News BBC News: Icesave Saga - Is Repayment Fair?

[rootX]

http://www.bbc.co.uk/news/business-13029210

I am confused about this whole Icesave deal. They lost money and then carried out a referendum few months ago to decide if they should repay UK and Netherlands?

I see their behavior irresponsible.

 

[Vanadium 50]

Who is "they"? The bankers? The Icelandic government? The EEA/EFTA? The depositors? The people of Iceland?

 

[rootX]

I was referring to the government.

But, here's what I think happened (I only came across this issue two times, last time was few months ago and the news article didn't offer much details):
- Iceland bank Landsbanki collapsed in 2008 (and it had depositors from UK, Netherlands, and Iceland)
- Iceland government paid Iceland depositors, UK UK, and Netherlands Netherlands.
- Iceland government was supposed to pay back UK and Netherlands. Iceland http://www.bbc.co.uk/news/business-12485819" agreed to do so but the president didn't approve it.
- They asked for http://news.bbc.co.uk/2/hi/8552971.stm" and majority was no
(It seems like there were two referendums and both failed and now Iceland doesn't want to go into third one)

 

[ParticleGrl]

I'm confused as to why a government should have to pay back deposits from a private bank? The bank failed, the money is gone. Trying to pay it back could put Iceland in the same position as Ireland- another small country whose banks ran amuck.

 

[rootX]

I'm confused as to why a government should have to pay back deposits from a private bank? The bank failed, the money is gone. Trying to pay it back could put Iceland in the same position as Ireland- another small country whose banks ran amuck.

I am also confused about that but it seems like Iceland government would have to pay it out. It could be argued that it's the government's responsibility to make sure that its private banks don't run too wild but such discussion is bit too generic and out of the scope in regards to this thread.

Iceland's Landsbanki bank ran savings accounts in the UK and Netherlands under the name Icesave and investors there lost 4bn euros (£3.5bn; $5.8bn).

When it collapsed in 2008, the British and Dutch governments had to reimburse 400,000 citizens - and Iceland had to decide how to repay that money.

If the government doesn't:

The Icelandic people were damned if they did and damned if they didn't. It looks as if they still couldn't stomach the idea of paying off the debts of privately owned banks - even if the revised deal was considerably more generous.
...
Iceland's bid to join the EU will be paused or even vetoed by Britain and the Netherlands. And the tiny Atlantic economy is facing legal action in the EFTA court which might force it to pay up sooner than planned and at a punitive interest rate.

 

[AlephZero]

I'm confused as to why a government should have to pay back deposits from a private bank? The bank failed, the money is gone. Trying to pay it back could put Iceland in the same position as Ireland- another small country whose banks ran amuck.

It's not a question of "could". The Iceland banking crash was orders of magnitude worse than Ireland. So far as ordinary people were concerned the entire financial system just shut down without any warning. No access to cash, no credit card transactions, nobody would take payment by check, nothing.

I don't have much sympathy with foreign "investors" who deposited money in Icelandic banks at rates that were way too good to be true. But for whatever reason the UK government decided to support sorting out the mess, so I think they have a right to expect the Iceland government to stick to whatever was agreed at the time.

In some parts of the UK there are still plenty of bad memories of the Cod War over Icelandic fishing rights in the 1970s. I expect the politicians have conveniently short memories about that, but if you looked in the right place, you could find people whose reaction to the original crash was "great news, if they all freeze and starve to death then good riddance, and we'll have party to celebrate."

 

[russ_watters]

I'm confused as to why a government should have to pay back deposits from a private bank? The bank failed, the money is gone. Trying to pay it back could put Iceland in the same position as Ireland- another small country whose banks ran amuck.

A couple of possibilities (I'm not really sure, just suggesting...):

1. It could be government insured (see: FDIC).
2. The government could have decided that the damage was too great not to try to pay it back.

 

[rootX]

It's not a question of "could". The Iceland banking crash was orders of magnitude worse than Ireland. So far as ordinary people were concerned the entire financial system just shut down without any warning. No access to cash, no credit card transactions, nobody would take payment by check, nothing.

I don't have much sympathy with foreign "investors" who deposited money in Icelandic banks at rates that were way too good to be true. But for whatever reason the UK government decided to support sorting out the mess, so I think they have a right to expect the Iceland government to stick to whatever was agreed at the time.

In some parts of the UK there are still plenty of bad memories of the Cod War over Icelandic fishing rights in the 1970s. I expect the politicians have conveniently short memories about that, but if you looked in the right place, you could find people whose reaction to the original crash was "great news, if they all freeze and starve to death then good riddance, and we'll have party to celebrate."

Currently, there's also anger over the UK's use of anti-terrorism legislation to seize the Landsbanki assets in 2008.

From 2008:

The Icelanders are hurt that the British government acted under the Anti-terrorism, Crime and Security Act 2001, specifically Part 2, Article 4.
...
It is not clear why the Act and not another had to be used but one suspects that it was to hand and was quick.
And it shows how an Act designed for one set of circumstances can easily be used for another.

http://news.bbc.co.uk/2/hi/7662827.stm

 

[AlephZero]

A blog from 2008, which gives some idea what was going on at the time. (I know the blogger, from another forum).

http://www.icelandphotoblog.com/SOS-icelandphotoblog.html

 

[dobie2564]

In order to understand the real issue, you first have to understand the concept of "fiat" money issued by a central bank. Fiat currency is currency that is not backed by anything except the good faith of the issuer. In the case of Iceland, and for that matter the United States, the issuer is not the government, but the privately owned Central Bank. The equivalent in the USA is the Federal Reserve.

