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29th May 2022

Iceland not liable for Icesave compensation after landmark ruling

Icelandic taxpayers are not liable to finance compensation of an estimated 350,000 British and Dutch citizens who lost their savings in the wake of the collapse of the country's banking sector in 2008, following a landmark court ruling.

The Court of the European Free Trade Association (EFTA), of which Iceland is a member, ruled on Monday (28 January) that Iceland had not broken the terms of the EU's deposit guarantee scheme legislation.

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  • 350,000 British and Dutch savers lost money when Icesave collapsed. (Photo: mydogminton)

By ruling that deposit guarantee legislation does not require governments to act as a guarantor of last resort, the court has also posed a difficult question for EU law-makers in advance of legislation to harmonise national deposit guarantee schemes as part of a proposed banking union.

In a statement, the EFTA court said that "the Directive did not envisage the alleged obligation of result to ensure payment to depositors in the Landsbanki branches in the Netherlands and the United Kingdom in a systemic crisis of the magnitude experienced in Iceland."

"How to proceed in a case where the guarantee scheme was unable to cope with its payment obligations remained largely unanswered by the Directive," it concluded.

For their part, the Icelandic government expressed "satisfaction" at the ruling, which it said "brings to a close an important stage in a long saga."

A ruling that Iceland had breached the terms of legislation on deposit guarantees could have paved the way for the UK and Dutch authorities to seek damages estimated by the International Monetary Fund to be around €2 billion.

The EFTA surveillance authority brought forward the case against Iceland in December 2011, with the support of the European Commission. It claimed that the Icelandic government was liable to pay out the €20,000 minimum compensation payments set out in the directive to the British and Dutch depositors, and that by reimbursing Icelandic nationals who lost money Reykjavik had breached the principle of non-discrimination.

Iceland's defence had maintained that although the directive requires countries to set up a scheme to protect the deposits of savers, it did not force national governments to guarantee payments.

However, although Iceland is not obliged to repay foreign depositors, the 'winding up committee' of Landsbanki is continuing to reimburse the British and Dutch depositors. A government spokesperson told EUobserver that the estate of Landsbanki had "already reimbursed 50% of the total claim to the UK and the Netherlands…over 90% of the maximum required by the deposit guarantee scheme directive."

"The winding up committee expects to pay all deposit claims with 2-3 years," she added.

Iceland's banking sector collapsed in 2008 at the height of the financial crisis, owing an estimated €4 billion. The liabilities of the three main Icelandic banks, Kaupthing, Landsbanki and Glitnir Bank was over ten times the size of the Icelandic economy prior to their collapse.

The case also provoked a diplomatic row after the UK government, which compensated its citizens who had lost money, imposed financial sanctions on Iceland.

Iceland's President Olafur Ragnar Grimsson, last week launched a bitter attack on the actions taken by the British government during the crisis. In an interview with Sky News he said his country would "never forget" its treatment by former Prime Minister Gordon Brown.

"The Brown government decided to put the Icelandic government on a list of terrorist states and terrorist phenomena. We were there together with al Qaeda and the Taliban on that list. We have not forgotten that in Iceland," he said.

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