least do have some kind of formal protection for their money.
I want to under stand how this gap in the regulations made in to directive EC/94/19 that did apply this freedom of establishment pillar to branches.
How did the process of COREPER to parliment and council process not get this discussed.
Did Germany vetoe the directive because of this or because the German burecrats did see the future moral hazard of state guaranteeing of deposits ?
I want to find out — but I can’t seem to find the procedure page for 1994 — like it was possible to find for the 2002 supplementary supervision of credit institutions in a financial congromolates directive.
“What I would very much like to know is who was the burcrats in COREPER of EU commission responsible for Directive 94/19/EC.”
@Fisy – There is much that can be said about the EU, but I doubt ordinary citizens, tax payers, depositors – or whatever humans are called – find it problematic that they at least do have some kind of formal protection for their money.
To RebelEconomist,
Interesting to hear you say that. We found out the hard way, that this issue was just WAY TOO complicated for our own government to understand or decide. :-)
They just kept making mistakes after mistakes. So we exercised our constitutional right, to decide this IceSave matter for ourselves. We will find out within few years, after the legal cases have been resolved, whether we were right or wrong.
As citizens of Iceland, we can have our own opinions of various world leaders and their decisions. Some we may agree with and some we may not. But in the end, these are only opinions, and the voters in each respective country, have the right to make their own final determination on who they vote for and whether they agree or accept their political decisions.
Same of course goes for Iceland. This is our own country, and we have the fundamental right as a sovereign nation to be in control of our own decision making process, and our destiny.
What I would very much like to know is who was the burcrats in COREPER of EU commission responsible for Directive 94/19/EC.
All I could find on EU parliment website was that when it made its way into the Council, Germany did vote against it, i.e against Directive 94/19/EC ( of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes ).
They parliament website seems only to go back to 1996.
If some one does know who was rapporteur in the debate in ruber stamping of EU Parliament procesc back in 1994 and before that would allow to find the debating history in the achive.
+https://www.icenews.is/index.php/2010/01/10/icesave-explored-from-different-angles-on-icelandic-tv/#comment-110069 Here I found it for the 2002 financial conglomerates directive but that was maybe because I had name of the rapporteur.
RebelEconomist wrote:
> “the British taxpayer was barely aware of the issue, so I don’t think the British >negotiating position was motivated by British public opinion ”
I forget to say before, welcome and good to see you posting here as well at your blog.
If Brown had dared to have poll asking that people in UK should bail out foreign owned banks answer would no doubt be no. But same answer if the question was asked about bailing out UK ownered banks.
Reading of history indicates that this attitude toward Iceland from Brown did come from need to keep him self in his seat in governmetn chair as leader of Labour party by to not lose to the Scottish National Party in that 6 November 2008 by election.
Attacking Iceland and the ” arc of insolvency ” in October was good for that+ and this line was used during October all way up to November election and did continue from then onwards.
The Dutch did follow on after that as poodle of UK benefitting from the hard work that Brown and his cabinet ministers did put in the initial stages.
And that attitude did continue onwards until Labour kicked out of office in May 2010 and also in Holland in June 2010.
It made good head lines for him and as he did not allow any ivnestgaton of UK parliament into details of the RBS and other banks like HBOS and Bradford and Bingleys then the jingoist head lines against Iceland 2008 until 2010 was good for him.
The pressure from EU member states to block IMF did not just come from UK and Dutch but as has been pointed out from other states too. They did not want under mining of confidence in the many EU based banks by focus on horrible regulation gaps and depositr insurance deficiances.
That might have been true during early 2009 but by 2010 things were past that stage of blustering, with many of the banks and governemtns in EU and eurozone unable to hide the problems caused from 2001 – 2008 orgy of cheap money from Japan, and US Federal reserve low interest rates and resulting loaning polciies.
In summary, as Lee Buichet++ did reveal the negotiating team on UK and Dutch side was same — only it was their political masters that had changed by time of IceSave III process being done.
So it was they political masters earlier that did block Icesave I and II.
How other wise can you explain what happened in the deal of Icesave I ( as amended by our parliament ) being rejected by British and Dutch ?
+http://www.telegraph.co.uk/news/politics/byelection/3395591/Labour-wins-shock-victory-in-Glenrothes-by-election.html
http://www.heraldscotland.com/murphy-in-arc-of-insolvency-attack-on-snp-1.891802
++I am sorry that his hard work in negotations IceSave III did not turn into the deal being accepted by the Icelandic voters
Fisy,
Believe me, by the time that the Icesave dispute was being negotiated between the governments involved, the British taxpayer was barely aware of the issue, so I don’t think the British negotiating position was motivated by British public opinion. In fact, if you look at some of the discussions in British newspapers at the time (eg as linked in the blog post I mentioned above), you will see that the majority of British people were sympathetic to some notion like “plucky Icelanders rejecting demands to bail out bankers”. This issue is too complicated to be decided by public opinion in any of the countries involved.
“A continuation of misdirecting away from the own problems of failed supervision of their own banks — although Dutch were less guilty of this than Gordon Brown.”
The main difference was the ditch asked the Icelandic regulator to limit the amount of money they were stealing and setup a fully funded protection scheme, the UK didn’t. They knew it was pointless.
When you have a government like Iceland hell bent on robbing your citizens through legal means there is nothing you can do about it. The Dutch tried and the British tried and it made no difference.
RebelEconomist :
” I think the problem was that, instead of a professional debate about the structure of the loan, or the legal basis of the British and Dutch claim like we have had here, the issue was thrown to the ill-informed and emotional reaction of Icelanders ”
Youve got that ass backwards — it was the masters of the negotiating team of British and Dutch that did not take advantage of revised offer from our parliament of IceSave I that showed an ill-informed and emotional reaction — that of trying to look ” tough ” to they own tax payers.
A continuation of misdirecting away from the own problems of failed supervision of their own banks — although Dutch were less guilty of this than Gordon Brown.
By time our political idiitios in the government seats of Red – Green coaltion did ram through IceSave II it was too late. The political settlement in Iceland between paarliament and people had already changed coure.
I am disaapoointed that IceSave III was not accepted in the referendum but it is important water shed time as we are looking now at direct democracy for important decisions.
No longer is our parliament to be trusted alone.
They blew their absolute power now for generation — if not forever — as new constituial selltment is coming to Icelanders. That of direct democracy.
This also means that people of Iceland ( unlike other places than maybe Swiss or Leichenstein ) the tax payer and voter of Iceland does decide as well if they wish to.
