In These New Times

A new paradigm for a post-imperial world

The Icesave dispute – The view from Iceland

Posted by seumasach on January 6, 2010

October 15th 2009


The Icesave dispute – The view from Iceland

1. A complete collapse of the Icelandic banking system

The autumn of 2008 will long be remembered in Iceland. During the first days of

October it became apparent that the three largest Icelandic banks were in grave danger

of collapsing due to insufficient liquidity. Collectively, these three privately owned

companies accounted for about 85% of the Icelandic banking system. Among them was

the Landsbanki bank, responsible for the high interest Icesave accounts that had

become very successful in Holland and the United Kingdom. On Monday October 6th the

government reacted urgently by passing legislation, enabling the Icelandic financial

service authority (FSA) to effectively nationalize the banks if they were deemed to be on

the brink of collapse. This was conceived as an emergency measure to guarantee

national security and permit the government to maintain the financial infrastructure

necessary to keep Icelandic society functioning through the impending crash.

On that same day, Icesave depositors in Holland and the United Kingdom were

unable to gain access to their funds, allegedly because of technical problems, but more

likely because of liquidity problems of Landsbanki. On Tuesday October 7th the Icelandic

government seized control of Landsbanki, which it deemed had gone beyond the point

of no return. The next day the British government invoked the Anti-terrorism, Crime and

Security Act of 2001 to freeze the assets of Landsbanki, the Central Bank of Iceland and

the Government of Iceland in the United Kingdom. The aim of this draconian and

unprecedented action was apparently to protect the interests of British Icesave

depositors. The Dutch government took similar, but less stigmatizing, steps to freeze the

assets of Landsbanki in Holland. A few days later all three of the main Icelandic banks

had collapsed. The terrorism stamp destroyed what little faith the outside world had in

many Icelandic businesses and blocked off numerous economic lifelines, making it

effectively impossible to transfer funds between Iceland and the outside world for

several months.

A year later, the Icelandic economy is still in a state of deep freeze, with a weak

currency and national debt and unemployment both soaring. Help is on the horizon

from the International Monetary Fund (IMF) and associated loans from many of

Iceland’s neighbours and allies. However, this help is currently being blocked by the

British and Dutch governments, through their considerable influence in the IMF, until

the Icelandic state agrees to reimburse them for compensating British and Dutch

Icesave depositors. The collusion of the IMF in this blackmail has been publically

acknowledged on many occasions by the Prime, Foreign and Finance Ministers of

October 15th 2009  INDEFENCE

Iceland and was admitted by Gordon Brown in the British Parliament on May 6th 2009.

As a result, the Icesave dispute has become one of the most serious political and

economic problems the Icelandic nation has faced since it became sovereign in 1944.

2. Serious flaws in the EU deposit guarantee scheme

The Landsbanki bank established the Icesave accounts in the United Kingdom and

Holland on the basis of EU regulations, aimed at ensuring the flexible operation of banks

across national borders within Europe, in line with the ideal of the free movement of

goods, services, capital and persons within a single European market. These regulations

include a deposit-guarantee system (European Parliament directive 94/19/EC from

1994). Each European state is responsible for setting up its own independent guarantee

scheme, into which its banks must transfer 1% of their deposits. The underlying

principle is like that of insurance companies. All the banks pay a premium, and if one

fails, then its depositors receive compensation up to a maximum amount of €20,887. At

face value, this seems like a rather nice plan. However, the crash of the Icelandic

banking system revealed fatal flaws, which now lie at the heart of the Icesave dispute.

The success of such a guarantee system, reflected in its ability to compensate all eligible

depositors in the event of a bank failure, is clearly dependent on the number and size of

banks paying the premiums. The optimal situation is a large nation with many small

banks. The existence of large banks poses a serious threat, whatever the number of

banks paying premiums.

