Hearts of Ice(save)

Imagine: It is 2009, November. It's a UK that is ever so slightly different to ours, an alternate version. Nuclear energy is what's on the table, like our reality the plans have passed through government that 10 new power stations are to be built. But wait! In this alternate reality a referendum is forced. We the UK people do not want our nuclear power to be supplied via the danger of our own shores, and so it is put to a public vote. Where to host these 10 new nuclear power stations? In the UK? or shall we instead impose them on Iceland?

It sounds ridiculous, doesn't it? a "democratic" solution to forcing a potentially harmful situation on to a set of people that have no say in the matter, while we reap the benefits of the whole thing. Thankfully that sort of thing can't happen, right? Uh... right?

Well in a turn of events it seems possible enough, as the Icelandic people aim to do the same with debt as they call for a referendum on whether to pay back what they owe in full or not (Iceland's actions also masterfully satirised by DSquared).

A quick declaration before I carry on. I was a customer of Icesave, the online UK arm of Landsbanki that offered savings products to UK customers. I didn't lose any money as part of their collapse due to the actions taken by the UK Government, nor do I hold any grudge or ill feelings against the unfortunate situation faced by Landsbanki.

This article is one of disbelief in current arguments that a) Iceland is right to reject repayment of it's debts and b) that the UK is somehow trying to fleece the Icelandic people for more than they owe, not of resentment for my individual situation; a situation that I have at no point felt was particularly negative or worthy of much ire.

In 2007 Icesave were fairly new on the scene. The rate of savings in Icesave ISA's were incredible, but not so overly large to be suspicious or "too good to be true" with other companies such as ICICI offering levels of interest not largely dissimilar. These savings accounts were part of UK based Icelandic bank "Landsbanki" and thus weren't subject to exactly the same financial guarantees of UK banks, but they were subject to the rules bound by the European Economic Area (EEA) Treaty that allowed them to trade in the UK, rules which state the member state must guarantee the first €20k of retail accounts. Icesave had the cautious backing of "internet gurus" such as Martin (of money tips fame), and so the ground looked relatively safe, at least to lay person's like me.

So some 300,000 UK customers, like myself, assessed the risk of using a non-UK bank, saw the legal guarantees for our money, and went for it. Unfortunately it wasn't the best decision. In 2008 Icesave collapsed in to receivership. Accounts were frozen, naturally some savers were incredibly anxious about their money. After a week or so of hearing not much we got contacted by the Financial Services Compensation Scheme (FSCA) and in a matter of only a couple of months we were all getting money back, indeed for some people the money they received back is more than they could hope to have got under any strict application of the law. The UK government had essentially guaranteed to pay back all retail depositors their savings, even over the £50k that the FSCA is obliged to cover.

But why did the UK government do this? The first answer is probably politics, it can't hurt to bail out your own citizens, especially when you weren't the one that hurt them. But realistically they also expected, as the common person did with regard to the EEA law, to have their debt paid by those that truly owed it...Iceland.

the UK government's actions were generous, the point was to ensure that people got their money without a long and protracted legal effort against Iceland and Landsbanki that was being nationalised as quick as possible. Perhaps as well for diplomacy and international relations they chose to pay Iceland's bill and take it up with them later. So what was Iceland's response? Gratitude?

Unfortunately not. Iceland started promisingly with albeit cagey assurances of Iceland's willingness to pay Icesave's debt as required by law, but it turned to more frosty encounters the next year. It turned out the Icelandic government would be trying to weasel it's way out of it's legal obligations to cover the debt owed to Icesave depositors. In a move that is easily perceivable as discriminatory, and thus illegal under EEA law, Iceland claimed it would guarantee Icelandic deposits but not those from foreign customers.

So it looked pretty bleak for the UK's finances, though not for Icesave customers who were treated incredibly well throughout the whole matter. So the UK (and the Netherlands who were also affected) brought out the big guns. Freezing assets and threatening language regarding economic membership was used, some have chosen to call this blackmail. Personally I think it's a stretch to call a government using appropriate law to try and secure the money it is owed a state of blackmail, but I can see the argument all the same.

As a result, and due to a collapse in the Icelandic government vote, the situation rolled on to August 2009 where a new Parliament voted confidently on a package to reimburse the UK and Netherlands for the money they legally owed depositors, so far covered by their own nation. $5bn was to go to the two countries between 2017 and 2023, capped at a ceiling of 6% of Icelandic GDP. This deal was signed in to law by Icelandic President Ólafur Ragnar Grímsson, but it seems Iceland failed to really check if that deal was ok with the countries it was paying back. Put simply UK and the Netherlands didn't think that it was a fair deal.

The trouble is that after 2023 any further debt would be wiped clean with nothing more to be said. This is where the controversy really ramps up, as the bill recently agreed by the Icelandic parliament, yet vetoed by the same President that signed the last bill, did little more to change the previous agreement than to ensure that the UK and Netherlands would be repaid in full and seemingly to settle on a new interest rate of 5.5% with the repayments being interest only for the first 7 years. Is this interest rate too much? with a national interest rate nearer 10% I'm not entirely sure it looks as bad as our own countries context would influence our judgement towards.

Unfortunately it is around this part of the subject that some on the blogosphere (and perhaps twitter) are woefully misguided and misinformed. Aside from the insane accusation that this is the UK government's attempt to claw back money for councils riskily investing in a foreign bank (such organisations wouldn't, to my understanding, be covered under any such law), the assertion seems to be that the UK (and by proxy the Netherlands too) would gladly see Iceland collapse in to economic ruin so that we got all of our money back AND MORE.

There is no proof of this, however, with some rather misguided economic calculations going on far too hastily. The $5bn actually covers specifically the amount owed to customers bailed out.

If 300,000 customers were covered at €20k for a total amount of €3.2bn, or just under $4.1bn at the time. Yet the reality is that the UK only loaned Iceland £2.2bn or €2.6bn/$3.3bn. Commentators have quite erroneously took the $5bn amount as being owed only to the UK, yet a portion of it, some $1.4bn (~€1.1bn) was owed to the Netherlands for their contribution in helping Iceland survive their crippling economic collapse.

Quite aside from the accusation that the UK is trying to not only get back the money it loaned to Iceland, but also to get Iceland to pay for the FSCS contribution and more, the figures state very much that the money being returned to the two nations are what they put in. And given how long they're willing to wait to get it back, I think the accusation that the UK and Netherlands are happy to economically ruin Iceland are also more than slightly premature and fantastical. Then again perhaps it's hard to blame them when the figure is presented by the media as "40% of Iceland's GDP" instead of "No more than 6% of GDP per year until the loans are repaid, starting at a point in the future far enough away to give Iceland a chance to sort out it's economy, and not requiring more than interest to be paid in the beginning."

I guess the last description doesn't quite roll off of the news desk so easily though...

And so on to that referendum, the President quite rightly listening to his people, but should there be a referendum? I don't care, as long as the result ultimately remains the same; the UK and Netherlands are owed money that was provided to get Iceland out of a tight legal spot with their finances, and that has to be repaid. If all three countries need to agree on different time scales or lower GDP ceilings so be it.

But one thing is for sure, I'll be damned if I can ever agree that it is democratically or morally correct for a nation to vote in contradiction to the EEA law they're signed up to, and to essentially steal some or all of ~€3.8bn because they would rather spend our savings on helping themselves, without severe diplomatic and economic repercussions.

Other links on this subject:
Robert Preston on anger with banks
Liberal Conspiracy and John B with the article on Iceland's president's veto