April 9, 2011
The people of Iceland have rejected an agreement between the Icelandic Government on one hand and Great Britain and the Netherlands on the other – that forced Icelandic taxpayers to guarantee the losses of Landsbanki bank in Britain. We have seen the nationalization of private bank losses in the United States and all over Europe since the financial crash in 2008, effectively moving huge amount of wealth from the people to the bankrupt financial system. The latest example is the virtual enslavement of the Irish people by their financial system, carried out by their politicians.
But why is a refusal to pay from a tiny nation big news? Firstly, Iceland is the only country where the people have been allowed to have a say in the matter. Secondly, it may inspire others. Both are bad news for the international financial system.
Landsbanki was one of the Icelandic banks that went bankrupt in the crash in 2008. Before the crash, it had started offering a personal savings scheme in Britain and the Netherlands, offering people higher interest rates on their deposits than their competitors. The saving scheme was called ‘Icesave’. It was a last-ditch effort to secure liquidity to keep the already bankrupt bank going. British and Dutch customer deposited billions of Pounds into the accounts while all Governments in question turned a blind eye to what was going on.
Immediately after the crash, the Icelandic government seized control of Landsbanki and the Icelandic parliament passed an emergency law that effectively gave priority to individual Icesave account owners in Britain and the Netherlands over other debt holders of Landsbanki. The Icesave customers would get the proceeds from the sale of the assets of the bank (at least up to the limits guaranteed by the bankrupt deposit guarantee fund) – and others, i.e. the European financial system, would get the rest, if any.
The British and Dutch Governments immediately reacted by deciding unilaterally to compensate Icesave account holders with taxpayer money to prevent a run on their banks. Furthermore, the British Government seized all Landsbanki assets in Britain, using the Anti-terrorism, Crime and Security Act of 2001. The official reason given by Britain was that there had been suspicious movement of capital from Landsbanki in Britain out of the country. While that was probably the case, the main reason may have been the shocking nature of the emergency law passed in Iceland, moving individual deposit holders in front of banks in the compensation queue.
A d v e r t i s e m e n t
The liberal/conservative coalition Government in Iceland was driven from power in protests shortly after the crash and a new liberal/socialist coalition Government assumed power after general elections. The new Government started negotiations with the Dutch and British Governments that resulted in an agreement where Iceland would guarantee that the British and Dutch Governments were compensated.
At the same time the new Icelandic Government applied for EU membership, despite the majority of the nation being against joining the EU. The Icesave agreement was widely regarded as an admission payment into the EU. The Government pushed the agreement hard but it was rejected in a national referendum in early 2010. The agreement was slightly modified and another referendum took place on April 9, 2011 – where it was rejected again.
The agreement contained several interesting items:
- Icelandic taxpayers guarantee 3,8 billion Euros of private bank losses, with interests. This is equivalent to more than 40% of Icelandic GNP and more than the total value of exports in 2010. It was quite a sum for an already bankrupt nation of only 300,000.
- Instead of being able to use all of Landsbanki’s assets to pay Icesave deposit holders, the Icelandic Government would only get just over half of them. The British and Dutch government would get the rest to compensate ‘others’. Icelandic taxpayers would pay the rest. This is an effective nullification of the emergency law that favored Icesave account holders above others and an apparent intervention by the British and Dutch Governments on the behalf of their financial systems.
- If Iceland, at any time, failed to pay on time, the British and Dutch Government would be able to confiscate any asset of the Icelandic Government, apart from basic Government apparatus. This includes power companies, land and other assets. Since access to foreign capital markets would be necessary for Iceland to make payments on time, a repeat of the 2008 crash would guarantee that Iceland wouldn’t be able to pay. And since a repeat crash is almost guaranteed, the confiscation of Icelandic state assets was almost guaranteed too.
The most bizarre part of the whole dispute is that Landsbanki’s assets will almost certainly suffice to compensate the British and Dutch Governments for their costs in compensating Icesave account holders – as long as the emergency law is upheld. But that was not the real issue. The real issue seems to have been to nullify the emergency law keeping financial system debt holders away from Landsbanki’s assets and sending Icelandic taxpayers the bill instead. Or maybe the real issue was a hostile takeover of a country.
The view of the Icelandic liberal/socialist Government is that this is a fair price to pay for EU membership.
John Stratton is a pen name for an irate corporate consultant who has witnessed too much to stay silent.