Current politicans cant stand idea of direct demorcacy ( although I would expect Davið to actually come out on side of it ) and certainly not the power centalizing burecrats in the EU commission.
This idea of direct demoracy and right of initiative that we WILL HAVE in Iceland is very scary to those being exact opposite of EU super state ideas.
But it is also the enemy of the ” old system ” pre 1991 that the current Red- Green colation is trying to bring back thorugh state power of everything in appointee by the politican hands.
NEVER AGAIN!!
DO YOU HEAR US YOU USE LESS ICELANDIC POLITICIANS? YES ALL OF YOU.
To RebelEconomist,
I can easily understand why you would think UK/NL were not too “demanding”. We just respectfully disagree.
You do not live in Iceland and you do not, as far as I know, pay any taxes in Iceland, nor do you have the right vote here. Even many of the people in the “Yes” camp, believe that UK/NL had been trying to bully Iceland into accepting agreements, that were clearly very unfair to us.
As I mentioned earlier, the Icesave I agreement, with the economic conditions attached, was in fact accepted by the parliament and signed by the President during the summer of 2009.
The UK/NL governments then decided not to accept those conditions. Instead they renegotiated with the Icelandic government, what then became the Icesave II agreements. These new agreements were passed by the parliament in December 2009 by a very close margin.
What all three governments failed to realize, was that during this time, the bloggers and opposition groups such as InDefence gained the clear upper hand in the debate. By the time we had the referendum, the Icesave II agreements were struck down by 98% of the votes.
Partially this strong opposition happened, because of the perceived extreme unfairness in Iceland of asking regular people, that were already suffering greatly as a result of the crash, to pay for the mistakes of private bankers and incompetent governments.
This idea that it is perfectly alright to have private banking, with enormous profits when things go well, and then just nationlize the “losses” when then things go bad, is a clear example of a “moral hazard”.
It is even worse when one set of countries (UK/NL) decide, that they can do whatever they want (pay out the depositors), since some other smaller country (Iceland) will just pay for all the costs.
In our view, there should at least have been some kind of judgment first by an independent court, that confirmed this was in fact a legal obligation for the Icelandic people.
You say that the debate here in Iceland was ill-informed and just an emotional reaction. I think if you had participated, you would have been amazed how informed and detailed it actually was. Every aspect of the agreements, financial, legal, political, strategic, fairness, and moral, were parsed and analyzed, and then debated to the n-th degree.
Yes, lot of people were angry and some were quite emotional (Bromley86 can probably attest to that :-)), but in the end the voters made their final deliberate choice, with the second referendum.
The final outcome with 40% Yes-vote, shows that large part of the population was in fact willing to consider agreements, which they considered to be fair.
They were just not the majority, and since Iceland is a democratic country, the No vote with 60% of the vote had their victory. Now the only option left is to resolve this in court, as should have been done right from the beginning.
I would dispute that Britain and the Netherlands were too demanding at any point in this negotiation. If I recall correctly, Icesave I included a provision in which if, given the limits set on repayment according to Iceland’s economic growth, the debt had not been repaid by a certain time, the remainder would be written off. While it might have been useful to have seen an estimate of the present expected value of this feature, it was obviously considered unacceptably disadvantageous by the British and Dutch. The interest rate also seemed high, although possible reasons for that are considered in the blog post I mention above, and even if the British and Dutch were adding a margin to their own borrowing costs, it should not be forgotten that the rate was far less than Iceland could have achieved by borrowing itself from the market at a competitively determined margin that reflected the probability of default.
I think the problem was that, instead of a professional debate about the structure of the loan, or the legal basis of the British and Dutch claim like we have had here, the issue was thrown to the ill-informed and emotional reaction of Icelanders to ideas like paying for bankers, being branded as terrorists and enslavement on a par with WWI reparations. If the British and Dutch were remiss, it might be that they did not go far enough to make their case directly to the Icelandic people – eg by being interviewed on TV like Lee Buchheit – if that is the case (and, not having access to the Icelandic media, I would not know).
To Bromley86
The main point I am making is that there were actually lot of opportunities in 2009 to resolve this dispute, but the whole thing was mismanaged badly by ALL three governments.
The Icelandic government failed by sending, what can only be described as sending one of the most incompetent negotiation team ever, and then trying to ram bad agreement(s) through, that clearly did not have support.
The UK/NL governments failed, by not realizing how weak support the agreements had in Iceland, which became very clear during the summer of 2009. I do not fault the UK/NL negotiating teams taking an advantage of their clearly less-capable Icelandic counterparts. But all the secrecy involved, and the one-sided terms and unfair provisions in the agreement, that kept dripping out slowly during the summer, did a great damage. This soured the support of the population in Iceland, that was being asked to pay for this.
UK/NL still had an opportunity to either accept Icesave I with the economic conditions, or continue negotiating on the real issues that were being raised by Indefence and others. Instead there were only relatively minor changes made in Icesave II, which was then soundly rejected in the March 2010 referendum.
It is my estimation, that if the Icesave III agreement had been negotiated and presented in 2009, it would have been passed then without much hassle, just like the Icesave I did.
Iceland see you in court.
The consequences are going to be far worse than your Volcano.
Enjoy your rain dance for now :-)
>The interesting thing is that UK/NL would also probably have been better off, by just by accepting the IceSave I agreements in 2009. Even though they had the economic conditions attached by the Icelandic parliament
Perhaps. However I would put it to you that it would be preferable to risk a court case going against the UK (especially if the bulk of the principal will eventually be recovered) rather than create that sort of precedent.
>Iceland might even decide to argue in front of the EFTA court, that it did indeed pass laws that fulfilled its guarantee obligations
It would lose, as there is certainly no provision for time limiting the state guarantee that the directive (allegedly!) requires :) .
Unfortunately that argument goes both ways and will undoubtedly be used by Iceland to counter Peter’s point about acceptance of liability.
@Peter
>Obviously not as two apparently far better agreements were refused by Icelandic voters.
That’s Bjarni’s point – Icelandic voters may well have rejected Icesave I given the choice, but in this one case they were not. Well, they weren’t given a choice on Icesave II.5, but then that never made it into law anyway.
To Peter – London/Krakow,
The trouble with the Icesave I agreements was NOT by Iceland. They were in fact legally passed as laws in the Parliament, and signed by the President. Therefore the option of a referendum never even came up.
The trouble was instead that the UK/NL governments were NOT willing, at that time, to accept the economic conditions that were attached. If they had accepted, the Icesave I agreements would have ended the dispute, right there and then.
