FEATURE3 WHY ICELAND IS RIGHT
Iceland is right. Britain (and the Netherlands) should give way on the demand that it should pay them back in full for losses in the collapsed Icesave online bank. They will probably have to do so — but before they give way their stubbornness may drive Iceland, now within sight of joining the European Union, to the level of international basket case.
President Grímsson’s decision to block a Bill that would repay Britain and the Netherlands the £3.6 billion their savers lost has triggered a storm of abuse. But the tiny nation of 320,000 people has a good case for saying it won’t pay back all the debt on the dates set out. It has an even better case for saying it can’t.
When Landsbankii, the parent of Icesave, collapsed in 2008, Iceland questioned whether it was obliged to compensate foreign savers. To cool the panic and demonstrate leadership, the British and Dutch governments decided to pay the savers right away, and try to get the money back from Iceland.
Under EU law it’s very debatable whether Iceland is obliged to pay them. It signed up to “passporting” rules that allow banks to operate across national borders if they take part in their home country’s system of guaranteeing deposits. But crucially, these guarantees vary between countries, in their level, and in who runs them. In Britain, the guarantee comes from the Government, and shortly before Landsbankii collapsed, was raised to £50,000. In Iceland, insurance was offered through the Depositors’ and Investors’ Guarantee Fund, set up by private banks, and in value equal to only 1 per cent of deposits. That was within EU rules, which did not foresee the simultaneous collapse of the country’s entire banking system.
In asserting that Iceland must repay in full, Britain is making two contestable assertions. The first is that if Iceland’s private fund can’t pay, the responsibility passes to the Government and taxpayers. EU rules do not say this, if only because they fail to provide for such dramatic circumstances. The second is that Iceland must pay not the amount set by its own guarantee rules nor even the British £50,000, but the full amount of British savers’ losses, even though the Government chose to pay out more than UK rules obliged.
It is hypocritical of Britain, with the Netherlands, to insist on the full £3.6 billion. Britain describes this as a loan to Iceland, but the “deal” in June that purported to set out the terms has never been agreed by Iceland’s parliament and President — hence this week’s drama.
Britain claims that responsibility for foreign activities of a bank falls on the taxpayers of a country in which its headquarters happen to sit. But while Britain has courted foreign banks assiduously, it is unthinkable that if it faced paying £720 billion to foreign savers (as, scaled up for the UK population, a comparable bill would be) it would pay without murmur. UK regulators also approved Icesave, and bear responsibility too.
What’s more, the UK, which now claims to advise the world on regulation after the financial crisis, is ignoring two key questions that the Iceland debacle has raised but the EU has not begun to resolve. The first is whether bank activities which benefit from a government guarantee should be walled off from those that do not. It’s certainly a live debate, but hard to say there is much real impetus to resurrect the barriers. The second is whether EU members want to agree a common level and model for deposit guarantees, backed, in the end and in every case, by government funds. The answer so far has been no.
Iceland is hardly blameless. Its bankers and politicians are entirely at fault for the greed, ignorance, vanity and cronyism which led to the implosion. National fury at Gordon Brown’s misappropriation of anti-terror laws to freeze Landsbankii’s UK activities was understandable, but has become a self-indulgent evasion. It is very hard to get Icelanders to look beyond this insult to acknowledge the real injury to British savers. Yet the best answer to these inevitable weaknesses of a very small country is to bring it within a club such as the EU, and under its scrutiny and regulation. But the row may put EU membership beyond reach. Yesterday, the escalating dispute was also jeopardising help from Nordic countries and the International Monetary Fund.
After all the legal rows, Iceland’s best card is that it can’t pay. A fall in the currency would make debt insupportable; a fall in population (and many graduates are now leaving) would make full payment impossible. EU finance ministers concluded in November 2008 that talks should respect Iceland’s need to rebuild itself.
The total bill amounts to hardly more than a third of Britain’s annual aid budget. The UK could afford to help out a tiny neighbour that has been an ally for 60 years. At the very least, it should not pursue its debatable claim in a way that prevents others pulling Iceland back from the brink.
(bronwen maddox, The Times, 9January2010)
