Sunday

24th Jul 2016

Opinion

Why did Iceland say 'No'?

  • Why should Icelandic taxpayers be made responsible for the debts of a failed private bank? (Photo: Johannes Jansson/norden.org)

On Saturday, the people of Iceland for a second time refused via referendum to pay for the debts of the failed private bank Landsbanki Íslands and its online branch, Icesave, which operated in Britain and the Netherlands.

Almost 60 percent voted 'No' to an agreement that would have seen Icelandic taxpayers shouldering the responsibility of these debts, estimated at €11,875 for each of Iceland's 320,000 inhabitants. The result of the referendum was decisive with a turnout of 75 percent.

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During the so-called Icesave dispute – which began in the autumn of 2008 after almost the entire banking system of Iceland collapsed in the wake of the global financial crisis – no one has been able to point to any useful legal arguments for obliging Icelandic taxpayers to pay the debts of the failed private bank.

Indeed, since the beginning, the British and Dutch governments have refused to solve the dispute in a legal fashion and have instead insisted on a solution through political negotiations.

These negotiations were then followed up with repeated threats from the two governments to isolate Iceland from financial markets, prevent the country from receiving foreign lending and halt the Icelandic government's application to join the European Union (unpopular in Iceland in any case).

Just after the bank collapse in 2008, London even used anti-terrorist laws against Icelandic interests in Britain including those of the Icelandic state. This undoubtedly caused great damage to Iceland's already hard-hit economy.

Finally to the courts

The Icelandic people have always wanted the Icesave dispute to be dealt with in the courts and now after two unsuccessful attempts to find a fair solution through political negotiations, it will probably at last have the legal handling it should have had right from the start.

Many legal experts have claimed that Iceland would most likely win using the legal route, which is probably one of the reasons why the British and Dutch governments have repeatedly dismissed the idea of taking the matter to the courts.

But no matter how such court cases should go, it is highly doubtful that the results would serve the interests of London and the Hague or the EU. If Iceland wins, the two governments would not win a penny or a cent from Icelandic taxpayers.

They would, however, still be paid from the foreign assets of the failed Landsbanki Íslands when they are sold in the coming years (the first payment is scheduled this summer) - and probably more than they are entitled to according to the EU directive on deposits guarantee schemes.

On the other hand, in the unlikely event of an Icelandic legal defeat, it would mean that not only Iceland but every single country in the European Economic Area (EEA) – which includes all the EU member states – would be responsible for all deposits in their private banks, both domestically and in foreign branches within the EEA, and would have a clear obligation to step in with their taxpayers' money if necessary.

Banks undermined

There are other headaches for the British and Dutch governments as well as the EU in the event of court cases regarding the Icesave dispute. They would inevitably shine a spotlight on how badly funded and insufficient deposits guarantee schemes in most European states really are as a result of EU legislation.

The two governments as well as the EU would probably also have to make public a significant number of sensitive official documents related to the dispute and some of their other economic decisions.

Lengthy court cases, perhaps taking years, regarding how secure deposits in European banks are would also likely not improve the banks' image in the eyes of investors and depositors. It would further undermine the banks' credibility and so delay economic recovery.

Consequently, it is probably safe to say that no matter how badly Icesave court cases could possibly go for Iceland, it would not be Reykjavik that suffers the biggest defeat.

Hjortur J. Gudmundsson is the director of Civis, a free-market think tank in Iceland.

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