Icesave ruling in Iceland’s favour costs UK taxpayers £100m
Iceland unexpectedly won its legal battle to avoid being forced to pay back the British and Dutch governments for not honouring deposit guarantees for savers in Icesave.
The European Free Trade Association’s court this Monday rejected the lawsuit by the EFTA surveillance authority, the agency in charge of supervising Iceland’s compliance with European rules.
A defeat for Iceland may have allowed the Netherlands and the U.K. to seek damages of much as 335 billion Icelandic kronur, according to International Monetary Fund estimates.
The EFTA surveillance authority sued the island in 2011 over its failings, arguing that Iceland has a duty under EU law to guarantee a minimum compensation within a time limit and how this is achieved is up to the government. The U.K. and the Netherlands ended up compensating their citizens and were demanding that Iceland repay the full amount, with interest.
Landsbanki Islands, which had sought to attract foreign depositors through high-yielding internet accounts that saved it the trouble of opening subsidiaries abroad, collapsed in October 2008 with the rest of Iceland’s debt-laden banking industry.
The Icelandic authorities maintained that Iceland was obliged under European rules to guarantee minimum compensation of 20,000 euros ($26,900) to Dutch and British holders of Landsbanki’s high-yielding Icesave accounts.
What Icesave has cost the public in Iceland
Icelandic President Olafur Ragnar Grimsson said part of the country’s prescription to growing its economy in the wake of its terrible financial crisis was refusing to bail out the banks and rejecting austerity measures that put the burden on poor and working people.
Grimsson said one of the consequences of letting the bankrupt banks fail was it released mathematicians and technologists – previously employed by the banks – to use their talents elsewhere, thereby invigorating the country’s economy.
“GORDON BROWN will be long remembered in my country for centuries to come, long after he has been completely forgotten in Britain.” The bitterness still voiced by Olafur Ragnar Grimsson, Iceland’s president, at the 2008 decision by Britain’s former prime minister to invoke anti-terrorism laws to freeze the assets of a failed Icelandic bank was chilly even for Davos.
Before the crisis Icesave had used a European “passport” to open branches abroad and collected deposits in Britain and the Netherlands with almost no oversight from regulators in those countries. One condition of its passport was that it promised that its deposits were backed by a national deposit-insurance scheme in Iceland.
Yet when the bank collapsed Iceland’s deposit scheme was overwhelmed. Icelandic depositors in the bank ended up getting their money back; the British and Dutch governments both had to step in to compensate depositors in their countries.
Many observers had expected the court to rule that Iceland was obliged to stand behind its national deposit-protection plan and not to discriminate against foreign depositors. Instead the court found that Iceland was obliged only to make sure that it had a deposit-insurance scheme. The state was not required to pay out if the scheme had no money because of a banking crisis. Oddly, the court also found that Iceland had not breached an obligation not to discriminate between domestic and foreign depositors, even though it made only the domestic ones whole.
The questions addressed by the court may seem anachronistic: European law on deposit protection has been extensively rewritten since the crisis. Yet the ruling is another warning to those who hope that regulators can strike binding agreements on how they will share the costs of a future banking crisis.
Supervisors in America are already trying to ensure that foreign banks there operate as separately capitalised subsidiaries, so they do not have to rely on the vigilance of foreign regulators.
Hopes that Europe’s banking union will include a mutual deposit-guarantee scheme are in any case faint. This week’s ruling will only weaken confidence in the willingness of countries to bail out foreign creditors.
Courtesy BBC – Review in this video below what the British Exchequer, Alistair Darling said about Icesave and on that day in October 2008, immediately placed increased tax levies on British citizens. They have risen sharply after the verdict by the EFTA Court today.
We have seen this same attitude happens in Spain, Greece, Italy and Ireland. EU must change the regulatory framework for banks deposit protection.
The Icesave case is a lesson for governments, that they can´t always send the account for risky banking to taxpayers. This what we have learned today can happen in your country if your voice for changes will not happen.
The ruling from the European Free Trade Agreement (EFTA) Court can you find here of the Icesave case.