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.