Iceland’s voters expressed their outrage on Saturday against bankers, the government and what they saw as foreign bullying, overwhelmingly rejecting a plan to pay $5.3 billion to Britain and the Netherlands to reimburse customers of a failed Icelandic bank.
With all but 2,500 of the 143,784 votes counted, the authorities said, 93 percent voted “no” and 1.8 percent voted “yes” in the first public referendum ever held on any subject in Iceland. The remaining ballots were declared invalid.
But the referendum was more symbolic than substantive, and the Icelandic government hastened to make clear that Iceland would still pay back the money, albeit on different terms from the ones rejected.
[...]
How to repay the debt, which represents more than 40 percent of Iceland’s gross domestic product, has consumed this small, isolated nation for the last year and a half, since its banks failed, its stock market crashed and its currency collapsed.The money represents a portion of the losses incurred by more than 300,000 Dutch and British customers of Icesave, an Internet branch of the Icelandic bank Landsbanki. The bank went bankrupt in October 2008, along with 85 percent of Iceland’s banking sector. The Netherlands and the British reimbursed their citizens, and are now pushing to get the money back from Iceland.
The three countries have been fighting over the deal’s terms ever since. An agreement this fall that would have given Iceland 15 years to pay the money, at 5.5 percent interest, only narrowly passed the country’s Parliament.
But on Jan. 5, [Icelandic President] Mr. Grimsson unexpectedly refused to sign the bill into law, setting off the need for a nationwide referendum.
Seems to me the referendum was a stunt by the government to let the public vent and try to get them onside. I suspect Americans would have voted similarly had the US had a referendum on the bailouts.
@bdgbill,
Icelanders rejected a bill that would have saddle each citizen with $16,400 of debt, not 3,000, according to Businessweek. That’s 45 per cent of entire 2009 economic output of Iceland.
No wonder they rejected it.
@nobody, I appreciate the edification and perspective, but what was the motivation for the Dutch and Brits to place their money in an Icelandic bank.
Was it a higher return? If so how much higher that an EU based bank?
How much of their investment was repaid by the governments. The full value?
>That meant Britain regulated them.
Britain regulated them to the extent that it agreed with the Icelandic government that Icelandic bank laws and guarantees were equal to UK/Eu ones.
It’s like we allow Boeing aircraft to land at Heathrow because we agree that the FAA certification is equivalent to the UK’s.
There doesn’t have to be any fraud involved.
>The last I heard, Her Majesty’s Government will not >pay Lloyd’s of London’s liabilities,
Lloyds was not guaranteed – for historical reasons it isn’t even limited liability!
The bank guarantees are totally different.
What the UK did was cover the money in your checking account when your bank goes bust. If it didn’t do this you have the 1930s scenes of a bank run from a Wonderful life.
It’s not like the FED bailout covering the gambling losses of AIG.
The alternative, if you can’t trust the foreign regulator, is to require foreign banks to deposit gold equal to the value of their borrowing. Imagine if American express or Visa had to do this to operate in the Eu. Everytime you bought a T-Shirt in London your American credit card had to give gold Sovereigns to the merchant until you paid your bill!
So lets see if I have this right.
An Iceland bank was licensed to operate in the UK and to accept deposits. The UK deposits were insured by the UK version of the US FDIC.
The bank failed. The UK’s FDIC paid claims to cover the deposits.
Now the insurance company wants to recover their loss by demanding payment from the Island Government?
That is BS. They should not have insured the deposits, or licensed the bank to operate in the UK, if they didn’t know what they were insuring.
Are they claiming fraud by the bank? Then they should press criminal charges against the executives.
From what little I know, the UK’s FDIC fell asleep a the wheel and insured a bank they didn’t know enough about. Shame on them.
To me, this just goes to show that Scandinavians have the most intelligent electorate in addition to the best-looking women in the world.
>An Iceland bank was licensed to operate in the UK and to accept deposits.
