On October 15th 2009, the Icelandic organisation, InDefence published a press release updating its opinion on the Icesave dispute as viewed from Iceland.
The press release deals with various issues related to the Icesave situation, touching upon the complete collapse of the banking system, Gordon Brown’s use of terrorist legislation against Iceland, the British and Dutch solution to the Icesave dispute, loan agreements leading up to national bankruptcy, and the Icelandic government’s current stance on the Icesave situation.
InDefence is a grassroots organisation that was founded in October 2008 by a group of Icelanders with close ties to the United Kingdom and the rest of Europe. The organisation was founded in order to protest against the use of the Anti-Terrorism Act enforced by the British Government against Iceland and its people.
InDefence organised the largest petition launched in Iceland – the “Icelanders are NOT Terrorists” campaign – and handed in 83,300 signatures (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 labelling of Iceland’s citizens as “terrorists” by the British government.
More details about InDefence can be found on their website www.indefence.is or for additional information, please contact: press@indefence.is
PRESS RELEASE FROM INDEFENCE:
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 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.
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 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 foot.
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. 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 guarantee
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 legislation.
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.
Both parties are wrong. First about the British and the Dutch : By accepting an interest rate twice as high as other bankers offered, they should have known or at least, be ready to accept some responsibility themselves. My opinion is : twice as much interest ? yes, but the risk one has to accept is that only half the capital will be guaranteed in case if …
The other remark is about Iceland itself. Prior to 2008, they were so wealthy (you still can remark all the big all roadsters on all pictures of Iceland) and so rich they do not need and did not want Europe. And now they ask to join their neighbours they did not want to see before just to be covered by the European solidarity …
So let everybody pays its share : 50% for the British and the Dutch and 50% for Iceland.
Hermann – Leo and Niels are incorrect. The answer to your question is in the article above. It states:
“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… “
@ Hermann Ørn
It is only this 20k euro that the UK and NL are after.
To give a simple illustration: let us suppose a dutch depositor put 110.000 euro in Icesave:
20.000 was repaid by Iceland , the money coming from a loan given by the Netherlands: it is the repayment of this loan that the whole Icesave dispute is about.
80.000 was repaid by the dutch state (as it guaranteed the icesave deposits to a total sum of 100.000 euro)- so that money is coming from the pockets of the dutch tax payers.
10.000 is lost as it is above the limit of 100.000 euro.
@Hermann
As I understood it, the Dutch and UK governments only ask for the 20k per deposit, the rest paid for by the UK/Dutch governments themselves.
Mike.
It is a pleasure to read your comments here. As an Icelander living abroad i find it very difficult to understand whats going on. The Icelandic media has never bin able to do serious penetrating journalism, And to be honest, after looking into the British media coverage i have the impression that its taking the side of the poor *******s trusting icesave.
An understandable view.
I do agree in a most of your comment regarding Icelandic peoples failure to secure competent leadership and the complete lack of working control agencies to the credit industry.
However there is a thing i do not understand. And i am hoping you or some other on this board could help me grasp.
As i understand, EU regulation states that the home state of a bank has to guarantee a minimum of approximately €20k to each depositor in a bank approved by the countries credit agency. Any deposit about this minimum is at the risk of the depositor.
A rather unfair agreement you could claim with out me disagreeing, how ever that is the agreement.
What im trying to find out is if the claims of the British and dutch governments exceeds this minimum, or is that “all” they ask for?
Im not saying that what those banks did isnt despicable, im trying to agree with my self on where the nations responsibility ends.
So far i come to the decisions, that the icelandic nation i obligated to pay out those €20k to each depositors, im not that sure its morally obligated to pay out beyond that.
Mike – With current national debts, you could simplify the lesson further to just: earn, don’t borrow. Wait a minute, you’re in China. Change that to: invest, don’t lend.
Jim amazing! I’m sitting in a bar in Beijing – check the IP Alex – after giving a presentation on lessons to be learnt from Iceland: avoid nationalistic hubris and earn foreign currency, dont borrow it. Kudos to Jim!