“The interesting thing is that UK/NL would also probably have been better off, by just by accepting the IceSave I agreements in 2009. ”
Obviously not as two apparently far better agreements were refused by Icelandic voters. There is no reason to beleive that Icelandic voter will ever vote to refund the money and much prefer to go to court, even then I don’t think Iceland will refund the stolen funds.
“The IceSave I was legally passed as law in 2009 and signed by the President, so no referendum was needed. Since those laws are still on the books today, Iceland might even decide to argue in front of the EFTA court, that it did indeed pass laws that fulfilled its guarantee obligations, regarding the EC Directive. ”
So, in fact Iceland has already accepted responsibility and liability for the debt? You realise that passing laws and then making no effort to in force them, isn’t a defence more of a confirmation of guilt.
Which means the hearing will basically rubber stamp and give the NL/UK a legal basis to enforce repayment.
“See you in court! :-)”
The hearing will be in front of three judges where the EFTA SA will present a case against Iceland. The EU won’t be present as such.
To Bromley86,
The interesting thing is that UK/NL would also probably have been better off, by just by accepting the IceSave I agreements in 2009.
Even though they had the economic conditions attached by the Icelandic parliament, they still offered the higher interest rate, and with them Iceland formally accepted the responsibility for the “debt”. It could even be argued that IceSave I with the conditions was a more beneficial agreement for UK/NL, than Icesave III.
The IceSave I was legally passed as law in 2009 and signed by the President, so no referendum was needed. Since those laws are still on the books today, Iceland might even decide to argue in front of the EFTA court, that it did indeed pass laws that fulfilled its guarantee obligations, regarding the EC Directive.
The UK/NL governments never officially responded, but apparently said no, presumably because they wanted more at that time…
>Letting the first referendum go forward to a certain defeat, was a MAJOR tactical mistake for the UK/NL governments, as I warned repeatedly about at the time.
In fairness to them, they couldn’t stop it :) . They did try their best with the “best & final” offer at the same rate as the Nordic loans and with a 2 year interest free period.
To Peter – London/Krakow,
You are starting to sound a little bit desperate. See you in court! :-)
“You lay out pretty well what will undoubtedly be the main arguments of the UK/NL governments in the upcoming legal proceedings. And the Icelanders raise in the comments, many of the counterpoints the Icelandic government is likely be be making.”
The are not legal arguments, so much as deluded inventions of a desperate mind. By stacking one excuse and exception on top of another you get a flaky house of cards. Just one, differential treatment of EU citizens, blows it all away, because Iceland protected all its depositors.
“You are still not getting it. NO depositor got paid ANYTHING from the Icelandic government. Providing capital for starting the three new bank, is of course a completely different thing, than paying out depositors.”
They nationalised the debt for Icelanders and told foreigners to *** off. Thats the difference.
To RebelEconomist,
Thanks for the link to your blog. It was fun reading again the debate on the IceSave II agreements from a year ago. You lay out pretty well what will undoubtedly be the main arguments of the UK/NL governments in the upcoming legal proceedings. And the Icelanders raise in the comments, many of the counterpoints the Icelandic government is likely be be making.
Those that have followed my Icenews.is commenting here, will notice that while it was EASY for me to be against the Icesave I and II agreements, the case for or against the Icesave III agreement was little bit more muddled.
The new IceSave III agreement was in fact well negotiated, and relatively fair to all parties involved, sharing the cost among everyone. Looking at the risk factors alone, I judged our legal case to be good with the risk of a potential bad outcome to be relatively small and manageable. Still there is of course always risk going to court, no matter how good case you have.
At the same time, I judged the risk of accepting the agreement, and Iceland subsequently running into difficulties financially as a result to be about equal. I just was not as optimistic on this issue as the Yes camp and the government was. On the other hand, we would definitely get more “positive” support from various other European countries, if we said Yes.
One point for the UK/NL to consider, is that if they had been clever enough to offer the Icesave III agreement back in 2009, it is quite likely that the No camp would never have been able to form so strong opposition in Iceland.
Letting the first referendum go forward to a certain defeat, was a MAJOR tactical mistake for the UK/NL governments, as I warned repeatedly about at the time. While Icesave III got relatively positive response in Iceland first when they were published, having the earlier referendum made the task much easier for the No camp to stir up the opposition, and turn things around in the last weeks.
As for me, with the risk being about the same, in the end I basically decided, I would go with the democracy :-), and support whatever outcome there would be from the referendum.
Now that this has gone to the referendum and we have the final result, the only real option left is to go through with the legal process. This will probably take about 1-2 years, undoubtedly with some twists and turns along the way. At the end of that period, we will finally know who is correct and who is wrong, on most of the issues we have been discussing here.
My prediction is that the final result is going to end up being kind of a draw. That is Iceland will win on some points, and UK/NL are going to win on others.
To Peter – London/Krakow,
You are still not getting it. NO depositor got paid ANYTHING from the Icelandic government. Providing capital for starting the three new bank, is of course a completely different thing, than paying out depositors.
For example, I had money deposited in the Icelandic banks in October 2008, and its still stuck there today. I certainly did not get paid any money from the government or the TIF, as the British/Dutch depositors did.
Bjarni,
You raise a good point when you say that in most countries, the failure of the largest bank would generate an excess of deposit insurance payments over the ready funds in the deposit protection scheme that would place a large burden on the remaining banks. I suppose that this is considered less of a problem for a large country, because the failure of even its largest bank would have a smaller impact on its banking system, partly because larger economies tend to be more closed (ie more trade is internal), meaning that their other banks are likely to pick up the business of the failed bank, and partly because larger economies tend to be more diversified and therefore more resilient to the shock of the failure of a big bank. In a large country, therefore, the remaining banking industry should be able to cope with increased deposit insurance fees (note that this means that surviving banks are paying for the mistakes of a failed competitor, but this is a cost of having an ex post funded scheme, which also has benefits for the banks). Ability to recoup the cost of paid deposit insurance from future fees does not of course absolve the administrators of the deposit protection scheme from needing access to borrowing facilities to cover the immediate outlay, and it would be prudent to arrange this in advance. In Britain’s case, the Financial Services Compensation Scheme has statutory authority both to raise insurance fees to recover compensation paid and to borrow (http://www.legislation.gov.uk/ukpga/2000/8/part/XV).
Yes, I do think that Britain could cope with the failure of HSBC, although it would clearly be very disruptive if not costly. In theory, the FSCS could borrow the compensation from its own banks, because most of the compensation payments would be redeposited with them; in practice, it would probably be more straightforward to just nationalise the bank. It actually might not cost much in the end if the bank’s shareholders are wiped out and its assets are not too bad. While it was more difficult for Iceland to deal with Landsbanki because it had a relatively large foreign currency business, Iceland was fortunate in having a couple of lenders in Britain and the Netherlands willing to lend it foreign currency at much lower interest rates than it could have obtained from the market, but Icelanders said “Nei”!
