Is Iceland really trying to weasel out of its commitments?
The ongoing feud between Iceland and Britain is a generous source of news fodder, but what's the reality behind the sensationalist headlines?
The background
In short, by October 2008 the economic crisis was at its peak, and the Icelandic banking sector was insolvent; you can read more detail on that in this article I wrote at the time.
On 6 October, the Icelandic prime minister addressed the nation and spoke of the "very real danger [of] ... national bankruptcy". The Icelandic government assured domestic depositors that their deposits would be guaranteed in full, but did not give any similar commitment to foreign depositors; there was a risk that British savers could lose everything.
The following morning, 7 October, the Icelandic financial regulator placed Landsbanki in receivership, and customers of its Icesave business in UK were unable to access their funds.
On the morning of 8 October, the Treasury froze the assets of Landsbanki "until the position with respect to the future of the firm and UK creditors becomes clearer".
Didn't we classify Iceland as 'terrorists'?
No. The assets were frozen using powers granted under the Anti-terrorism, Crime and Security Act 2001, which allows the Treasury to make a freezing order if "action to the detriment of the United Kingdom's economy (or part of it) has been or is likely to be taken".
When the Act was introduced, following the attacks on the Twin Towers in New York, the opportunity was taken to word this clause in a catch-all manner, so that it need not necessarily relate to terrorism. Terrorism makes a better headline, of course, and the Icelandic government chose to take offence.
And before you get too excited considering who could potentially be guilty of "taking action to the detriment of the economy", note that the Act only applies to foreign governments and residents.
What guarantees did British depositors have?
British depositors would have expected to be covered up to the limit of the industry-funded Financial Services Compensation Scheme (FSCS), which had been increased the previous day from £35,000 to £50,000.
Icesave had opted in to this scheme as a 'top-up' member; as an Icelandic bank, depositors were already covered up to €20,887 by the Icelandic Depositors' and Investors' Guarantee Fund (IDIGF). The home countries of banks doing business within the a European Economic Area are required to guarantee deposits to a minimum of €20,000. Any additional balance up to a total of £50,000 would be covered by its 'top-up' membership of the FSCS.
In addition to this, the Treasury undertook to guarantee 100% of all UK retail deposits in Icesave, including interest. Many also viewed this as an implicit guarantee to all depositors in other banks.
So why are we chasing Iceland?
Rather than having depositors trying to claim back their money in Reykjavik, the British government paid out the money due under the Icelandic guarantee via the FSCS, and then pursued the Icelandic authorities for the amounts due under the scheme. Iceland still owes us that money, £2.3bn in total. Adding the €1.2bn owed to the Dutch authorities gives a debt equivalent to over £11,000 for every man, woman and child in Iceland.
They don't have that sort of spare cash lying around, so it's being treated as a loan at 5.5% interest, to be repaid over 15 years.
And Iceland are refusing to pay?
No, they have reiterated that they are determined to pay out this money; what is in dispute are the terms and scheduling of the payments. Following the intervention of the Icelandic President, Iceland's citizens will vote on this next month.
What about the British taxpayer?
Because of the Treasury's commitment, retail deposits in Icesave over £50,000 are covered by British taxpayers. I don't have a total figure for this, but my guess is that it's trivial in comparison the total cost of the bank bailout. Local authorities, on the other hand, have lost over £1bn, which was not covered by any guarantee schemes.
Regardless of the outcome of next month's referendum in Iceland, it seems clear that this repayment will put a severe strain on Iceland's resources for many years to come.
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