Iceland stands up to bullies

By Felix Salmon
January 6, 2010
cause a major international incident by vetoing a bill which would have put his country's citizens into billions of dollars in debt to bail out the UK and Dutch governments.

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There’s a reason why people are often reluctant to stand up to bullies, especially when those bullies have an enormous size and strength advantage and are credibly threatening to hurt you very badly. And so it’s going to be very interesting to see what happens now that Iceland’s figurehead president, Olafur Grimsson, has suddenly decided to cause a major international incident by vetoing a bill which would have put his country’s citizens into billions of dollars in debt to bail out the UK and Dutch governments.

In principle, I’m with Mish on this one: if you’re the president of a country where 70% of the population opposes the bill and 20% have signed a petition urging you to veto it, the noble course of action is clear.

But the UK, especially, is playing hardball, threatening Iceland with financial isolation. And as Dan Drezner says, “total isolation from the global financial system is not a fun experience, Great Recession or not”.

The threat of Iceland dropping off the face of the financial world is a real one, and the country’s bonds have been downgraded to junk status as a result. It’s really that bad: the ratings agencies have downgraded Iceland for not taking on an extra 40% of GDP in new debts.

I’m quite ashamed of the bullying tactics being used here by the UK government. What happened was that an Icelandic bank, Landsbanki, started attracting UK depositors through its Icesave brand. When Landsbanki failed, the UK government bailed out those depositors in full. And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits. If you thought the cod wars were bad, this is much worse.

If the UK were picking on a country its own size, here, I wouldn’t feel so bad. But Iceland is tiny, and has no real means to fight back, other than essentially saying “OK, then, hit me.” Which is what it’s just done. I hope that the UK doesn’t follow through on its threats — even if that means damaging its own credibility going forwards.


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A nice post and it’s hard not to be sympathetic to Iceland. However, while Iceland did not explicitly guarantee Landsbanki’s foreign deposits, Iceland did guarantee all domestic deposits. Iceland is choosing which depositors to reimburse based on nationality and residence. This goes against the spirit of international trade and relations, as well as contravenes international treaties which Iceland is party to (such as those including Iceland in the European Economic Area).

Iceland’s refunding of Landsbanki’s domestic deposits sets an important precedent in this case implying that all Landsbanki deposits were in fact guaranteed. Since Iceland decided to make the domestic depositors whole, then they’re obliged to make the foreign depositors whole. If Iceland can’t or won’t make the foreign depositors whole, then the U.K. (and Netherlands) can legitimately say that Iceland is not living up to its international obligations.

It’s a terrible situation where, as you point out, “the ratings agencies have downgraded Iceland for NOT taking on an extra 40% of GDP in new debts.” But the alternative is to allow Iceland to choose which obligations they meet and which obligations they can default on depending on their own self-interest.

Perhaps they need an international version of that Chapter 11 bankruptcy so that they can restructure and pay off their obligations in a more equitable manner.

Posted by Kosta0101 | Report as abusive

Kosta0101: “But the alternative is to allow Iceland to choose which obligations they meet and which obligations they can default on depending on their own self-interest.”

But isn’t that – rationally deciding on their economic actions in order to maximize their outcome – exactly what they are supposed to do, according to neoliberal economics? In that context, the UK’s warning is simply a reminder of possible ancillary costs that perhaps had not been factored into Iceland’s calculations.

Posted by KenInIL | Report as abusive

I thought they did have some obligations, such as written here?

“[Iceland] under EU/EFTA financial regulation equivalence rules, agreed long before the crisis even began that it would guarantee compensation of the first EUR20,887 of deposit to retail depositors in Icelandic banks from other EU countries”.

Posted by mjturner | Report as abusive

KenInIL: “But isn’t that – rationally deciding on their economic actions in order to maximize their outcome – exactly what they are supposed to do”?

There’s rationally choosing which future obligation to accept, and then there’s rationally choosing which past obligation to default on — the two are very different.

If a nation is allowed to pick and choose which past obligations to honour, then international trade and relations will break down. Today it might be Iceland not honouring the implicit guarantee of all Landsbanki deposits, tomorrow it could be the U.K. refusing to honour Gilts held by foreigners. The major difference between these two scenarios is whether the obligation is explicit or implicit, but in both cases, a sovereign would be defaulting and selectively so. And in both cases, the sovereign would be treated as an international pariah for trade and commerce.