I am grateful to Bromley86 for answering your question about the source of the TIF explanation of compensation in the event of the failure of two banks. This link appears in a blog post I wrote setting out why I felt Icelanders should have approved the terms put in the March 2010 referendum, and although that post predates events such as the ESA letter and last weekend’s referendum, it occurs to me that readers here might find some of its other facts and links useful: http://reservedplace.blogspot.com/2010/03/on-thin-ice.html
“The Icelandic government did NEVER paid out to ANY depositors. Not the foreign depositors, AND certainly not the Icelandic depositors.”
They guarantee the deposits and recapitalised the banks. The taxpayer did pay to protect the deposits. Iceland could have done the same for Icesave depositors.
To Bromley86,
In the end the courts will have to rule, whether the reverse “ensure” argument outweighs all the other parts of the EC Directive, that restrict the possibility of government “backup” guarantee and make state aid illegal.
To Peter – London/Krakow,
I think you are still not getting it!
The Icelandic government did NEVER paid out to ANY depositors. Not the foreign depositors, AND certainly not the Icelandic depositors.
The UK/NL governments on the other hand DID pay out all their depositors, in their respective countries.
>I think the intention of the TIF staff in the Q&A was to explain the MECHANICS of how the DIGF works rather than specifically implying that the fund itself had enough money to pay out the deposits for two banks.
But that’s precisely Rebel’s argument, isn’t it? There’s no way the third bank could have funded the liability, so the TIF was always going to have to get the government to borrow the money for it.
As the sole remaining bank could never have functioned if this liability was then recharged to it, even over a massively long period, the state was always going to take the hit.
Whether the courts look at this as proof of failure to “ensure” in the absence of a state guarantee is an unknown, but it certainly seems to be a strong argument.
To Vilhjalm Antonsen,
I agree with your point, that this will probably all come out in the “trial”. The reason I put the word trial in quotes, is that as I have explained earlier, this legal process we are now starting, will not necessarily be a normal trial in the usual sense of the word.
Rather most of the process will be focused in the beginning on whether the EC/94/19 Directive, according to the EEA Agreement has been implemented correctly through the Icelandic 98/1999 law passed. In this process, ESA will be acting kind of in the role as the prosecutor in the EFTA Court, with Icelandic government defending.
After the question of EEA Agreement violation has been resolved, a whole new legal process will have to be started by the UK/NL governments on behalf of the depositors. This will then mainly take place in front of Icelandic courts, but certain questions may be forwarded to the EFTA court for a guiding opinion.
The reason this has to go to Icelandic court, is because EFTA Court rulings cannot be used to establish liabilities or determine damages. This is where, the points you made are likely to be raised by the UK/NL governments. If the three conditions for liability are met (see previous comments above), the court may decide to award damages to the depositors.
Regarding the size of the banks before the crash, you can get the correct numbers from the 2007 Annual Reports for each respective bank. The total balance sheet for all three banks was about 100B Euros, with the liabilities about 55B Euros in loans and 35B in deposits.
To Bromley86,
I think the intention of the TIF staff in the Q&A was to explain the MECHANICS of how the DIGF works, rather than specifically implying that the fund itself had enough money to pay out the deposits for two banks.
But, I can see how people could easily come away from reading the Q&A section thinking that DIGF is alright. That is of course, until they start reading the News section and get the bad news :-(.
“But the system did NOT work for accounts in foreign currency. Everyone knew from the beginning that the Icelandic Central Bank had run out of their foreign reserves. ”
And of course that’s a red herring. Iceland never offered to pay in ISK. They have refused to pay full stop.
“I suspect that a full non-discrimination ruling for ~8bn euros would lead to default, but such a ruling is an outside chance.”
Countries cannot really default when it comes to intro country debt. The EU states would have to accept they would be paid and they don’t have to do that, Iceland has in effect defaulted – they have refused to pay the debt on time, what difference did it make – none. Neither Iceland nor the debt is going away.
“But the system did NOT work for accounts in foreign currency. Everyone knew from the beginning that the Icelandic Central Bank had run out of their foreign reserves. ”
Irrelevant, as has been pointed out, Iceland had a duty of care to guarantee the accounts, it knew trhat when it came up with the passport scheme to bail out its banks.
“The UK and Dutch governments, then unilaterally decided, that they would PAY OUT everyone directly.”
And of course Iceland did the same with local depositors and violated one of the core principle of the EU, preferential treatment top its own citizens over other EU citizens. Its also a point that the Icelandic scheme has not paid out ANYTHING to foreign depositors. It kept the 100million euros (or whatever). Whys that?
Bjarni says:
“So the question becomes, is the Icelandic government responsible for having authorized through laws 98/1999 a too small DIGF, compared to the size of its banking sector?”
Yes, absolutely. This will come out at trial. It is not adequate to merely enact a law that provides a minimum pool of reserves based on 1% of deposits. The scheme should have taken into account the high leverage of the banks, the risk of its loans and investments, their lack of hard currency, and the inability of the Icel. Central Bank to act as a lender of last resort.
As everyone knows now, and should have known in 2005 (before Icesave was started), the three Icelandic banks were highly leveraged, with an enormous amount of loans in untraditional investment-bank type of loans (as opposed to, for instance, mortgage loans). The loans were somewhere in the area of 80-100 billion euros, with something like 20 billion euros value (in ISK) in domestic Icelandic savings deposits. And only a relatively small proportion of the domestic deposits were held by LB, probably less than 1 billion.
In 2005, Landsbanki was essentially insolvent. The real value of its investments (loans outstanding vs real value) was essentially zero, and it did not have enough cash to continue operating as it had before. So LB came up with this brilliant idea to take in deposits in the UK, in order to raise hard cash.
In order to set up Icesave, LB had to get approval from the Icelandic government – so the government either knew or should have known that LB could not have been able guarantee the deposits in the UK/NL.
At that time, in 2005, the Icel. government should have either stopped Icesave, or forced LB to raise hard currency as a reserve, or increased the contribution of all the Icelandic banks with savings deposits to 20% or more (by changing the 1998 law), or loaned TIF a large amount of hard currency. Instead, they did nothing.
Does keeping a reserve of around 200-400 million Euros in value “ensure” 8-9 billion in deposits when the bank taking in these deposits is essential valueless? I don’t think so.