Jóhannes Þ. Skúlason said:
“The EU regulations for deposit guarantee only stipulate that the state should set up a guarantee fund to cover a minimum amount of roughly 20000 euros. When the fund has been set up the state’s involvement ends. The money in these independent guarantee funds are supposed to come from the banking system, not from the governments.”
The Icelandic regulator is required to *ensure there is sufficient funds in the guaranteed funds*.
This they refused to do, so not surprisingly they are now required to fund it. However, you are ignoring the fact that Iceland *did* guarantee the banks deposits with taxpayers money, but they decided to refuse the same guarantee to non domestic depositors.
Selective application of the law to suit Icelandic needs and viewpoints. There’s a surprise.
“Another thing is that Gordon Browns government has sxpressly stated that it’s opinion is that British taxpayers should not pay for the mistakes of British banks. At the same time they expect (using some pretty nasty methods I might add!) Icelandic taxpayers to pay through the nose for the mistakes of Icelandic banks. Fair?”
UK taxpayers are paying for the mistakes of bankers, a worthless comment from Brown doesn’t negate the fact that we are all liable for their debts. Its un-avaoidable.
Mike (UK Nordic analyst) said:
“On another blog (icelandweatherreport) the owner of the blog (admittedly a personal one so she can do what she likes with it) has said that she edits out posts which show no understanding of Iceland.”
Very true, she also censors anything that might conflict with here point of view. For instance here recent post about Iceland paying its UN bill on time; well she refused to post the up to date list of the 180 nations who have actually paid their dues as it rather spoilt her post.
Inconvenient facts got in the way of a chance to slag off the US and UK.
That is an opinion. I’m not saying that it is incorrect, but it is in disagreement with leading EU legal commentators. Bearing in mind that anything that passes over an Icelandic desk is leaked, we’ve yet to see a single legal opinion that backs up what you say, whereas I can think of two off the top of my head that don’t.
Because agriculture!=banking?
Nope. Both the UK and the Dutch taxpayers are picking up a bigger share of the burden than the Icelandic taxpayer.
Not at all. Iceland may apportion the pain as it sees fit. It just so happens that the magnitude is so great that the Icelandic taxpayers will get it in the neck whatever happens.
Absolutely incorrect. No depositor in a UK bank has been discriminated against based on place of residence. You’ve got your facts mixed up. The Isle of Man is in a similar position to Iceland, albeit a better one, in that they wanted to have a large bank sector and now they have to cough up for any banks that have gone bust.
Far more likely they just don’t care. Goodwill is one thing, but is it worth ~£2bn to the UK?
To Jóhannes Þ. Skúlason
‘ Would Switzerland and Luxembourg agree to such regulations, that the Swiss government had to guarantee deposits in all Swiss banks with taxpayer money? I sincerely doubt that.
‘
It might surprise you but Luxembourg actually guarantees HUNDRED THOUSAND euro per account:
http://www.lloyds.com/CmsPhoenix/DowJonesArticle.aspx?id=408751
About Switzerland I do not know, but they are not in the EU.
However you seem to be totally unaware how banking works in countries that are really experienced and developed in this field.
Keep in mind too that banking in lux and CH is funadamentally different from the cowboy-corruption of the icelandic ‘bankers’ .
In lux and CH the fundamental principle is discretion and reliability. People put their money here because they expect it to be safe (and secret). So banks in these countries will avoid risk at all cost.
This is totally different from the icelandic banks which tried to grow agressively, without understanding how the game is to be played.
That would be a rather blinkered naive view of the balance of power involved in the negotiations, the issues at stake for the EU and the alternatives that existed for Iceland.
“To put it simply, no one has been able to answer that question, because the UK and Netherlands have refused to take the matter to court to have the matter resolved.”
What a load of rubbish! Are you even aware that the dispute entered independent formal arbitration, but Iceland withdrew from the proceedings? After that, the UK and Netherlands gave Iceland the opportunity of negotiation first, rather than immediately submitting a legal complaint. Iceland could have simply refused negotiation if it wanted the matter to be tested in court – and the UK would have then submitted the relevant legal complaint.
To Mike (UK Nordic analyst). I agree it’s nice to see a lively debate going on here. I want to add one thing to it.