So what happens is this: The Central Bank prints currency and "loans" it to it's issuing banks who happen to be the owner of the Central Bank. These banks then take this money and as the theory goes, who loan it to companies and individuals which makes the economy tick. Bank regulations are supposed to keep the system from being abused. However, as we have seen recently the banks have made very bad decisions with this currency and when the deals went bad they would have collapsed. In most all cases, as in the USA, the UK, and the Eurozone, the governments have come in with bailouts and protected the the banks from collapsing because it means a collapse of the fiat currency. Since governments have no money of their own, this means the taxpayers are paying off the bankers for having lost their money.

Iceland has been the only country, so far, that has bucked this trend and this only happened when a very unhappy population showed up outside the President's home with torches ready to burn him down. i.e. the Bankers are eating the losses instead of the taxpayers.

 

[ideasrule]

The Icelanders are hurt that the British government acted under the Anti-terrorism, Crime and Security Act 2001, specifically Part 2, Article 4.
...
It is not clear why the Act and not another had to be used but one suspects that it was to hand and was quick.
And it shows how an Act designed for one set of circumstances can easily be used for another.

Is there another Act that allows the government to arbitrarily seize assets it deems valuable to the economy?

 

[AlephZero]

Is there another Act that allows the government to arbitrarily seize assets it deems valuable to the economy?

Over £1 billlion of the assets were cash deposits from UK local government authorities. If the UK government didn't already have a law to get its own money back, it wouldn't have had much difficulty in making one.

http://www.guardian.co.uk/politics/2008/oct/10/localgovernment-iceland

The local govt administrators claimed they were fulfilling their statutary obligations by using Icelandic banks, on the grounds that they have a duty to maximise returns on their assets and the Icelandic banks were offering the highest interest rates. Whatever you make of that argument, the UK government is basically looking to recover its own money. The alternative of raising another billion in local UK taxes to hand out £3000 ($5000) to every one of the 320,000 population of Iceland isn't going to play well politically.

According to a comment in the Financial Times today, the main loser from the second referendum result will be Iceland itself. The Icelandic government was and still is committed to repaying at least 90% of the UK's bail-out contribution. However the chances of it joining the EU in the forseeable future are now zero, and its prospects as an independent economic entity don't look good. A ruling against it from the court that regulates EFTA (the European Free Trade Area, i.e. the EU plus a few non-member countries like Iceland) won't improve its international credit ratings much.

 

[Vanadium 50]

I was referring to the government.

Which government? Iceland? UK? Nertherlands?

I'm confused as to why a government should have to pay back deposits from a private bank?

Deposit insurance. In fact, it is required for any bank operating in the EFTA to provide it.

Normally, a bank creates a foreign subsidiary, and in that case, the subsidiary gets their deposit insurance from the government of the country in which they operate. Icesave operated directly out of Iceland. It's debts were greater than the GDP of Iceland, so the Icelandic government did not have enough money to cover the deposit insurance. So they paid off accounts of Icelandic citizens, and not foreign deposits.

The UK and Netherlands governments paid out the deposit insurance claims for their citizens, and is now attempting to recover some or all of that from Iceland. Germany was able to seize the accounts before the money went back to Iceland.

 

[ParticleGrl]

Deposit insurance. In fact, it is required for any bank operating in the EFTA to provide it.

But normally deposit insurance has some cap (FDIC here in the US is something like 250,000 per account holder) Do you happen to know the structure of Iceland's deposit insurance?

 

[Vanadium 50]

Iceland's is at least $30,000, and the UK and Dutch systems are all well above $100,000. The average depositor outside of Iceland had about $20,000.

Deposit insurance works if you have 100 banks and 1 fails. It doesn't work so well if you have only 3 banks.

 

[Proton Soup]

Over £1 billlion of the assets were cash deposits from UK local government authorities. If the UK government didn't already have a law to get its own money back, it wouldn't have had much difficulty in making one.

http://www.guardian.co.uk/politics/2008/oct/10/localgovernment-iceland

The local govt administrators claimed they were fulfilling their statutary obligations by using Icelandic banks, on the grounds that they have a duty to maximise returns on their assets and the Icelandic banks were offering the highest interest rates. Whatever you make of that argument, the UK government is basically looking to recover its own money. The alternative of raising another billion in local UK taxes to hand out £3000 ($5000) to every one of the 320,000 population of Iceland isn't going to play well politically.

i wonder if they also have a duty to minimize risk? if Iceland's system truly lacked diversification, then that would be a decent argument that those local gov't admins didn't exercise due diligence in their investments.

 

[AlephZero]

i wonder if they also have a duty to minimize risk?

"Minimize risk" is meangless. Of course they have a duty to exercise due diliigence.

if Iceland's system truly lacked diversification, then that would be a decent argument that those local gov't admins didn't exercise due diligence in their investments.

I can't give you a reference this long after the event, but at the time they were all saying they had carried out the same checks as they would on any other financial instutution. (Whether any of those checks were really adequate is a different question of course)

Some of them were also pointing out that numbers like £10m or even £100m might seem like a lot of money, but actually it was a very small part of their total budgets. Typically, they were using these banks for short term cash deposits (i.e. a few days), not for long term "investments".

 

[Vanadium 50]

Of course the customers didn't exercise due diligence. A) Icesave was offering 6% on a passbook account when you couldn't get better than about 1% on a CD from other banks, and B) they did go under, after all.

But with deposit insurance, why bother with that? If the bank goes under, you get your money anyway, so the rational act is to go with the bank with the highest interest. So what if it's insolvent? You're covered.

I'll be accused of being a heartless reactionary by saying this, but I think FDIC insurance should be altered. There should be a tiered sharing of risk - perhaps deposits below $10,000 are insured at 100% of their value, below $50,000 at 90% and below $250,000 at 75%. Then customers have a stake in assessing whether the deal offered by a bank is too good to be true.