When the truth comes out at trial about Landsbanki’s poor financial condition in 2005 – and what the government knew at that time, the effect will be very damaging for Iceland’s case.
>You mentioned that the TIF web-site mentioned somewhere, the DIGF was large enough to cover even two banks that went bust at once.
It’s in the FAQ:
“What happens if more than one deposit institution becomes insolvent at the same time?
The minimum amount guaranteed by the Fund is based on each national ID number in each bank. If a deposit owner has accounts in more than one deposit institution – two, for example – and both of them become insolvent at the same time, the customer in question will receive two payments equalling the combined balance of the deposits in the two banks or, at least, twice the minimum payment. ”
http://www.tryggingarsjodur.is/QA/
To RebelEconomist,
When you are dicussing any DIGF, it is important to make sure you understand why there are there and how they operate.
The purpose is mainly twofold: to provide consumer protection for depositors that are in general considered to be not so sophisticated, AND secondly to provide stability for the financial system by lessening the chance of bank runs, in case there is trouble in the financial market.
The trouble is that, by design no DIGF ever has enough money to cover ALL the deposits each respective country’s largest banks. This point is very easy to prove. Just take the total amount that is in any county DIGF fund, and compare it to the total amount that the largest bank has in deposits.
So the consumer protection will ONLY work if the bank is relatively small compared to the overall size of the financial system in question, or if somehow you can convince the depositors NOT to withdraw the money.
The system actually worked as planned in Iceland, where the government by promising to guarantee all the deposits for the new banks in ICELANDIC KRONAS, never had to pay anyone anything. All the depositors decided in the end to keep the money in the bank Actually, during the first weeks after the crash they were forced, since large any withdrawals were not allowed.
But the system did NOT work for accounts in foreign currency. Everyone knew from the beginning that the Icelandic Central Bank had run out of their foreign reserves. The UK and Dutch governments, then unilaterally decided, that they would PAY OUT everyone directly. This they could do relatively easily, as for them the amount, few billion Euros, was well within their available funding limits. But as far the second goal was concerned, the system actually failed its purpose, while it satisfied the first goal.
If it had been the HSBC that went under, do you think the FSCS, or even the UK government, would have been able to come up with enough cash to pay out all the depositors, which would require approximately 670B Euros?
Or would the DNB or the Dutch government be able to cover the 500B Euros, that would be need to pay out all the depositors of ING?
So the question becomes, is the Icelandic government responsible for having authorized through laws 98/1999 a too small DIGF, compared to the size of its banking sector, when its clear that its relative small size is in fact very similar to the DIGF size in most other European countries.
You mentioned that the TIF web-site mentioned somewhere, the DIGF was large enough to cover even two banks that went bust at once. I would be very interested in seeing a reference to this statement, since clearly this guarantee could never have been possible.
The future banking system of Iceland will never have any ability pay anything but just a fraction of the money TIF is required to pay out to FSCS and DNB. Therefore, you are correct, that any loan to TIF would never be repaid, whether it would come from the Icelandic government (which does not have the money anyway), or anyone else.
>For sure, you have presented a convoluted argument based on ignoring facts that contradict your argument and inventing concepts that doesn’t exist
There’s a certain irony to this point :) . It’s also not the case; Bjarni’s points are well reasoned and, more importantly, his opinions are flexible.
For example, I remember him saying that the Icelandic deposit guarantee law allows for payment in ISK, but when I pointed out the fixed convertibility clause he accepted it.
>You know damn well that Iceland will refuse to take the consequences when it loses.
In theory, as Grimsson has publicly said he will accept the judgment of the courts, this shouldn’t be a problem. I suspect that a full non-discrimination ruling for ~8bn euros would lead to default, but such a ruling is an outside chance.
I personally think that going to court is a massive mistake for Iceland, but that’s based on my personal interpretation of risk. Ultimately, no reasonable person could argue with this:
“We want our day in court, and we are willing take the consequences whatever they are, so long as UK/NL do the same.”
“We want our day in court, and we are willing take the consequences whatever they are, so long as UK/NL do the same.”
You know damn well that Iceland will refuse to take the consequences when it loses.
If by some bizzare chance the EU loses there will be the same or even worse consequence for Iceland.
“We are well aware of this argument you are making, having debated it here on Icenews.is and in the Iceland blogsphere multiple times. ”
For sure, you have presented a convoluted argument based on ignoring facts that contradict your argument and inventing concepts that doesn’t exist, but at no time have you persuaded any independents, never mind independent experts, that Iceland has any case.
I’ve read the EFSA letter and it pretty much rips apart everything you have claimed based not only on the laws, but the fact that these laws have been tested in court and therefore the precedent is set. One of the central argument you and others have tried to present is that the laws have never been tested in court; well they have.
I don’t know who you are trying to convince, but you better accept that Iceland is going to lose big when it goes to court (and it will thanks to the ridiculous arguments they Icelandic people have been fed, that somehow the law is uncertain).
[…] (en) Les clients néerlandais et britanniques seront payés malgré le non au référendum (IceNews) […]
Bjarni,
It is not so much that Iceland’s deposit protection scheme did not ensure the full payment of €20K in every situation, but more that it did not ensure full payment of €20K in most plausible situations. The failure of any one of the major banks was enough to break it, and yet the TIF was so complacent that the DIGF website actually describes how depositors would still get paid if two banks went bust at once. Perhaps the TIF staff themselves believed that the government would back the DIGF if necessary.
Arguably, government backing in the form of a loan to the deposit protection scheme to be repaid out of future deposit insurance fees does not breach the European rules, but such a solution was never likely to be viable for Iceland because the failure of one of its major banks would probably weaken its banking industry so much that it would be unable to support the increase in fees necessary to repay the loan.
To RebelEconomist,
Yes, we are definitely still keen of settling this legally. That was what the whole referendum was about, where 60% of the voting population, after extraordinary amount of discussion and debate, decided to said NO to the current Icesave III agreements.
We want our day in court, and we are willing take the consequences whatever they are, so long as UK/NL do the same.
To RebelEconomist,
We are well aware of this argument you are making, having debated it here on Icenews.is and in the Iceland blogsphere multiple times.
Basically the argument goes, since the laws 98/1999 passed in Iceland did not “ensure” full payment of 20K Euros in every situation, by reverse argument of the preample, the Icelandic government should become liable to pay any shortfall.
We the people of Iceland, just respectfully disagree with the interpretation of this preample.
For example, many other parts of the Directive contradict this interpretation, by requiring a private DIGF, funded solely by the financial institutions themselves. Furthermore it goes on to say, that the payments into the fund must not be so high, that they would jepardise the financial stability of the system.