Your comments seem to indicate that there is some kind of state guarantee on all bank deposits and therefor Iceland should not complain come payday.
This is fundamentally wrong.
The EU regulations for deposit guarantee only stipulate that the state should set up a guarantee fund to cover a minimum amount of roughly 20000 euros. When the fund has been set up the state’s involvement ends. The money in these independent guarantee funds are supposed to come from the banking system, not from the governments.
There is not and has never been a state guarantee on any european banks.
Would Switzerland and Luxembourg agree to such regulations, that the Swiss government had to guarantee deposits in all Swiss banks with taxpayer money? I sincerely doubt that.
Such a system would most likely be in violation of EU competition regulations that ban government grants. Why should EU banks be state guaranted if EU agriculture can not be?
So you see the issue is not that Icelandic taxpayers don’t want to pay money that they owe depositors in the failed banks. The issue is that Iceland did everything according to the rules ad regulations of the European market, and it has never been shown that Icelandic taxpayers actually owe this money. Yes the banks failed, yes the Icelandic regulators failed, but so did regulators in the UK, Netherlands and the rest of the european banking regulators. Yet the only ones being asked to carry the debt are Icelandic taxpayers. No wonder they feel hard pressed.
Another thing is that Gordon Browns government has sxpressly stated that it’s opinion is that British taxpayers should not pay for the mistakes of British banks. At the same time they expect (using some pretty nasty methods I might add!) Icelandic taxpayers to pay through the nose for the mistakes of Icelandic banks. Fair?
Brown’s government claims that Iceland should pay because it can not discriminate between Icelandic depositors and british depositors. But at the same time Brown’s government discriminates between British depositors and depositors living on the Isle of Man and Guernsey in exactly the same way! Fair?
So you see, this is no simple matter of paying your debts. This is a very complicated matter of “is it the Icelandic taxpayers debt at all?” To put it simply, no one has been able to answer that question, because the UK and Netherlands have refused to take the matter to court to have the matter resolved. Instead they resort to blackmail through the IMF. Classy. I really do not think the UK and Netherlands realize at all what bitter enemys they have made of Icelanders by behaving like that.
Poor Mike. He must be residing in restrictive China now for he’s no longer able to post anonymous personal comments. Enjoy the duck feet in black bean sauce…
Hi guys,
Work calls me away and confidentiality means I won’t be able to post for a while.
Let me say, that whether I agree with you or not, I enjoy the way that the debate is conducted here. Each of you has a distinctive voice and I get the feeling that the views expressed are real ones with genuine motivations. I like the way that Alex allows even apparently wacky posters (hi there, SIR EURO) to have their say. On another blog (icelandweatherreport) the owner of the blog (admittedly a personal one so she can do what she likes with it) has said that she edits out posts which show no understanding of Iceland. Boy! That sounds just like the bankers from 2006 when we were all told that we didn’t understand “Islenska leidinn”. The woman who runs that site obviously has genuine feelings as well but the coat of liberal-international-eco-green paint that covers the site appears to be wearing thin and a distinctive nationalistic-Icelandic-red-white-and-blue is beginning to show through.
Thank goodness Alex allows us all to post in our real colours!
Alexander E: I love your watchman analogy and it is very close to the truth. But I would argue that the reality of any economic system comes down to people doing things. I don’t like these grand economic theories (which are like looking into the nature of time to use your analogy) which are based on weird assumptions and produce counter-intuitive results. At some point someone has to do something – anything! And at that point they need to look at their watch (which I made!).
Another comparison (related the time/watch analogy) is to say that I am an engineer and not a scientist. I can build things, and generally they stand up under the conditions under which they were built. I’m not interested in the fundamental nature of sub-atomic particles but how can I create a new and sustainable life for someone.
Here’s an example. Long ago I was working in microfinance – making loans of 50 to 100 dollars to very very poor people (like 50 bucks was a year’s wages for them). These were loans that normally these people would never get. I gave a loan of 50 dollars to a woman in northern Nigeria who mended clothes. She had a sewing machine, but all the needles were blunt or bent. With the loan she bought a new set of needles and some thread. I visited her years later – she had moved from a rat infested mud hole into a proper room with windows and … electricity! She employed a young woman to help her. Not only was she mending clothes but making new ones. That microfinance loan was instrumental – but at root she did the work, she did something! But at least I facilitated her work. That is the true role of finance to enable, to facilitate.
