Icelandic Debt Relief Put Its People's Needs Ahead of Financial Markets

The three largest Icelandic banks, accounting for 85% of the Icelandic banking system, were highly leveraged, as were many around the world. There was a global withdrawal of credit in the financial system immediately after the Lehman Brothers’ bankruptcy.

Until then, Landsbanki Bank had a very successful online deposit programme ‘Icesave’ in the Netherlands and the UK as it paid the highest interest rates to most likely diversify its balance sheet. However, due to its major liquidity issues, the Landsbanki bank was put into receivership by the Icelandic government on October 7th to protect the financial infrastructure.

On October 8th, the UK government invoked the Anti-terrorism, Crime and Security Act of 2001 to freeze the UK assets of Landsbanki, the Central Bank of Iceland and the Government of Iceland. The aim of this draconian and unprecedented action was apparently to protect the interests of British Icesave depositors. The Dutch government then took steps to freeze the assets of Landsbanki in the Netherlands. A few days later, all three of the main Icelandic banks had collapsed.

• When the Icesave issue came up last October the Icelandic foreign minister said that Iceland had to take on the Icesave responsibility as the EU felt that there was a real risk of bank run in Europe. This was confirmed by the Finnish Finance Minister on September 9th this year when he admitted in an interview that European banking was near collapse last October. He says: “we were a couple of days away from a complete catastrophe, which would have been ten times worse than the current situation.” He described October 8th as the worst day, when central banks worldwide simultaneously decided to reduce interest rates by half a point.
• Landsbanki and Glitnir were taken over October 7th exactly at the time when the fear in the EU was its greatest. Iceland revealed a flaw in the EU depositors’ insurance scheme and showed that it did not always manage to cover deposits. For this to be revealed at the same time when the EU believed its banking system was close to collapsing was unthinkable for the EU. Even the doubt that the scheme would not hold was unacceptable and Iceland’s request to resolve this issue before an international court was declined.
• Due to the gravity of the situation, Iceland’s interests were simply neglectable and clear that Iceland had to take on the responsibility no matter what. Iceland was even threatened with embargo. In the end the Icelandic government gave in and accepted the Icesave commitment.

The Dutch and UK governments compensated their domestic Icesave depositors, without consulting the Icelandic government, using their own depositors’ guarantee schemes. They thereby placed the burden of the depositors’ guarantee on their taxpayers instead of the financial institutions as was foreseen by the EU rules and by that changed the environment

The Dutch, UK and Icelandic governments as well as the EU agreed on the Brussels guidelines. The guidelines state that for taking on the obligation of repaying the UK and Dutch governments which would in turn.

“..take into account the unprecedented difficult situation of Iceland and therefore the necessity of finding arrangements that allow Iceland to restore its financial system and its economy.”

This was to reflect shared international responsibility. The Brussels guidelines also stated that:

“the EU [..] will continue to participate in finding arrangements that will allow Iceland to restore its financial system and economy.”

The current Icesave agreement has in no way been made to reflect the Brussels guidelines and seriously threatens the Icelandic economy to the point of national bankruptcy.

The Dutch and UK governments entered into negotiation with the Icelandic government, claiming:

• a stake in the bankruptcy estate of Landsbanki bank,
• a full sovereign guarantee of the Icelandic Depositors and Investors Guarantee Fund
• full repayment of the €3.91 billion (i.e. up to a maximum of €20,887 for each Icesave depositor): £2.35 billion and €1.33 billion for the UK and Dutch governments, respectively, and
• that Iceland bears all the foreign exchange risk

The Icelandic negotiators were outnumbered and outgunned in all respects. Two agreements were signed on June 5th 2009 accepting repayment over 15 years (first 7 years no repayment) at 5.55% interest with terminations clauses (including an inability repay any other debt), restrictive waivers of defence and sovereign immunity, and waivers of the right for legal appeal against the governments.

As well, they would only receive under 53% of all assets recovered from the Landsbanki estate. According to the bankruptcy law in Iceland (and most other countries), each deposit should yield only a single claim on the estate of the bank. If this were the case, the vast majority of the Landsbanki assets would offset the first €20,887 of each deposit.

Unacceptably, one of the conditions was strict confidentiality of the agreements and documents – even the representatives of the Iceland Parliament were not permitted to see them. After extensive lobbyism, the agreements were finally made available online. Shockingly, all projections based on realistic assumptions about the recovery of the assets from Landsbanki, economic growth, etc. showed without doubt that Iceland would be unable to meet the repayments as reported by the University of Iceland’s Institute of Economics on August 3rd 2009 to the Parliament.

Although representatives of the Icelandic government had inexplicably signed the Icesave agreements on June 5th 2009, they could only come into force by means of legislation passed in the Parliament to authorize the state’s guarantee of repayment of the loans.

After enormous pressure from certain Parliament representatives, the Minister of Health and organizations such as InDefence, it became clear even to most members of the government that the Icelandic Parliament could not pass legislation that jeopardized the future of the nation. Considerable effort was therefore put into the formulation of preconditions for the state guarantee that could be incorporated into the legislation. The aim of these preconditions was to redress the most perilous clauses of the Icesave agreements, such that Iceland retained crucial legal rights, would only meet repayments of the loans if able to do so and that normal procedures would apply to the handling of claims on the bankruptcy estate of Landsbanki.

On August 28th, this was approved by the Parliament: act number 96/2009. The President approved the act on September 2nd, 2009, however stating that the solution would have to ‘take account of the fair rights of the nation, Iceland’s interests in the years ahead and a shared international responsibility’.

Subsequently, the UK and Dutch governments outright refused the preconditions and demanded that the initial agreement be complied with.

After a second round of negotiations with the UK and Dutch authorities was concluded, a new bill on the state guarantee on the Icesave loans was submitted by the government at the Icelandic Parliament on October 19th. The bill included amendments to the Icelandic Icesave state guarantee legislation, passed by Parliament in August. The finance ministers of Iceland, the UK and the Netherlands were obligated to maximize the value of Landsbanki’s assets.

The Icelandic Parliament passed the bill by a thin majority on December 30th, submitted to the President on December 31st for his signature.

On January 5th, 2010, as per Article 26 of the Icelandic constitution, the President declared that he would refer this bill to the people via a referendum after having received a petition from InDefence signed by about a quarter of the electorate.

Should the referendum be negative, the original act number 96/2009 will be in force.

Iceland is caught in a tidal wave, fighting a lethal combination of crises: a failed banking system; soaring national debt; a valueless currency; and an economy in tatters. The collapse of the Icelandic stock exchange was even greater than that of the Dow Jones in the USA during the Great Depression in 1929-32. This has led to huge losses in the assets of Icelanders. The local currency devalued drastically, causing an unsustainable rise in debt for many Icelandic companies and families, many of whom owe money in foreign currencies. Inflation and unemployment have skyrocketed. The treasury’s fiscal deficit is close to 30% of its revenues and it has taken on a huge amount of debt due to the collapse.