Then we have the issue of “Illegal state aid”m which is specifically banned in the EEA Agreement. In fact the EC Directive specifically states in Article 3:
“the system must not consist of a guarantee granted to a credit institution by a Member State itself or by any of its local or regional authorities”
If your legal reading of the EC Directive ends up being confirmed correct by the ESA, then EFTA Court, then Icelandic Supreme Court, then the whole deposit guarantee scheme system for EU/EEA will have to be redesigned.
The DIGF in every EU/EEA Country will then automatically be required to be backed up by a State guarantee for any potential shortfall in the payments. Hence State aid would therefore be REQUIRED, instead of being ILLEGAL as it is now.
Bjarni,
If Iceland lets this dispute go to a neutral court, there is only one verdict that you could get that would be good for Iceland, which is that your present position, that the state of Iceland has no liability for compensating depositors, is correct. The downside possibilities if Iceland loses, however, are horrendous. You run the risk that:
(1) The court orders you to pay the British and Dutch what they ask.
(2) The court orders you to pay them now, perhaps even with compensation for the delay compared with the time limit laid down under Directive 94/19/EC, borrowing the money on whatever terms you can to do so.
(3) The court takes the view that, because Iceland protected its own depositors fully, Iceland must fully compensate all Icesave depositors, in which case you would have to pay about twice as much as the British and Dutch are claiming now. The total value of the Icesave deposits when it failed was about €8bn.
(4) The court finds not only that Iceland must fully compensate all depositors, but also that, far from helping matters as you suggest, the emergency law, passed when it was already clear that Landsbanki had failed, is of an ex post facto nature and strikes it down, meaning that having paid the €8bn to depositors and taken their place in the Landsbank creditor queue, the state of Iceland must share the liquidation proceeds pari passu with the bondholders.
Are you still so keen on settling this legally?
Bjarni Kristjansson,
This is how I conclude that the state of Iceland is liable for at least the EEA minimum compensation paid by Britain and the Netherlands:
The penultimate recital in the preamble to Directive 94/19/EC says, “this Directive may not result in the Member States…being made liable…if they have ensured that one or more schemes guaranteeing deposits…under the conditions prescribed in this Directive have been introduced”. In other words, member states are liable if they have not ensured the existence of an adequate deposit protection scheme. Now, if Iceland claims that the DIGF compensation was always intended to be limited to its own fund designed to hold just 1% of insured deposits (maybe plus what it could borrow on the basis of future deposit insurance fee income), given that Iceland’s banking industry was dominated by three banks of similar size, it was a near certainty that its deposit protection fund would be inadequate to provide the mandatory compensation in the event of a failure of one of those banks (ie affecting roughly a third of insured deposits and curtailing about a third of deposit insurance fee income). It follows that Iceland failed to “ensure” the existence of an adequate deposit protection scheme and is therefore “liable”.
My guess is that this situation arose by accident. Working in a small country with limited capacity to maintain expertise across the range of government activities in a developed economy, Iceland’s regulators applied the deposit protection model of much larger countries with a far less concentrated banking industry, like the US FDIC which also sets aside about 1% of insured deposits (as you say, this level of coverage is normal). Unfortunately, no-one seems to have stopped to consider whether that model was suitable for Iceland. It seems to me that this is a risk which goes with sovereignty for a small nation, and that Iceland should accept the consequences philosophically.
To Vilhjalm Antonsen,
I did a little bit digging on Google and found some of the EFTA Court cases where the question of state liability and compensation has been determined in regards to EEA agreement violations.
Please note this question would ONLY apply if the EFTA Surveillance Authority (ESA) determines that there is in fact a EEA agreement violation, and then gets that opinion confirmed with a judgment from the EFTA Court. The UK/NL would then subsequently have to file a lawsuit in Icelandic court, and the court would then forward the case back to the EFTA court for guiding opinion on whether there is a sufficient liability to warrant potential compensation.
The main EFTA case precedent regarding state liability seems to be the Sveinbjörnsdóttir case E-9/97 from 1998:
http://www.eftacourt.int/images/uploads/9-97_Advisory_Opinion.pdf
Here you can read the specific rulings on conditions for state liability in items 64-69. In short, they put three main conditions in place:
“1. The directive in question must be intended to confer rights on individuals, the content of which can be identified on the basis of the provisions of the Directive.
2. The breach on the part of the State concerned must be sufficiently serious.
3. There must be a causal link between the breach of the State’s obligation and the loss and damage suffered by the injured parties.”
It goes further on to say:
“The factors which the competent court may take into consideration include the clarity and precision of the rule breached, the measure of discretion left by that rule to the national authorities, whether the infringement and the damage caused was intentional or involuntary, whether any error of law was excusable or inexcusable, the fact that the position taken by an EEA or Community institution may have contributed towards the omission, and the adoption or retention of national measures or practices contrary to the EEA Agreement.”
Here is an example of another case E-4/01 that refers to the original Sveinbjörnsdóttir decision:
http://www.eftacourt.int/images/uploads/E-4-01_Judgment_EN.pdf
See for example item 33:
“Subject to the existence of an obligation under EEA law of the State to provide for compensation, and where the conditions for State liability for breach of EEA law are met, compensation by the State for the loss and damage caused must be based on national liability law.”
So it is not enough for UK/NL to just show that there has been an violation. They also need to show that there is a clear rule that establishes what the state has breached, that the breach is serious enough, and there must be direct link between the breach and the damage suffered.
The main argument Iceland will likely be putting forth among others, are:
a) The EC/94/14 directive at the very least is NOT very clear on state liability
b) The 98/1999 laws in Iceland were fully implemented according to the wording of the Directive
c) The emergency laws 128/2008 actually increased the expected payments from LBI, by giving the depositors higher priority against other claimants
d) No sufficient damage was suffered by the depositors by Icelandic government emergency actions during the crisis.
e) If there is need for compensation for damage, it must be determined based on national liability laws.
To Vilhjalm Antonsen,
Well we are going to find out soon enough who is right and who is wrong here. Here are the main points:
1. The Icelandic laws 98/1999 were passed specifically by the Icelandic parliament, to fulfill the Icelandic obligations to the EC/94/19 directive. The Icelandic law was accepted at the time as written by the EU, and no objections were raised by anyone involved. They are similar implementation of the directive as with many other EU/EEA countries. If you believe any of these points to be wrong, please provide exact references that show otherwise.
2. One of the points UK/NL can raise in their upcoming lawsuit(s), is that the 98/1999 laws do not fulfill all the obligations that are required by the EC/94/19 Directive. You raise the point, for example, that 1% contribution by the banks clearly not enough. Can you point to any EU/EEA country were a higher contribution is actally made?