It’s a soppy and heart warming story I know, but if ever I want to ground myself in my work then that is who I think about.
Time? If you can tell me what the true nature of time is then I’ll lend you 50 bucks to buy some needles!
“a watch doesn’t create TIME, it only measure time … Same with financial system – it doesn’t create any value, only measure it”
So, the Icelandic financial system neither created nor destroyed value. It only measured the Icesave deposits…
Indeed, how utterly disloyal and ignorant it was of the Icelandic economic serfs to protest with pots and pans outside their parliament.
Surely they should have known their place in the economic and political scheme of things and accept peacefully that they have been undone by normal everyday political corruption and ineptitude.
Surely they could have postponed such outward displays of hostile emotions until their government decide when and where to have the next general election.
Surely they should also have realised that every government bailout since the South Sea bubble has put the burden of losses by speculators onto the citizens.
Excellent analysis, Mike.
But I have two questions!
Were this number of things known to analysts or it was something super-secret?
If it was well known – why did all rating agencies give “excellent” marks to the bank?
Could you explain this miracle?
It’s an excellent example. Really. Thank you very many!
You right, Mike, Icelanders should stop shouting outside Parliament.
Instead Iceland must declare war… on Britain after its invasion of Iceland.
Exactly as Mike recalling of his great experience.
—————
You know, Mike, I have no doubts about your knowledge and experience with finance. You know very well all its rules and mechanics. Like a watchman who can explain what gear is for what and how they are interdepending etc. You know very well how to tune up the mechanism, when to oil it. You know all kinds of clocks, their advantages and shortcomings, tens of way to display times, dates, whatever. But you lost the main point – a watch doesn’t create TIME, it only measure time. But you have started to think otherwise at some moment – at the very moment when you found out how to “tune-up” the system to show “time” you like.
Same with financial system – it doesn’t create any value, only measure it. But analysts and new class – financial lords – think they do create value. As the result – they creating mess (and wars).
Sorry for this side note. Please just answer first two questions.
PS. Bromley86 – you are also a watchman. A good one ;-)
“how countries meet their international obligations that seems to have been lost on the average Icesave demonstrator”
The UK repaying the US for funding the UK’s reconstruction after WWII is fundamentally different to Iceland repaying the UK for funding a bail-out of UK despositors. In the former case, the debtor’s citizens benefit from the loan; in the latter case, the creditor’s citizens benefit from the loan. That’s a huge moral difference.
to Peter
yes ok, I understand that british army was in UK, and they couldnt help, but the fact is that they sign a treaty wich guaranties help, militaary help.
I dont have any problem with that, I just wanna say that Mike claims responsibility for every Icelander for some private bank, but Iceland just cant pay that (like brits couldnt help then). I didnt use this as example he did, so, if you dont see similarity here ok.
And yes we was betrayd in Yalta, thats why we have to work in UK, Iceland whole world almost now, but I hope it will soon be over and we come back to our country wich can give us good quality of life.
comunism was terible but capitalism isnt perfect.
polish worker
My example still stands – even more so given your posting. The war ended and the ordinary Brit had no say over any of the final settlements – they were decided at Yalta and Potsdam. Churchill didn’t come back from Yalta and ask parliament to agree the post-war settlement – it was a factor of representative parliamentary democracy.
The issue of Poland in 1939 was for the British government a line in the sand to stop fascism rather than standing up for the rights of Poland per se. (The government in Poland in 1939 was a hard line dictatorship anyway – although at least it was a Polish dictatorship and it wasn’t threatening anyone else.) The correct place to draw the line – as many pointed out at the time was 1938 and Czecho-Slovakia. (And to assure you that we are principled many British people DID bang pots and pans in September 1938 in support of the Czechs. Downing Street and Whitehall were closed to clear demonstrators. Very strange for such law-abiding days.)