>The UK deposits were insured by the >UK version of the US FDIC.
Not quite.
The bank’s deposits were insured by the Icelandic government, the UK agreed to license them because it accepted that the Icelandic government’s FDIC was up to Eu standards.
When it failed the UK’s FDIC (FSCS) paid out up front, hoping to recover the money from Iceland’s FDIC later.
Partly this was to prevent a run on every other high street bank whether UK/Eu/other – there had just been a run on Northern Rock, a small building society (=Savings&Loan) in spite of the government telling everybody it was insured.
So if the government had told people that their money was only insured in a UK bank there would have been panic. How do you tell if the Hong-Kong and Shangahi Banking Corporation (ie HSBC) is British?
The other complexity is that a lot of local councils had put a lot of savings into these banks (they had been encouraged to seek the best return). In theory these wouldn’t be covered by the Icelandic FDIC because they were more than the $100,000 limit.
But the prospect of cities going bankrupt, Police, fire and hospitals closing because of a banking collapse was politically unacceptable (having an officially bankrupt city isn’t as commonplace in Europe)
#4. I agree. And should mention, that interest rate is the highest available on the wholesale exchange.
To make this less poufy, each Icelander would need to pay $135 per month for the next 10 years.
Putting the anti-banker rhetoric aside, the long term effects are probably:
The Eu will demand much larger contributions to it’s FDIC from Eu banks. It will have to block foreign banks from operating in the Eu (at least for high street banks) – unless they also pay full Eu FDIC.
In the past the only foreign retail banks were middle eastern (like BCCI) which weren’t guaranteed – but that was OK because using one pretty much meant you were a crook or terrorist anyway.
It might have a big effect on the US – if the Eu doesn’t believe the Fed (or US voters) would bailout Eu savers in the event of a crash – then it might be very hard for US banks to operate in the Eu and so for US companies trying to do business there.
Iceland is royally screwed. It’s economy was totally based on being a giant hedge fund. It’s only hope now is to join the Eu, adopt the Euro and let Germany bail them out. But trying to do this while defrauding (as they see it) two of the Eu’s major members is going to be tricky.
It can’t even borrow money – no commercial outfit is going to touch it and with no friends, political clout or strategic value it’s influence at the IMF is zero.
Unless Al Queda take the north pole and the US needs an Icelandic airbase again, or the world suddenly develops a massive demand for Cod or Bjork albums they don’t even have anything to sell.
Thank you #25 (Nobody). In the US, when a bank is insured by the FDIC, there are stickers on the doors, logos on the website, etc. And, if a bank takes deposits that are NOT insured, they have to point that out to you.
Don’t UK depositors have the same checks and balances?
It seems to me that the UK’s FDIC is the victim here. They covered the loss because they were directed to by their bosses in the UK government. So it should be the UK gov’t that eats it since they made the decision to pay a claim on something they did not cover.
BTW… what is the UK’s FDIC? Sorry to our non-US readers to have to wade through US acronyms. The FDIC is the US government’s semi-autonomous agency that insures your money in bank account (within limits).
right on, Iceland. right on.
The UK (rough) equivalent of FDIC is Financial Services Compensation Scheme (FSCS). It covers savings, cash investments and insurance if the bank/insurance company goes bust – upto a limit.
Like the FDIC it’s paid for by a (too) small charge on banks, but like FDIC, it was really designed to handle rare 1930s style small-town bank failing – not a global credit crunch.
You don’t even see the FDIC signs in the UK because generally the banks have been so well regulated that it never occurred to any member of the public that a ‘real’ bank could fail – Barings and BCCI didn’t affect ‘real’ people – that was part of the governments rush to promise anything to reassure people.
And anything calling itself a bank in the Eu is very heavily policed, even small local charity credit unions.
Like the US it’s semi-autonomous; but the Bank of England, the treasury, the government, FSCS and the various financial regulators are all ultimately the taxpayer.
