So Iceland doesn\’t actually owe the money

In the crisis, the UK Government moved swiftly to guarantee the full value of British bank deposits. The Dutch Government adopted a similar policy. These assurances went far beyond the strict requirements of the deposit protection schemes then in force. In the UK, only 90 per cent of any bank deposit up to the value of £35,000 was guaranteed. Iceland might therefore cavil at the notion that it is legally bound to pay compensation in full. But if it takes that route, it will be resorting to a legalistic pedantry that will inflict lasting damage on the country’s reputation for probity, never mind solvency.

The British Government is indeed asking that Iceland pay the full whack: not the €21k per account that the European rules actually say they should have to.

As I understand it (and I\’d be very grateful to anyone who can either confirm this or correct me) the situation is as follows.

The Icelandic Government under EEA (or maybe EFTA) rules has to offer deposit insurance to all depositors with Icelandic banks of up to €21,000 or so.

I believe this leads to, with Icesave, a bill of some £800 million.

The British Government is demanding £2.3 billion. This is for two reasons. Firstly, the British deposit scheme gave, as that quote above shows, a higher guarantee. That is of course a matter for the British Government. More than that, the British Government decided to make whole all of the individual depositors (but not I think I\’m right in saying the commercial or public sector depositors). No limit on the guarantees. Now that again is a matter for the British Government in my eyes.

So there\’s a difference between the £800 million that Iceland is contractually bound to pay and the £2.3 billion that the UK is demanding. The difference being caused by the actions of the UK Government.

I have to say that I don\’t see that as legalistic pendantry. I see that as agreeing to be bound by the terms of the law and of the contract.

Now amongst the habituees of blogland we have one JohnB who, in comments elsewhere, has noted that he worked on this issue at the time. We\’ve probably got a few other finance types amongst the readership as well.

So, can one or other of you tell me whether the above is a decent sketch of the situation?

Is the UK Government demanding just that €21k maximum deposit insurance per account or is it demanding the full amount, both the higher UK deposit insurance and the cost of making everyone whole?


Dsquared explains it nicely over here. Well, until the last few paras about right wing governments etc.

Right that the British are asking for the cost of reimbursing 100%, Worstall on the question of this being a unilateral decision by the UK government.

What needs to be pointed out is that this isn’t about “the Icelandic banks” – it’s specifically related to Icesave. The UK also paid out on Kaupthing and isn’t asking for the money back.

The difference is that Kaupthing UK was a subsidiary with a UK banking licence, while Icesave was a brand name for Landsbanki, an Icelandic bank with no UK licence (operating under EEA cross-border privileges).

When Landsbanki got into trouble, the Icelandic government first assured the UK government that it was solvent, then assured the UK government that it was guaranteed by the Icelandic state, then nationalised it. On that basis and in agreement with the government of Iceland, the UK paid out the depositors and took ownership of their Icesave deposits

Then, after the fact, the Icelandic government, having set up Nyi Landsbanki (New Landsbanki, the vehicle which it used to nationalise Landsbanki), announced that it would only be moving over the liabilities from the domestic branches of Iceland, not the Icesave accounts – whether this discrimination is legal or not is a matter of disagreement, but if it wasn’t, then the Icelandic government would be liable for 100% of the deposits (including the local authority and corporate deposits).

The fact that losing the discrimination case would massively increase the liability is the main reason why the Icelandic government was keen to settle out of court. They did, then, in fact, settle out of court, agreeing that they had an obligation to the UK and Dutch governments.

So I was right to a point: and then wrong, as I didn\’t know about the subsequent negotiations. So now whether the UK Government has a legal right to claim the full amount depends upon whether what governments say (but do not enact in law or sign as a treaty) is indeed a legal liability.

I can see that all this international diplomacy stuff would work a great deal better if it were. But I\’m not entirely convinced that all governments everywhere actually act in that manner. There have been any number of defaults for example: Argentina comes to mind just as one example. Russia as another. Umm, actually, some 800 of them over the years and centuries.

13 thoughts on “So Iceland doesn\’t actually owe the money”

  1. Yes you are right, the UK/NL decided that they would guarantee depositors 100% unilaterally.
    To add insult to injury the UK used anti terrorism laws to freeze assets of Icelandic banks in the UK.
    Under EEA law only 21887 EUR is guaranteed, and UK/NL want to be repaid for money they spent with out event talking to the Icelandic government first.
    To get this the UK/NL has used just about every trick in the book to bully a nation many times smaller than them selves into paying what would amount to just over 11.000 pounds per Icelander.
    Thats the short version.

  2. Jeremy Vine interviewed an Icelander yesterday who said one of the issues was that the UK was demanding interest on the amount our government says is owed of over 5% when they had “borrowed” the money to pay back the investors at around 3.5%. Therefore despite the rights or wrongs of the case the UK Govt would make a “profit” on the interest differential.