I grew up in an English town in the midlands and there were very large Polish (and Ukranian) communities around us. I well remember parties and weddings of friends held at The White Eagle Club (crikey that fire-water you guys drink is paint stripper!), and the Stara Polska restaurant in town. There was an essential homesickness and longing amongst those ex-pat Poles that made everyone feel immensely sad that the post-war settlement had failed to free the country. But still one could argue (I won’t!) that the constancy of policy paid off in the long run.
My point is doubled even more so by your own example: your own compatriots had to abide by a settlement over which they had no power at all. But they did. The Poles have shown by their own example a strength of character which in turn has made the country immensely well respected in the world at large. Despite all the “slings and arrows of outrageous fortune” the Polish people have managed to maintain their own culture, and now have their own fully-functioning and indepedent state. Good on you! It’s an example of fortitude in the face of grim facts that many Icelanders would do well to ponder.
Also, you ask what would happen if the Brits had to pay this sort of money. Well, to use the same era as an example the cost to the British for the war was a destroyed infrastructure and 250% of GDP in national debt. It took 60 years of sustained effort to pay back that debt, including 20 years of harsh austerity in which every productive effort was essentially nationalised and used to pay back our creditors. That debt was sustained in an effort that had at least some moral justification rather than feeding the material desires of a country. Another example of how countries meet their international obligations that seems to have been lost on the average Icesave demonstrator.
polish worker said:
“brits declare the war to Germans after they invade Poland but did they do something else?? NO”
As a Pole whose father was in the British Airforce I feel entitled to comment on that. I have only ever heard this comment from ex-communist occupied Poles, its the line the Russian fed to the Poles -‘We saved you the West abandoned you’. Its true Poland was betrayed at Yalta and handed over to communist occupation for, but at least Churchill attempted to persuade the Americans to stand to to Stalin, the Americans and Russians laughed at Britain – a destitute, tiny country with a small Army could not do anything without the US.
Why the Poles think the British we particular responsible for inaction in 1939 is a another mystery to me. The French were the only country with an army within range, Britain had half as many troops as Poland and they were in Britain. By the time the BEF could have assembled in France Poland was defeated. What do the Poles think the UK should have done in 1939 (except what it did attack military targets with the short range of its aircraft)? Perform some sort of Black magic?
“Iceland CAN’T pay with its own money, that’s why it needs to borrow”
Almost every country is in the same position. For example, the UK currently pays for things by taking on additional debt (I think an extra £12bn last month alone). But paying by taking on additional debt (such as that) is very different from saying the country CAN’T pay (ie can’t take on additional debt).
DD said
“Iceland CAN’T pay with its own money, that’s why it needs to borrow”
This statement has been true for the last 10 years at least, but as long as the money was being borrowed from foreigners to lend to Icelanders, the Icelanders were happy to let it continue.
Now the money needs to be paid out to foreigners, they sing a different tune.
To Mike analyst
maybe brits declare the war to Germans after they invade Poland but did they do something else?? NO
So dont tell me about responsiblitis “That is why individual Icelanders are responsible”, becouse following your thinking Brits are responsibile for destroying Poland and leaving her to USSR, and I mean every “individual” we also have an agrement that brits will come and help, and what have happend we all know.
I agree that Icelanders are resposibile for Icesave, but yours example is just funny, becouse you look only on yours side of medal. I wonder what would happen when we turn around situation and that british a duch goverment should pay this kind of money to Iceland.
probably 1939 again.
Iceland CAN’T pay with its own money, that’s why it needs to borrow. It’s an additional burden for the country and its people, apart from all economic problems it needs to face as e result of the bank crash. A burden that some fear can cause serious problems, even state default. As I said before people should look more deeper into the matter as to prevent such events in the future from happening, because if they didn’t, next time it could be another country. Blaming only Iceland and “bad icelanders” won’t help.
“Some changes, additional regulations are needed. That’s the lesson. And while people keep themselves busy blaming only Iceland, refusing to look deeper into the problem, the system can collapse again.”
I think it will, Iceland is just ahead of the rest.
“The solution to the problem is not simply that “the state should guarantee bank deposits”, because if the state doesn’t have the money, it can’t pay.”