Let’s put it another way. If a sovereign is allowed to arbitrarily choose which past obligations it will fulfill, then why would any other nation (or foreign actor) enter into any kind of relation with that nation, given that there would be little confidence that the nation would fulfill any future obligations or commitments (such as repayment of bonds).

Posted by Kosta0101 | Report as abusive

@ Kosta0101: But precisely this is what Finance Theory is argueing, especially in valuating credits. Have a look at the Merton-Model, e. g. here: ertons-Model-Credit-Risk-and-Volatility- Skews-John

Oh, and you might take a dictionary and look up what “sovereign” stands for :P It would not be the first time for a sovereign to default on their debt – see aculty/51_This_Time_Is_Different.pdf

Posted by owe.jessen | Report as abusive


What exactly is England’s threat? How will it do the isolating? Just blocking the IMF loan?

I also fail to see how Iceland insuring its deposits only for Icelanders goes against the spirit of international trade. If I had an account with an American bank in France, and the bank went bust, I would expect to that if I got recompense, it would be through the French system. And I would expect if French deposit insurance didn’t cover it, especially at abnormally high rates, that I was making an investment and not getting a savings account.

Posted by AnonymousChef | Report as abusive

Terrific post!

Grimsson did the right thing for his people. Score one for politicians representing the people over special interests! Grimsson, please come to Washington and teach a class!

Iceland has a solid economic foundation to fall back on. Its fishing, aluminum and tourism industries are world class.

Iceland, if you are scorned by London’s bitter bankers, you can still enjoy Wall Street’s loving embrace!

Posted by DanHess | Report as abusive

I will say that Felix really does need to grapple with the failure of the Icelandic version of the FDIC to meet its obligations. There are ways to do it (the doctrine of odious debts, as I understand it a general lack of standing to bring such claims if the bank fails, that Iceland’s FDIC was in fact better capitalized than other countries, and hence they weren’t really irresponsible) but it should get coverage in all fairness.

Posted by AnonymousChef | Report as abusive

What do you think the Brits would do if the shoe were on the other foot? Almost certainly the same thing as Iceland, whether big or small.

If the Reykjavik government is not responsible for the stupid investments of British citizens under the terms by which the Brits invested, then that’s just too bad. OTOH, sounds like Icesave was only one step removed–but a very legal step–from a Madoffesque Ponzi scheme.

Posted by Lilguy | Report as abusive

@owe.jessen: I am not quite sure what you are referring to with your reference to the Merton-Model, but perhaps it is my suggestion that a sovereign can’t arbitrarily choose whether to default on past obligations without consequence? Or perhaps you are referring to my claim of distinction between past obligations and future obligations?

Either way, I think it is informative that Fitch downgraded Iceland’s bonds after that nation’s President put off committing the country to increasing its debt by 40+% of GDP and instead moved to a selective default. In Fitch’s eyes, increasing the national debt by that huge amount is a better outcome than selectively defaulting on the obligation to the UK and Netherlands. So if I’ve got it right, Finance Theory is in fact arguing that committing to an onerous future obligation is better than reneging on past obligation.

And yes, many nations have defaulted in the past, and that is an option for Iceland. But there are repercussions for sovereigns that default, repercussions that Iceland should consider.

But Felix Salmon’s original blog isn’t on whether Iceland should default or not, it’s a post claiming that Iceland is justified in standing up to bullies. My point is that whether you consider the U.K. a bully or not, Iceland’s decision to guarantee domestic Landsbanki deposits, but not foreign deposits is tantamount to Iceland selectively defaulting to foreign creditors only. It will be a sovereign default.

It may be that Iceland’s best option at this point is to default (adding 40% of GDP as debt seems rather onerous to me). But, I’m not sure that it is fair to pick on the U.K. about this. Iceland did implicitly guarantee all of Landbanki’s deposits (by explicitly guaranteeing domestic deposits). The U.K. stepped up and used British taxpayer money to make British deposits whole (up to the first 60,000 pounds I believe). This is an Icelandic obligation, not a U.K. one, so why should the British taxpayer foot the bill?

Posted by Kosta0101 | Report as abusive

The U.K. is doing what they are entitled to, namely asking Iceland to pay what they owe. As a member of the European Economic Area, Iceland was entitled to have their banks open subs in the E.U and raise deposits from the public provided that their deposit insurance scheme would pay the first 20000 euros compensation in case of a bank failure. Iceland is getting extraordinarily lenient terms like 0 interest for the first 7 years and a 15 years window to pay back what they owe. Iceland is entitled to walk away but don’t come crying when you see the consequences…i.e. no more I.M.F money for a start.