The looming disaster for such a scheme is a relatively small nation with a handful

of large banks – in other words, a nation like Iceland. For such a state, it should have

been patently obvious to all the parties concerned, including the financial services

authorities in Iceland, Holland and the United Kingdom, that the Icelandic Depositors

and Investors Guarantee Fund (DIGF) would be unable to meet even a small fraction of

the compensation that would be required if the Landsbanki bank were to fail. As it

happened, the entire Icelandic banking system collapsed. The scale of the DIGF’s

shortfall is mind-boggling. At the beginning of 2008, despite following all the relevant EU

regulations, the DIGF held a total of €47 million. With the collapse of just the Landsbanki

bank, the amount needed to compensate just the British and Dutch Icesave depositors

up to the €20,887 maximum is €3.91 billion! Given that a shortfall such as this was easily

foreseeable in the event of a large bank collapsing, one must either have serious doubts

about the intellectual capabilities of the people responsible for devising the guarantee

system regulations or conclude that the system was just lip-service, based on the

wishful assumption that large banks would not fail. Consequently, the culpability for the

inability of the DIGF to compensate the Icesave accounts lies not only with the

Landsbanki and the financial service authorities of the three nations. It also lies with

those responsible for the defective banking regulations – that is with the EU itself.

October 15th 2009  INDEFENCE

3. The British and Dutch solution to the Icesave dispute

The final quarter of 2008 was not only calamitous for Iceland. The entire world finance

system teetered on the brink of collapse. Governments all over the world took drastic

unilateral measures to support their failing banks and to prevent runs on them due to

dwindling public confidence. They did this, for example, by declaring national

guarantees for all deposits, by taking them over or by lending them huge sums of

money. As a part of such actions, the governments of Holland and the United Kingdom

acted quickly to compensate Icesave depositors, using their own depositors guarantee

schemes, far beyond the EU guaranteed amount of €20,887 – up to €100,000 for Dutch

depositors and £50,000 for British depositors. It is important to note that these actions

were unilateral and arbitrary, in the sense that neither the DIGF, nor the Icelandic

government, were consulted about the time or amount of compensation.

In their next move, the Dutch and British governments entered into negotiations

with the Icelandic government with both demands about the repayment from the DIGF

of the total amount corresponding to the EU guarantee and claims for a stake in the

bankruptcy estate of the Landsbanki bank. The key demand was that the Icelandic state

(i.e. its taxpayers) should foot the bill for the difference between the €47 million held by

the DIGF and the €3.91 billion corresponding to the EU guarantee of €20,887 for all

Icesave depositors. There were two main problems with this proposal.

First, EU banking regulations and directives include no provision for a state

guarantee of EU deposit guarantee schemes – and thus no justification for burdening

Icelandic taxpayers with the huge deficit that was primarily the result of the reckless

management of a privately owned bank, inadequate regulation by the financial

authorities of three nations and defective EU banking regulations.

There is at least one obvious and important reason why there is no such

provision – it would completely destroy the ideal of an even playing-field for banks

within the single European market. Put simply, if such a provision were to exist, then

depositors would simply avoid banks from small states, because their deposit

guarantees would be unsafe, since they might not be able to bridge the gap between EU

guarantee compensation costs and the amounts held by their guarantee schemes. It

would, for example, be interesting to learn whether other European states, for example

Luxembourg, Switzerland or the United Kingdom, would be willing to publically declare a

state guarantee of their deposit guarantee schemes.

This omission can hardly be viewed as a mistake by EU legislators. Rather the

omission of a provision for a state guarantee of EU deposit guarantee schemes must be

due to the fact that EU legislators did not want to force taxpayers to cover the losses of

privately owned banks. Moreover, such a provision would clearly promote excessive

risk-taking by both banks and their depositors.

