Losing Iceland

By insisting that Iceland compensate former Icesave clients who lost most of their savings last year, Britain and the Netherlands are failing to think ahead.

The ravage left by the Icesave debacle still frustrates relations between Iceland and the United Kingdom and the Netherlands. The latter two insist that the island nation repay the four billion euros which they spent compensating consumers who nearly lost all their savings last year when the Iceland bank went under. Although the country’s parliament, the Althing, which is actually the oldest of its kind in the world, decided that the money must be repayed, President Olafur Ragnar Grimsson has vetoed their bill. Four billion euros is a lot of cash for a country of 300,000 people. In fact, it amounts to a third of their yearly GDP. A referendum March 6 will decide the confrontation between president and parliament.

Grimsson received his fair share of international criticism. Finance Ministers Alistair Darling of Britain and Wouter Bos of the Netherlands both scolded him for suggesting that Iceland won’t follow through on its commitments. The president patiently explained that four billion euros is too great a burden to carry for a nation of largely traders and fishermen. It would definitively ruin Iceland’s economy which has already taken quite a beating by last year’s financial meltdown.

Darling and Bos both bended the rules themselves when they decided to compensate former Icesave clients well above the legal requirement. In the Netherlands, savings up to €20,000 are guaranteed by the government. Bos promised to compensate up to so much as €100,000 per Dutch Icesave client. Now he demands that the people of Iceland foot the bill.

Neither the British nor the Dutch are particularly contemplative about their stance. Should Iceland be forced to cough up the money, its economy will remain in shambles for years to come while, as a potential European Union member state, it could be a powerful asset to both the EU’s economy and its security.

Iceland’s strategic position made it a valuable NATO ally during the heydays of the Cold War and up to this very day, Russia remains interested in gaining a foothold in the North Atlantic. Moscow came to Iceland’s aid before: in October 2008, as the situation seemed as its direst, Russia offered to loan Iceland’s central bank €4 billion. While Darling and Bos continue to hassle the Icelanders, their enthusiasm for EU membership deteriorates quickly: there’s doubt that a majority of the people will vote “yes” in the necessary referendum. If they don’t, Europe may end up losing Iceland because of its own shortsightedness.

Comments

  • 1. The UK/NL are not demanding that Iceland foot the bill for the full amount, as you imply. You may be aware of what is called the Ragnar Hall issue, whereby the UK/NL do attempt to get Iceland to pay more than the 20,887 euros per a/c. However, there is already a clause in the law that allows for this to be overturned by an Icelandic & EFTA court.

    The Mishcon advice to the Althingi questioned whether this revision to the loan agreement would stand in an English court, so that certainly needs further scrutiny.

    2. If the Ragnar Hall issue resolves in Iceland’s favour, then the entirety of the state guarantee would be covered by the estate of Landsbanki. So the cost is just the financing. Not inconsequential, but not 4bn euros.

    If the Ragnar Hall issue was not resolved in favour of Iceland, then Iceland would be on the hook for some of the principal and not just interest. Not the full amount though, as Landsbanki will cover 88%.

    Bjarni covers it all very well in the comments section of an FT article:
    http://blogs.ft.com/economistsforum/2010/01/how-the-icelandic-saga-should-end/#comment-969108

    3. Iceland in the EU. Icelanders have never been pro-EU, with the exception of a few months in the dark winter of 2008/9. Everything looked bleak and they considered it, but they’re simply not interested. Take a look at any poll to confirm that.

    4. Russia. You neglect to mention that that $4bn loan never materialised. Eventually, after a year or so, a $500m loan was talked about, but AFAIK that’s not even on offer ATM.

    And Iceland’s president offered the Russians Keflavik point blank back in Nov 2008. They laughed.

  • Leave a reply