Posted by alea | Report as abusive

“And now it wants that money back from the Icelandic government, which never guaranteed the Icesave deposits.” is incorrect; the Iceland government has guaranteed the first 20.000 Euro of each Icesave bank account. See urance#Iceland

Posted by appelboor | Report as abusive

So, Felix, what is it then? It looks as though Iceland is obligated to cough up the first 20k euros of each account. Shouldn’t they be liable for their, er, liabilities? I understand how awful this would be for the citizens, but it looks pretty clear-cut from this angle. What’s your rationale again?

Posted by Sensate | Report as abusive

Europe is not a country (although it likes to fancy itself as one). Iceland is a country. Iceland’s ‘obligation’ is more like a trade agreement.

Landsbanki is not the people of Iceland. It was a corporation that has now gone bust. Most Icelanders had no involvement. The returns it was offering were stock-like, not in line with the returns of ordinary bank CDs.

I too, looked into Icelandic deposits a few years ago, but they were not insured and they looked way too high for comfort.

That said, some level of partial payment by the Icelandic taxpayers would be an honorable gesture.

Posted by DanHess | Report as abusive

So, Iceland gets an IMF loan to pay off the money, and then the IMF demands, as it ALWAYS demands that hat Iceland:
* Dismantle its social safety net
* Sell off its fishing rights, which is the major productive industry in Iceland, to foreigners who will rape the fisheries.
* Fire public employees.
* Privatize energy, water, and other utilities, so that foreigners can buy it and rape the citizenry.

In return, Iceland’s debt might not get downgraded to junk status.

Posted by Matthew_Saroff | Report as abusive

I first saw this news on – the article accused Iceland of ‘stealing’ and of the 150 comments, all were anti-iceland.

This advances the story, because even though it was my first time seeing the story in the news, I immediately thought the UK government was wrong. Iceland could not have created a liability equal to 40% of their GDP were they not serving customers on others’ soil. Banking guarantees serve the sovereign of the depositors, not the vessels flag.

But the fact that the vitriol was so fervent and one sided says that the UK populism is driving this, not good economics policy (I live in the US). Thus I suspect it is a tempest in a teapot, and the UK will back off. I am amazed it came so close to passing.

Posted by Bob_Goodwin | Report as abusive

Iceland did guarantee the deposits. Iceland has also acknowledged its liability to the UK and Netherlands. What is happening here is not so much “plucky Iceland standing up to bullies” as “a President from the same political party that caused the crisis trying to play silly buggers with the current government’s restructuring plan”. The actual elected head of government of Iceland wanted to conclude this agreement and is furious with the referendum decision. You’ve got this diametrically wrong mate.

Posted by dsquared | Report as abusive

I applaud Iceland!! Icelanders were victims of fraud by this “international community” and they are acting as anyone should who holds an ounce of pride in their own sovereignty.

Posted by csodak | Report as abusive

Perhaps it is time for some fundamental truths to be pointed out to the Icelandic people.