    Also the bank that operated the IceSave account was private, registered by the FSA to operate in the UK and therefore covered by the guarantee here. We’re only chasing the Icelandic Govt cos we can rather than the “billionaires” who owned the bank. Ironically in the interview yesterday those billionaires were said to be hiding out in….you guessed it…London!!! Probably laughing all the way to the BANK.

  3. Not entirely true, the UK/NL have thus far flatly denied to have a 3rd party enter the negotiations as a mediator nor does the UK/NL have this go to court.
    I would imagine that the mixed messages received from Icelandic authorities during those fateful days in October 2008 are a result of panic that spread like wildfire throughout branches of government, still pretty inexcusable.
    And no, that was never “your” cod, like India was never “yours”.

  4. So the simple solution is:

    Iceland issues bonds to the amount owed and hands them over to the UK government. It then defaults on those bonds.

  5. On the original post, the gbp800m figure still sounds way too low given that there were 300,000 UK depositors in Icesave.

    On Dsquared’s comment, yes, this clears things up somewhat. The basic point being that the UK government acted, at all times, based on what the Icelandic government told it – in particular, that the decision to pay UK savers full compensation came *after the Icelandic government had agreed to accept liability for providing full compensation to UK savers*. This is the opposite of the lies that the Iceland-defenders are telling about the situaiton.

    @1, we’re trying to “bully” you into paying that money because you stole it from us.

    @4, Landsbanki was *not* registered in the UK, and was *not* covered by the guarantee.

    @5, not “mixed messages”. Completely clear messages, which involved going back on their word.

    (oh, just for the record I never worked on any of the Icelandic bank administrations – I worked on administrations and restructuring for Icelandic and UK companies whose main creditors were Icelandic banks, and knew people who worked on the bank administrations)

  6. Brian, follower of Deornoth

    Hmmm. Very interesting. But I think we can safely assume that anything said by the British Government is a lie until proven otherwise.

  7. The Great Simpleton

    So to sum up:

    An Icelandic politician lied to a British politician. That British politician being the one who argued in court, successfully, that manifesto commitments aren’t contractually binding.

    That same British politician is now surprised when said Icelandic politician argues that commitments made in the heat of political battle aren’t contractually binding.

    That same British politician will soon be asking us to believe his promises and trust him to negotiate on the international stage when he asks for our votes at the upcoming politician.

    And they are surprised that nobody trusts them.

  8. So Much For Subtlety

    JonR – “And no, that was never “your” cod, like India was never “yours”.”

    Actually it was our cod. Ours in the sense that it belonged to all mankind. I think Iceland did a sensible thing in asserting property rights over what had up to then belonged to all of mankind but there is no denying the shift was from something we, as a planet, owned to something we, as anyone outside of the Iceland Government, did not.

    As for India, by any rational definition we owned it. Literally when it was run by the Company. It went to war in 1939 when we said so. We divided it up when we left as we saw fit. By any rational definition of ownership, we, the British people, owned it. After all, we created it so why not? Or do you think that property is passed down racially?

  9. What a fascinating mixed string of bluster and prejudice and common sense and facts on the other blog, Tim, and you seem to have gotten closer to the truth than I have found anywhere else on this. Still, the crux of it seems to be not deposit insurance rules, but this:

    “When Landsbanki got into trouble, the Icelandic government first assured the UK government that it was solvent, then assured the UK government that it was guaranteed by the Icelandic state, then nationalised it. On that basis and in agreement with the government of Iceland, the UK paid out the depositors and took ownership of their Icesave deposits”

    I must say I’m sceptical. the poster’s report is sober, intelligent and factual, convincing, but this paragraph has a string of legal leaps in it that it would be good to see evidenced –

    – “first assured the UK government that it was solvent” – when and it what words (remembering that back then all the banks were solvent till the moment they weren’t any more)?

    – “then assured the UK government that it was guaranteed by the Icelandic state ” – big word, guaranteed, and there’s “assured” again, too

    – “then nationalised it”. But just in the same way HMG nationalized Lloyd’s, right? not quite the same as stepping into their shoes and assuming all their liabilities.

    – “On that basis and in agreement with the government of Iceland, the UK paid out” – that combines reliance and contract as making the Iceland government liable. is it really both? If “in agreement”, especially before any pay-out, things really should be cut and dried, but I don’t hear that from ministers (I mean the one really shifty-looking one I’ve seen on TV on this).

    All also true for the Dutch, too?

    Maybe all this is down at a nitpicky level that doesn’t add anything to the discussion, in which case, apologies. Keep up the good work.

  10. Pingback: Icelandic dilemma « Freethinking Economist

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