3. We are NOT arguing that the EC/94/19 Directive is void and we never have. Rather, the argument we are making, is that if you actually read the Directive and compare it to the 98/1999 laws in Iceland, we fulfill all the obligations required as stated exactly in the Directive. Until or if a court rules otherwise, the 98/1999 laws are fully valid, and this will remain our position.
4. The British and the Dutch have NO jurisdiction in front of the EFTA Court (there is no EEA Court). The rules how these kind of cases are handled, can therefore become rather complicated. In short, proving that there has been any violation of the EEA Treaty or any of the EC Directives, will be mainly handled by the ESA (EFTA Surveillance Authority).
5. If and when the violation has been established, UK/NL will have to prove in front of an ICELANDIC court that they suffered sufficient economic damage by the violation, that the damage was caused by action or inaction of the Icelandic state, and finally that they are entitled to damages to be paid by the Icelandic government. The EFTA Court does NOT have authority access damages and payments by the EFTA Countries. Again if you do not believe this to be correct, please provide references that prove your counterpoint.
6. While all the above cases will be winding through the various court systems, the LBI bankruptcy proceedings will start making payments to the prioritiy claimants, mainly UK/NL governments, in accordance with Icelandic bankruptcy laws. The current estimate is that majority of the claims will be paid up within the next few years, just as they would have if the Icesave agreements had been accepted.
7. The outcome of the court cases will therefore only really affect whether the Icelandic government will be required to cover any potential shortfall in the payments from TIF (which originate from LBI), and whether the Icelandic government, will also be required to pay interest on the delay by TIF in making those payments.
8. The Icelandic courts have shown over the years they are quite independent, and their guiding princible has always been strongly directed towards following the EXACT letter of the law, as they are written. This has often resulted in judgments that go against the wishes or expectations of the government. I therefore think you can not make the assumption, that any ruling by the Supreme Court will automatically “favor” Iceland. They will be much more likely follow the applicable law (both Icelandic and EU), and completely ignore the politics involved.
9. If the outcome of the court cases will end up resulting in damages being paid by Icelandic goverment, this will be decided by the courts themselves, not the UK/NL governments. As all the countries involved here are considered civilized, this would in my view never reach the point that UK/NL will try to simply start seizing assets in Iceland. That would simply be illegal and never be accepted by the courts.
Bjarni, you are wrong.
The Icesave conflict is essentially a breach of contract case (since a treaty is a contract). The question is, what are the governing terms of the contract, and did Iceland breach its duties under the contract?
The applicable law is EU/EEA terms, specifically the 1994 directive. When and if you have a conflict between terms of the contract, a judge will look to what the parties saw as the governing law when the contract was entered (i.e. when Iceland allowed Icesave deposits). That governing law is clearly the 1994 directive, and not native Icelandic laws. All these Icelandic laws you cite are irrelevant.
The key issue here, as all the neutral parties have seen, is whether Iceland ensured that an adequate compensation scheme was established by the Icelandic government. Clearly it wasn’t, since the 1% contribution by the banks wasn’t anywhere near enough to cover the deposits. Therefore the Icelandic government breached its duties under the governing contract.
Similarly with your previous arguments, to the effect that the Icelandic government was not authorized to assume debt and liability without the expressed consent of the Icelandic people or the constitution. That is a false argument. A government is assumed to act with the authority of its people. You cannot go back in time and argue that the treaty was void from the beginning because it was not properly authorised.
Iceland may use several defenses to counter its breach of contract. These include: force majeure (such as the collapse of the European markets and Icelandic banking system) and contributory negligence (“unclean hands”) of the British and Dutch banking oversight authorities. (And no, Iceland cannot argue that Landsbanki’s actions were criminal, since a party to a contract cannot invoke its own wrongdoing to decrease damages.) These defenses would come in at the damages phase of the trial, after liability (breach or not) has been established. A judge would determine what percentage of damages is due to Iceland’s breach, and what percentage is due to force majeure and unclean hands and so on.
You also seem to claim that Icelandic courts have jurisdiction and will apply Icelandic laws. Wrong. The Icelandic courts may have first jurisdiction, but the applicable law is clearly the EU directives. If the courts rule against the British/Dutch, they may appeal to the EEA court and then the EU court and the governing laws are those of the EEA and EU.
It looks very likely that the EEA court will rule against Iceland, even if the Icelandic courts (naturally) find in favor of Iceland. The question then becomes, what percentage of damages are due from Iceland’s breach and what percentages due to force majeure and/or British/Dutch actions.
The next step after that will be more interesting. Will UK/NL go all out after Icelandic assets abroad, such as fish (LB essentially owns the quotas) or Flugleidir? Or just kick Iceland out of EEA? Or block EU membership, or stop IMF aid? Or will UK/NL just demand the Iceland sign an Icesave repayment agreement? At that point Iceland will be dependent upon the pity of the UK/NL government, although in several years (by 2013) it may not matter much since the EU will be in a state of crisis and will probably collapse.
“Therefore, its wrong to say, that there was no warning given to depositors. In fact this was all public information, available for anyone to read.”
Not having a fully funded protection scheme is no reason to not pay out, and the Icelandic scheme hasn’t paid out anything to non-Icelanders.
You understand all these silly arguments you keep putting forward have been comprehensibly torn apart by the EFTA SA, in writing, backed up with precedents? The only people you are going to convince are yourselves as there is zero chance anybody else will believe it.
RebelEconomist, welcome to Fantasy Iceland, you will need a new English dictionary, its been written especially for here.
To RebelEconomist,
The Icelandic laws that govern deposit guarantees in Iceland, are public and available for anyone to read at on TIF’s web site:
http://www.tryggingarsjodur.is/modules/files/file_group_26/log/log-98-1999-ens.pdf
The laws are very clear on the following:
a) TIF is a private fund, not government
b) what exactly is covered (up to 1.7M ISK indexed by EUR rate 1999)
c) how its funded (1% of guaranteed deposits paid by the BANKS)
d) what option TIF has in case it does not have enough money available to pay out (TIF is allowed to borrow).
Therefore, its wrong to say, that there was no warning given to depositors. In fact this was all public information, available for anyone to read.
You may feel that “Iceland should accept that the state may need to make a contribution to paying off the British and Dutch deposit protection schemes”. But the Icelandic voters, which are the ultimate decision makers on what Iceland should pay or not, decided with 60% of the vote not to offer this. That decision stands until UK/Netherlands can prove their case in court.