1. HM Government claims that extensive discussions were held between senior UK officials and their counterparts in Iceland in the months prior to October 2008 in efforts to address and avert the impending disaster in respect of Landsbanki, Kaupthing Singer & Friedlander and Heritable Banks trading within the UK.
2. Both jurisdictions appear to have a different version of their discussions and events, however, the outcome indicates that whatever conversations took place, all meaningful negotiations failed.
3. on 6th October the Icelandic Government rushed an emergency bill through the Althing which guaranteed domestic commercial and savings banks.
4. that same day the Guernsey FSC ‘approved Landsbanki’s Guernsey branch directors’ decision to place the branch in voluntary administration.’
5. on 7th October the Icelandic FME placed the bank in receivership, announcing that all Landsbanki’s Icelandic deposits would be protected in full.
6. at 10:10 on 8th October the Landsbanki Freezing Order 2008 came into force, freezing all assets of Landsbanki, the Central Bank of Iceland and the Government of Iceland.
7. on 9 October, the Icelandic assets and liabilities of Landsbanki were transferred to a new government-owned bank, Nýi Landsbanki. As Landsbanki had been acquiring assets in Iceland with foreign loans and deposits, the assets of Nýi Landsbanki exceeded its liabilities (domestic deposits and government equity capital) by 558.1 billion krónur (€3.87bn, £3.06bn) even after Nýi Landsbanki had made provisions for over half its loans to customers. Icesave deposits, along with all foreign borrowings, remained in the old Landsbanki, which was left with 1743 billion krónur (€12.1bn, £9.56bn) in assets to face up to 3197 billion krónur of liabilities (€22.2bn, £17.5bn). [Source: Wikipedia]
8. While the ultimate use of Part Two of the Anti-terrorism, Crime and Security Act 2001**, to justify the Landsbanki Freezing Order 2008 and thereby paralise movement of Icelandic banks’ funds held in UK; together with the threat of legal action by Great Britain, may or may not have been ‘heavy-handed’ and ‘highly offensive’, there appears to be little doubt that these banks were in serious trouble with some extremely questionable practices taking place, if recent reports regarding UK-SFO investigations are to be believed. believed.
9. HM Government’s use of these particular measures, where other legislation may arguably have been less emotively and better employed, has merely served to provide Iceland’s Government and people with the extremely convenient and much utilised diversionary tool of raucous furore and indignation at the concomitant inference of ‘Terrorism’ to thereby distract Iceland’s populace and media from the fundamental issues: that inadequate regulatory control meant that these banks were operating at the very least outside accepted international banking practice, if not – as is now emerging in certain instances and possibly with some senior officials’ compliance – illegally. Railing against perceived allegations of terrorism, while allowing Icelanders to vent their understandable rage and humiliation, it would be more accurately directed at the failure of their Government, banks and as a direct result, their economy and monetary system.
10. Despite the findings of the respective banks’ administrators and/or liquidators as to the financial status of the Icelandic Banks, the Icelandic Government audaciously claimed that the UK Government had caused the Icelandic banks’ collapse by its actions and continues to divert attention from the real issues.

The unequivocal facts are:

1. The Iceland electorate democratically voted for their Government, thereby providing its elected representatives with an unequivocal mandate to oversee the control and regulation of Icelandic banks.
2. The Iceland Government, for whatever reasons – and so far speculation has ranged from incompetence, through ‘blind-eye’ and ‘arms length’ management, to outright complicity – clearly completely and utterly failed to effectively regulate or responsibly control its banks, either to local or international standards. The actual reasons and accountability for these failures are currently under investigation and have yet to emerge.
3. During the years prior to 2008, many Icelanders apparently unquestioningly and bizarrely took out a high number of loans in foreign currencies, including US dollars and Japanese Yen and were happy to live an inflated and economically unrealistic lifestyle. With the collapse of the banks and the krónur and the knock-on effects of job-losses, those same creditors have found themselves unable to repay their loans and in parlous financial situations. Their anger is understandable, but misdirected if focused anywhere outside Iceland.
4. Although not a member of the EU Iceland is a member of the European Economic Area and EFTA. It was therefore bound by the regulatory bank compensation scheme under EEA law under Decision 18/94 of the EEA Joint Committee, which Iceland wrote into its national law in 1999.
5. This EEA law is based on and regulated by EU Directive 94/19/EC and Article Seven states: ‘ 1. Deposit-guarantee schemes shall stipulate that the aggregate deposits of each depositor must be covered up to ECU 20 000 in the event of deposits’ being unavailable. Until 31 December 1999 Member States in which, when this Directive is adopted, deposits are not covered up to ECU 20 000 may retain the maximum amount laid down in their guarantee schemes, provided that this amount is not less than ECU 15 000. ‘
6. Known as Tryggingarsjóður [the Depositors' and Investors Guarantee Fund] it was to be funded via a 1% levy on all bank deposits. According to Wikipedia: ‘At the time of Landsbanki’s collapse, the Tryggingarsjóður had equity of only 10.8 billion krónur, about €68 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.’
7. Considerable upstreamed funds from Landsbanki Guernsey and personal account deposits in IceSave aside, it is known that ‘wholesale depositors including 123 local authorities and other public bodies had a total of £920 million (€1.1bn) deposited with Icelandic banks. The Audit Commission, the independent body responsible for overseeing local government finances, admitted having £10 million deposited with Landsbanki and its subsidiary Heritable Bank.’
8. Such a shortfall would surely justify an independent audit, comprised of international politically unafilliated experts, of the funds transferred to Nýi Landsbanki to investigate the correlation between the deposits of Icelandic origin, which were allegedly transferred to the (surprisingly liquid) new bank, when compared to the total amount of outside deposits made over time via upstreaming from international branches and subsidiaries; a large part of which appear to have totally evaporated if the balance remaining in Old Landsbanki is to be believed.
9. In this regard, with breathtaking hypocrisy, while blindly ignoring its constitutional obligation to represent and protect Crown Dependencies in its negotiations with Iceland, and repeatedly seeking to defame and discredit UK small depositors in UK offshore Icelandic banks, the British Government has sought to accuse Iceland of a breach of its obligations under Article 4 of the EEA Agreement which prohibits “any discrimination on grounds of nationality”, reflecting Article 7 of the Treaty of Rome.
10. If the UK and Dutch Governments individually or collectively chose to exceed their own predetermined EU or National depositor compensation schemes’ maximum payment limits and/or reimburse savers in full, it is surely a matter for those individual countries, not Iceland, to underwrite. Nevertheless, it cannot be denied that Iceland does have a financial commitment to the extent of its declared liabiity under EEA legislation. Despite such fundamental logic, these governments have sought to bully Iceland into repaying ‘loans’ which were made arbitrarily without prior discussion or agreement, together with a 5% interest charge which is patently excessive by today’s standards. These demands were leveraged via pressure on the IMF and its delivery of loans to Iceland. The result of its economic situation and financial pressure on Iceland has resulted in that island’s reluctant application for EU membership, with the inevitable impact on its historical primary economic resource; its fish stocks.
11. Concurrent with this debate and long after all Icelanders’ interests have been protected, it is apparent that depositors in Landsbanki Guernsey are to be treated as non-preferential creditors by the Iceland Landsbanki administrators. This will place LG depositors’ claims behind those of many other creditors, ie: the British and Netherlands Governments (for IceSave payouts), public bodies etc. This will result in a negligible reimbursement when compared to ‘preferred creditors’.
12. In the event that this course of action is not adjusted to a fair and equal distribution, surely the argument surrounding the interpretation of Article 4 of the EEA Agreement should also apply to LG depositors’ rights. Iceland claims its decision to pursue the legitimate objective of the survival of a banking system complies with the precedent established by the Garcia Avello case brought in the European Court of Justice, which held that: ‘It is in this regard [Articles 12 EC and 17 EC] settled case-law that the principle of non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. Such treatment may be justified only if it is based on objective considerations independent of the nationality of the persons concerned and is proportionate to the objective being legitimately pursued. ‘ If this judicial decision is upheld in Iceland’s case then there is an argument that the failure to recognise that Landsbanki Guernsey depositors have equal claims to those of other parties is discriminatory and also that Iceland completely failed to protect the Icelandic-owned banking entities (surely by definition ‘systems’) in other jurisdictions.