Second, €3.91 billion amounts to about 50% of Iceland’s GDP and thus could not

be immediately repaid in one go, regardless how EU banking regulations are

interpreted. In fact, no nation in the world could possibly pay such a ransom. To put this

into perspective, it is helpful to consider comparable per capita commitments for other

states. This amounts to a forced and legally disputed claim on the UK of £700 billion or

on the Netherlands of €300 billion! The solution proposed by the British and Dutch

October 15th 2009  INDEFENCE

governments was that the sum of €3.91 billion would be defined as two loans – £2.35

billion (€2.58 billion) from the UK and €1.33 billion from Holland. Unfortunately for

Iceland, this solution was backed with considerable pressure by the EU, IMF and many

individual states in November 2008. At this time, all governments were in a state of high

anxiety about their banks and any mention of defective EU banking regulations was

simply not up for discussion. Thus, Iceland’s right to appeal was in effect sacrificed to

prevent further destabilization of the European banking system. The Icelandic

government was thereby forced into trilateral “Icesave” negotiations with the Dutch

and British governments about the terms of the loan agreements.

Why are Icelandic taxpayers being forced to guarantee the depositors guarantee

scheme, when there is no such requirement in the EU banking regulations? All European

citizens should ask themselves this question. Tomorrow the shoe could be on the other


4. Loan agreements leading to national bankruptcy

The Icelandic negotiators were outnumbered, outgunned and outclassed in all respects.

They returned to Iceland at the end of May 2008 with two extremely unbalanced

agreements, wherein almost all the British and Dutch demands were accepted. In brief,

the Icelandic government agreed to repay the loans over a 15 year period at an interest

rate of 5.55%, with numerous termination clauses (including an inability to repay any

other debt), restrictive waivers of defences and sovereign immunity, and waivers of the

right for legal appeal against the agreements. The only notable concession to Iceland’s

dire economic situation was an initial seven year period, where no payments would be

made, but interest would accrue. It should be noted that based on these conditions, just

the interest on the loans will most likely amount to well over €1.5 billion by the time

repayments start in 2016.

Astonishingly, the agreements also stipulated that the British and Dutch

governments will receive just under 50% of all assets recovered from the Landsbanki

estate. According to bankruptcy law in Iceland (and most other countries), each deposit

should yield only a single claim on the estate of the bank. If this were the case, the vast

majority of the Landsbanki assets would offset the first €20,887 of each deposit – in

other words, cover repayments of Iceland’s Iceave “loans”. The 50% stake given to the

British and Dutch governments is a testament to the one-sidedness of the Icesave

agreements, the ruthlessness of their negotiators and the ineffectiveness of those

representing Iceland.

In light of this, it is perhaps no coincidence that the British and Dutch negotiators

insisted on strict confidentiality about the Icesave agreements and accompanying

documents, to the extent that representatives in the Icelandic Parliament (Alþingi) were

not even permitted to see them. However, after considerable pressure from parliament

representatives, organizations such as InDefence and the media (who received leaked

copies), the Icesave agreements were finally made available online to the Parliament

and the general public. As the details of the agreements were examined by a variety of

Icelandic specialists, including economists and lawyers, one alarming fact became clear.

October 15th 2009  INDEFENCE

All projections based on realistic assumptions about the recovery of assets from

Landsbanki, economic growth, income in foreign currency, population growth and debt

levels showed without doubt that Iceland would be unable to meet the repayments

stipulated by the Icesave loan agreements. This was conclusively demonstrated by a

report requested by the Icelandic Parliament’s Finance Committee from the University

of Iceland’s Institute of Economics on August 3rd 2009. Until that time, the Icelandic

government had made several unsuccessful attempts to convince the Parliament and

the public that the Icesave agreements represented an unfair but manageable burden.