[…] news channel, IceNews has been covering the latest developments regarding Icesave and the recent Icesave referendum result. One such post, scored from the Icelandic Prime Minister’s office, explains some vital […]
[…] Some international Read more at IceNews – Daily News […]
At last. Some slight sense.
Perhaps this mess will get cleared up after all.
Bye the bye Steve/Bromeley86 … sorry for pulling your leg … but you were rather pompous and stuffy so I decided to let you live a little …
Quit entertaining reading your whew … about your escapade with Bjarni´s compatriots.
And yes .. it was a compliment.
But I do disagree with most about why Brown used the aspects of the Act … seem´s to me he went out of control there … understandable since he had to get at Cameron and friends. And no Bromley86 if you look at the monetary transfers Darling should have been able to see then he could not have seen any suspicious transfers … unless he was using the Swift agreement. Unless Darling is clairvoyant.
And Bjarni ? Now what on Earth was your namesake doing in a private visit in London last year …. just looking up old friends ? And then he had this sudden revelation about his Icesave attitude.
You boy´s do of course know that Tower IV Macao was joint venture of islanders and the triad ? No ? Stanley´s triad everybody knows that … and yes he owned the other side lock stock and smoking barrels.
And no, Robert Wessman has a Burlington but not the one I am interested in … but the coincidence is … interesting.
Have fun with your legal mumbo jumbo … just do not forget law´s are not to be broken … just bent.
Sorry boy´s but if you are buying that Whitehall´s boy´s are innocent and honest mr. Bean and friends … well … then I suppose you are in for a rough awakening.
[…] vote does not mean that depositors in the United Kingdom and in the Netherlands will go without their money. The vote […]
[…] UK, Netherlands taxpayers will still get Icesave cash back after … Despite some confused reports to the contrary, this weekend’s Icesave referendum result does not mean Iceland will withhold refunds to the British and Dutch governments for the money they lost bailing out Icesave account holders in … Read more at travel to Iceland – Google Blog Search […]
Sorry to be hostile in my first comment here, but, judging by the title, you seem to be trying to convince yourselves that Iceland is behaving correctly in this matter, and I don’t think it is.
In the event of a bank failure, deposit protection schemes are supposed to provide some additional money, beyond what remains in the bank, to compensate small depositors quickly. Typically, deposit protection schemes hold some liquid assets to pay compensation, but not normally enough to cover the default of a sizeable bank, because to do so would require banks to lock up a substantial proportion of their assets in the deposit protection fund. It is generally understood though that, in the event of default, the deposit protection scheme will borrow the money, if necessary from the government, and repay it over time. In other words, the deposit protection scheme is “ex-post funded”. In line with other EEA countries, Iceland established such an ex-post funded deposit protection scheme itself – the (deposit department of the) DIGF run by the TIF. As the TIF website explains, the DIGF was obliged to hold only 1% of insured deposits (similar to, for example, the US FDIC deposit insurance fund), but may “take out a loan in order to compensate losses”. Since there were only three similar-sized significant banks in Iceland, the conclusion must be either that the DIGF was always intended to borrow to compensate depositors or else that the Icelandic authorities had failed to “ensure” the existence of a deposit guarantee scheme meeting the required EEA standard. And in practice, there are so few banks in Iceland that any government loan to the DIGF is unlikely to ever be repaid.
It is possible for Iceland to quibble about how definite EEA law is about the extent of the state’s responsibility for deposit protection schemes, but the fact remains that Iceland did not warn depositors in the three main Icelandic banks that the Icelandic deposit protection scheme would only cover a small percentage of their deposit in the event of a default, and still does not, presumably because to do so would mean that Icelandic banks would be unable to compete with foreign banks from countries with a stronger deposit protection scheme.
Having paid out the guaranteed amount to depositors, a deposit protection scheme takes over the compensated part of their claim on the failed bank, and becomes an unsecured creditor on a par with incompletely compensated depositors and any foreign deposit protection schemes involved as the result of top-up guarantees. That means that, if liquidation fails to recoup sufficient funds to fully pay off all of these unsecured creditors, a deposit protection scheme should end up making a net contribution to the money recovered by depositors overall. It is not good enough to link repayment for the British and Dutch deposit protection schemes to recovering enough from the Landsbanki estate only. Moreover, bondholders would normally rank equally with depositors as unsecured creditors, in which case even more money would need to be recovered from Landsbanki before the British and Dutch deposit protection schemes could be fully compensated, and the emergency law passed by the Althingi on October 6th 2008 giving priority to depositors was probably introduced too close to the closure of Landsbanki to survive a legal challenge by Landsbanki bondholders.
Iceland should accept that the state may need to make a contribution to paying off the British and Dutch deposit protection schemes.
The whole ‘Depositors’ Guarantee Fund’ is full of baloney, it’s more regulations against the free market.
To Terry,
For a while now we have known that LBI bankruptcy proceedings will likely be able to cover almost all of the Icesave liabilities (90-100%).
What the argument has instead been about is whether Icelandic government, and therefore by definition, the Icelandic taxpayers should be required to guarantee any missing payments by LBI if things go wrong, and also whether they should be required to pay interest on any delay in payment.
This is of course all still based on certain assumptions, such as whether the emergency laws will hold, no surprise outcome lawsuits regarding priority by the claimants, and whether the NBI will be able to pay off the bonds in 2014-2018. Some people think these possible outcomes are likely and other do not.
In any case, the Icelandic people decided through the referendum that they were not willing to provide such a guarantee, unless there is at least some judgment first from the EFTA court and the Supreme Court in Iceland, that this is indeed required.
“The EFTA Surveillance Authority now awaits the response from the government of Iceland before deciding whether to start preparing a legal case against Iceland before the EFTA Court to establish whether or not the Icelandic taxpayer is legally responsible for the debts of Landsbanki – a private bank.”
I doubt this is a correct description. As far as I know the basic issue is about level of bank guarantee and equal threatment of bank customers.
[…] governments for the money they lost bailing out Icesave account holders in … View post: UK, Netherlands taxpayers will still get Icesave cash back after … Share […]
Ah!…. That makes it clear. So the IceSave 1, 2,& 3 negotiations were not about loans – as these are not needed.
The referendum was a purely a theoretical question to the Icelandic people about liability in respect of the Banking guarantees – had they been required to honour them?
>the three deals which were struck and then repealed (once by the British and Dutch governments and twice by Icelandic voters)
Not strictly accurate. The deal that the UK/NL rejected was not one that was “struck”. They rejected what was effectively a new offer after the Icelandic parliament attached numerous conditions.