As mentioned earlier, one can empathise with Icelanders for electing the wrong people to government: people who failed to fulfill their entrusted roles with due diligence and selfless responsibility and who have landed them in this ghastly mess by ignorantly or knowingly allowing the bankers free rein to create a false economy with the resultant and inevitable consequences. However, their present reliance upon their democratic rights is somewhat at odds with their current disregard for the activities of their former democratically elected Government.

The ‘soft touch’ regulatory approach to banking of the various authorities in the UK, Netherlands, Germany, Guernsey, etc: must bear some significant responsibility for not having acted more strongly and considerably earlier to halt the excesses and possibly salvage not only wholesale and private deposits of their own citizens and possibly, thereby, Iceland’s banking system. The misguided and bullying actions of Gordon Brown and other international leaders was a stark demonstration of too much and too late – BUT, it should be remembered that at the end of the day, full accountability lies with Iceland – its Government of the day and the Icelandic people who elected them, thereby allowing their own bankers to run the Iceland economy into the ground, to destroy the Krónur’s exchange rate and to destroy the reputation of an honest, diligent and internationally respected nation.

** NB: this Act is an unfortunately emotive and inflamatory title for what is largely a reincarnation of its predecessor, which was used against Rhodesia in 1965 and Argentina in 1982, ie: Section 2 of The Emergency Laws (Re-enactments and Repeals) Act 1964 – which itself originated from the Defence (General) Powers Regulations, 1939.

Posted by EmmaB | Report as abusive

Tanta, is that you?

Posted by Sensate | Report as abusive

I am not British and I am not Icelandic.

It’s true, Icelanders lived better than they should have. They behaved terribly, enabled by astounding and inappropriate international capital flows onto their shores that the tiny nation of fishermen did not understand.

Still, the terms demanded by Britain are reminiscent of France vs. Weimar Germany. Germany acted badly in WWI but the terms of the settlement helped nobody.