But the Icelandic state CAN pay (eg via long-term loans). It just doesn’t want to. Why else would Althingi try to limit the guarantee to 2024? That time limit isn’t based on ability to pay (note that extending the repayment period would increase the ability to pay), but rather a desire to pay less. Many debtors try claiming they CAN’T pay, when the reality is they just DON’T WANT to pay. Debt collection agencies have to deal with that ruse all the time.
Make, I don’t know what exactly is your definition of “normal”, but banks these days hardly stick to only giving loans. All universal banks in Europe are allowed to hold equity stakes in companies. So I would say that’s pretty normal.
You, Jim, did not learn much as well. The solution to the problem is not simply that “the state should guarantee bank deposits”, because if the state doesn’t have the money, it can’t pay. What happened to Iceland can happen to others. Iceland is not the only country in the world with bank assets exceeding multiple times its GDP. UK, Switzerland, Denmark to name few. There are flaws in the whole system. Some changes, additional regulations are needed. That’s the lesson. And while people keep themselves busy blaming only Iceland, refusing to look deeper into the problem, the system can collapse again.
“the issue here is why taxpayers are picking up the rather large bill for their incompetance”
Well, if Icelanders still don’t understand why the state should guarantee bank deposits, then there’s no hope for Icelandic banking in future! Iceland will probably make exactly the same mistake again in a 10 or 20 years. I’m surprised that the learning process is taking more than a year – they’re still stuck in the denial phase…
Scotia:
The answer to that one is very simple as well. Banks always fail, always have, always will, and given the inter-relatedness of banking the failure of one bank usually has a negative impact on others (default/failure correlation in the jargon). Nothing new there, no surprises.
So Icelanders are NOT being held responsible for the failure of a bank but the failure of their legal system used to control the banks. Specifically this is in two regards. First, the bank supervision was poor. In effect the banks were allowed to engage in practices that are disallowed elsewhere (supplying loans to buy their own shares!). Secondly, and more specifically, the deposit guarantee scheme had a number of faults. The main one that has become obvious to all Icelanders is that the Icelandic deposit guarantee scheme was being used to provide support for deposits held in currencies which were not the base currency of the supervising Central Bank. You see, in the UK if a British bank fails then the vast majority of the deposits guaranteed are held in GBP – the bank must pay out in pounds sterling. But the Bank of England holds one special power that no other bank holds: it can print pound notes. But in Iceland’s case the Sedlabanki was called upon to guarantee deposits which weren’t ISK. The Emergency Law tried to enforce payment in ISK. See Chapter IV, Article 8 (a) which reads:
“The Fund is authorised to reimburse the value of deposits from its Deposit Division and to remit such payments in accordance with the terms applying to the deposit or securities; for example, as regards tied periods, termination, and the like. It shall always be permissible to reimburse the value of deposits, securities, or cash in Icelandic krónur, even though the original transactions may have been in another currency.”
This gives the guarantee fund _discretionary_ power to force payment in ISK. In reality that article was thrown into the bin from the start: there was no way British savers were going to accept ISK in place of their deposited GBP!
So to return to the main point the Althingi – made up of people YOU, the Icelanders, voted into power – passed poor laws, created an incorrect legal framework for financial organisations, and even when they adopted regulations from outside bodies they failed to implement those regulations or empower the necessary enforcement bodies (it’s no good having laws without the police and courts).
That is why individual Icelanders are responsible : you chose those people to make your laws, no one else did.
Let me put it this way. I’m old enough (almost) to remember the Second World War. When Hitler invaded Poland the UK declared war on Germany. Many Brits were called up, some fought, and some died. I don’t recall any of them banging pots-and-pans outside Parliament in 1939 complaining that the war was caused by a failed government policy (appeasement) organised by a handful of prominent people. No. They accepted that representative parliamentary democracy carries within it both rights and responsibilities. You vote for your representatives. You trust (to varying degrees) that they will do the right thing (rarely happens, but it happens more often than in other systems of government), and when they foul up – the ordinary people carry the burden. That’s the way it works.
You cannot claim (i) I didn’t vote for them (since you agreed to the majority winning the right to exercise power when you voted, no matter who won), and (ii) that you personally didn’t benefit (if there was objectionable inequality in your society then the democratic mechanism was there to help you correct it).