The Icelandic-terrorism bit was unfortunate wording – the law that lets them seize foreign assets was tacked onto the end of a defence bill so it got a rather scary title.
So the missing information in the article is did Iceland guarantee the accounts, and if so for how much? I get the feeling, because this is left out, that there were no guarantees at all. In which case I’m with the Icelanders. Shame on the UK councils for being so greedy.
So why did the UK need to use anti-terrorism law to take control of the Icelandic banking assets. Something is very fishy, here, and its not the cod.
Did Iceland government guarantee the accounts the answer is NO.
As for Iceland being screwed, with such a highly educated population and a large island full of untaped natural resources, along with virtually free energy, I have a feeling Iceland has a brighter future than people give it credit for.
Now I know why the Founding Fathers never put in a referendum clause in the US Constitution: too much power in the peoples’ hands. It’d come in very handy here but the SOBs in DC would never “allow” this to happen.
@Richard
The banks were guaranteed by Iceland, they had to offer equal or better than Eu guarantees to operate in the UK and NL (typically upto around $50K/account)
The problem is that the Icelandic banks were over leveraged – or a giant Ponzi scheme depending on how charitable you wish to be. The UK/NL regulators could have looked into this a little more closely and blocked them, but politically this is a little like the UK deciding to ban Amex because the US debt is too large.
The deposits from councils, schools etc that were in the $M were not guaranteed. They will be covered by the UK/NL governments anyway – Iceland is only on the hook for about $2Bn, although if there is evidence of fraud (and there is ALWAYS evidence of fraud) then the guarantees are off and you can go after somebody for all the money (assumign you can find anyone who has it!)
@Germain
The uk didn’t use anti-terrorism laws – that was tabloid/political spin. The bill to seize assets was tacked onto the end of an international money laundering bill, the headline statement was that this bill was to stop terrorists and drug smugglers – but thats just the media spin put on all these sort of finance bills.
Yes Iceland is in a better position than Zimbabwe to recover from this – but at the moment it is screwed because nobody is going to give them credit.
Yes you have lots of natural resources, but how do you get the $$$ to buy the mining machinery, the oil to ship the product etc when at the moment Amazon wont even sell you a CD if you have an Icelandic credit card.
“they don’t even have anything to sell.”
They can always trade credits in their carbon neutral geothermal power generation.
At least their assets can’t be frozen. They already are!
The government and citizens of Iceland appear not to be legally liable for the debt, so it wasn’t rocket science for them to reject payment. The European banks are, for regulatory purposes, under the home country. Iceland met the minimum standards for setting up a national bank emergency fund. When that fund was used up Iceland is explicitly not responsible for any overages of debt.
The Icelandic government knew that the vote would fail, but appears to want to press on anyway.
You can make arguments that the population of Iceland is right or wrong, but it should be their decision to make.
I would like to add that the Icelandic FDIC is not a government identity but a privately own insurance company (owned by all the banks).
When all the banks failed this insurance company couldn’t pay out the 20.000 euros that it was suppose to insure, so either it goes bankrupt or the government quarantines a loan for paying out, making the people pay.
“A key factor in Icesave’s appeal to savers was its interest rate,….guaranteed to exceed the Bank of England Base Rate” So Icesave was an Internet bank that offered high interest rates.
Greedy Brits and Dutch looking for maximize their profits invested there instead of the their own country’s based banks. Now their governments want the 320,000 Icelanders to pay back their 340,000 citizens.? Seems Fair.
And if they don’t pay, here’s the next shoe to drop. “Although the International Monetary Fund has never explicitly linked delivery of a $4.6 billion loan to the reaching of an Icesave deal, it is committed to Iceland repaying its international debt — the months taken to reach the original Icesave deal were responsible for holding up the first tranche of IMF funds last year.” This is the classic way Britain and the Dutch have indentured third world countries since colonial times and now they are taking that model and applying it to Iceland. Fuck ‘em