5. The Icelandic Parliament introduces preconditions for a state


Although representatives of the Icelandic government had inexplicably signed the

Icesave agreements on June 5th 2009, they could only come into force by means of

legislation passed in the Parliament to authorize the state’s guarantee of repayment of

the loans. After enormous pressure from certain parliament representatives, the

minister of health and organizations such as InDefence, it became clear even to most

members of the government that the Icelandic parliament could not pass legislation

that jeopardized the future of the nation. Considerable effort was therefore put into the

formulation of preconditions for the state guarantee that could be incorporated into the

legislation. The aim of these preconditions was to redress the most perilous clauses of

the Icesave agreements, such that Iceland retained crucial legal rights, would only meet

repayments of the loans if able to do so and that normal procedures would apply to the

handling of claims on the bankruptcy estate of Landsbanki

It should be noted that the majority of Icelanders are strongly opposed to the

Icesave agreements. They see no moral or legal grounds for Icelandic taxpayers to bear

responsibility for the reckless behavior of privately owned banks that acted in

accordance with EU regulations. Many would have liked to see the legislative bill for the

state guarantee of the Icesave repayments rejected outright in the parliament, which

would have forced the British and Dutch governments to pursue their claims through

courts of law. This would be a battle that most Icelanders would welcome. A minority of

Icelanders, primarily supporters of the Social Democrat party (Samfylkingin) and part of

the supporters of the Left Green party (Vinstri-Grænir) have taken the position that

Icelanders must shoulder responsibility for Icesave, despite their being no clear legal

obligation to do so. They are therefore willing to accept the Icesave loan agreements,

insofar as Iceland can keep up the repayments. The preconditions that were finally

included in the state guarantee legislation should be viewed as the outcome of a

political compromise between these two perspectives in Iceland. This compromise was

so hard fought that it almost broke the coalition government. Now, at the beginning of

October 2009, it has become apparent that the British and Dutch governments have

protested fiercely against some of the key preconditions incorporated into the


October 15th 2009  INDEFENCE

As before, the Icelandic government will not divulge any information voluntarily,

giving rise to fears that confidentiality is once again being used to hide ineptitude. It has

been stated that most of the preconditions were accepted, demonstrating how poorly

negotiated the original Icesave agreements were for Iceland. It is not clear which

preconditions have raised the objections of the British and Dutch governments, but they

are serious enough to have already caused major turmoil in Iceland’s political landscape.

Thus, Mr. Ögmundur Jónasson, the minister of health, resigned his position over the

government’s handling of these objections. Public opinion is very supportive of Mr.

Jónasson, after he led the campaign to introduce the preconditions during the summer

of 2009. Once again the coalition government of the Social Democrats and Left-Greens

is in peril, as a number of other parliament representatives from the Left-Green party

are also likely to strongly resist any move to retract hard fought preconditions that

provide crucial safeguards against the draconian Icesave agreements.

The mood of the Icelandic people and parliament is defiant and resolute. They

are not frightened by the blackmail tactics of British and Dutch governments and their

improper use of the IMF and EU to coerce the Icelandic nation into accepting

devastating economic burdens for the sins of a privately owned bank and the defective

banking regulations of the EU. If the British and Dutch governments do not accept the

reasonable preconditions set by the Icelandic parliament for a state guarantee of the

Icesave loans, then the Icesave agreements will simply not come into force. This means

that the British and Dutch governments will have to pursue their claims through

Icelandic courts of law, at least in the first run. As far as Icelanders are concerned, that is

absolutely fine.

For additional information, please contact:

In Defence of Iceland (InDefence) is a grassroots organisation founded in October 2008 by a

group of Icelanders with close ties to the United Kingdom and the rest of Europe. InDefence was

founded to protest against the use of the Anti-Terrorism Act by the British Government against

Iceland. InDefence organised the largest petition launched in Iceland – the “Icelanders are NOT

Terrorists” campaign – and handed in 83,300 signatures(incl. more than a quarter of the

country’s population) to the British-Icelandic All-Party Parliamentary Group at the Houses of

Parliament in London on March 17, 2009 protesting the labeling of Iceland’s citizens as

“terrorists” by the British government.

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