So that, Scotia, in brief, is why ordinary taxpayers are picking up the bill for Icesave.
Scotia said:
“the issue here is why taxpayers are picking up the rather large bill for their incompetance.”
Because your government guaranteed the banks and went on roadshows to help persuade EU depositors to bank with Icesave because of the guarantee.
I’m sick of hearing Icelanders respectively complaining about their banks and governments behaviour. If you can’t do the time, don’t do the crime – get over it; Iceland got caught.
Scotia wrote :
>the issue here is why taxpayers are picking up the rather large bill for their incompetance.
The primary answer of course being because of the EU regulations on deposit insurance ( Directive 94/19/EC ) and that EU freedom of establishment pillar that should never have been applied to banks.
To Scotia, simple answer to your question; like most governments in the world. Business people, including bankers put people in government positions to control their business/schemes thru them. Why do you think no one has been arrested. All they are doing is re-naming their banks and passing their debt to rdinary citizens!
To Mike the analyst, I think every single person living in Iceland know the banks were run badly by and for a select number of chancers who gained a lot out of this mess, the issue here is why taxpayers are picking up the rather large bill for their incompetance.
And still to this day no arrests, nothing confiscated from the famous “Business Vikings”, o and all the same people running the same banks with diffrent names. No they want the IMF to throw money at them so the “Business Vikings” maintain their luxurious lifestyles while the average hardworking citizen pays for it. Move out of Iceland before Russia takes over it!
One should never underestimate the capacity of a parliamentarian to say one thing and do nothing.
JdK:
The answer to your question is because the assets base of the Icelandic banks were very poor. They did a number of things which “normal” banks don’t do. Amongst these were:
1. They took equity stakes in companies. Normal banks tend to stick to making loans to their customers (corporations and individuals).
2. They took both direct and indirect stakes in property. Normal banks let property developers do that.
3. They took stakes in retail businesses (upmarket ones at that – i.e. those likely to preform poorly in a recession).
4. They took stakes in each other (in roundabout ways). Normal banks don’t do that.
5. They made loans to “related parties” (the other Icelandic financial companies).
6. They would often lend money to companies to buy shares, with the shares as collateral. Not a normal practice.
7. Sometimes they would lend money and ask for no collateral at all!!
8. They had a horrible practice of taking equity stakes in companies that they had lent money to.
9. They engaged in a number of severe mismatches: they mismatched currencies and they mismatched the countries of origin of their assets and liabiities (the classic case was Icesave – deposits taken in two countries as nominal “matching” to assets held in Iceland. Doh!)
The result was that (i) the three banks shared the same systemic risks, (ii) rather than reducing those risks the banks deliberately magnified them, (iii) their loan portfolio was poorly performing, (iv) they were unusually exposed to equity markets, and (v) they were horribly exposed to two market sectors that have crashed badly in the downturn: property and retail.
The awful asset bases, and the poorly performing loan books, of the three banks were one of the major contributory factors to the eventual loss of liquidity.
One should never underestimate the capacity of a parliamentarian to say one thing and do another.
Concerning the EU deposit guarantee scheme there a bit of a very fast shortcut in the article, “large banks” are define as “large” because they have a large amount of assets and the deposit guarantee fund only comes in complement of those assets…
It is also to note that lot of European country also put a state guarantee of their deposit, some big ones like France and Germany but also small ones like Belgium.
Something more interesting is then why Luxembourg and Switzerland are not in the same situation than Iceland ?
“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”
LOL. Just 3 days after this bravado, the British, Dutch and Icelandic governments agreed a different set of preconditions. So, InDefence clearly doesn’t speak for Iceland’s government!
>InDefence is a grassroots organisation that was founded in October 2008 by a group of Icelanders with close ties to the United Kingdom and the rest of Europe.
“Close ties” – as in – ‘Keep your friends close, and your enemies closer still!’
This fascinating article seems to neglect the role of the credit rating agancies who had given the Icelandic Banks an AAA rating. Surely they fell down in their role of checking on the viability of any body which they endorse?