For Britain to expect 100 cents on the dollar is to deny that they were part of the problem during the bubble. Maybe the two sides will come back to the table and meet somewhere in the middle.

Iceland is defeated. Don’t think they are getting away with anything. They aren’t. They are suddenly poor and they feel rotten. They will not be going back to living the high life that they enjoyed, which feels worse than if they had never been rich.

Posted by DanHess | Report as abusive

Sensate: no kidding!

Posted by Uncle_Billy | Report as abusive

Go Iceland. The IMF is a joke and destroy more economies than they help due to their US corporate reins as are the neoliberal economic policies that got the world into this place in the first place. As mentioned in many other comments, if it were Britain or any other larger economic country they would do exactly the same. Likely without consideration of the actual voting population as has been shown so often by the UK government’s choices for the past decade… two… three decades… you choose. Iraq anyone?

Posted by DOD | Report as abusive

Coming back a bit late @ Kosta: My point with the Merton Model is that financial theory in valuating credits is explicitely using the possibility of rational default to value credits, it sees the debtor as selling his company to the creditor with a buy-back option, if the option is in the money in the final period.

What I was responding to was your point that Iceland shouldn’t have any leeway in deciding wether to honour prior obligations or not, and I think it is obvious and well-established that the rational thing for a creditor can, in fact be to default on a credit, if the accompanying loss (in this case a political cost most of all, with a diminishing likelehood of Iceland becoming part of EU) is smaller than the outstanding credit. This is no reflection on wether this decision was the right one, because I can’t value this political cost in relation to the additional debt.

Posted by owe.jessen | Report as abusive

Wow, so many are so down on the Icelanders…of course, I would expect Brits to be so (if they’re patriotic, at all), but the rest…the problem is that ALL the big countries have too much debt…somewhere, somebody isn’t going to be able to pay…are you going to invade? And what happens if Iceland is cut off from the world..starving Icelanders…most everything is brought into the island…I know, I lived there for a bit…the real issue is that everyone’s fiat currency is almost worthless, that the Chinese make almost everything, and the rest of us in the world are running out of money to buy their stuff…I applaud the Icelanders, and wish them the best of luck…Bless Bless.

Posted by heartlanpatriot | Report as abusive

The other problem I see is all of you who think that pie-in-the-sky economic theory is the answer…that’s what got us all into this mess in the first place…you can’t spend what you don’t or won’t have…you can’t make money without offering a good or service, or a material for said same…people will pay more for things that they want and are scare then for things they don’t want and there are a lot of…THESE are the things that matter to economies and always will…the rest is BUNK!

Posted by heartlanpatriot | Report as abusive

A few things to consider:

1. The UK government implemented anti-terror laws and placed Landsbanki on a list of known terrorist organizations. This severely impaired a substantial amount of Landsbanki’s assets which would’ve been used to pay the depositors. The UK is therefore partially to blame!

2. It’s somewhat ridiculous that the 180,000 taxpayers in Iceland, are to be held responsible for business decisions made by an Icelandic company in a foreign country.

3. The tax paid on the profit of Icesave was directly paid to the UK government – i.e. the UK government benefited from Icesave historically. There’s an argument that this should make the UK government at least partially responsible for the Icesave debacle.

4. The proposed Icesave agreement is way too big for Iceland to handle. Over 40% of historical GDP (and that GDP figure is probably inflated given that it incorporates contributions from the 3 collapsed Icelandic banks). The UK government and the IMF know this. In fact, I doubt there’s any illusion within the UK government that Iceland will default on this obligation at some point before 2024.

5. When creating Icesave, the EU regulation regarding foreign subsidiaries of banks was followed to the letter. A fund, guaranteeing some proportion of the deposits was created – however, this fund was not to be guaranteed by the government as this was not required under the EU regulation.

Finally, I feel that there’s substantial support in Iceland for honering its obligations – Icesave included! However, the UK needs to recognize its share of the blame and share the Icesave liability. Hopefully the UK will abandon its plan to bully Iceland into obedience so the two nations can go back to the drawing board.

Posted by OliJohnson | Report as abusive


1. No, this has the chronology wrong. Landsbanki’s assets were already impaired and the UK’s use of the “terrorist” controls was simply a measure to prevent the UK branches of Landsbanki sneaking the assets back to Rekjavik to pay domestic depositors and stiff UK depositors (which has been Iceland’s agenda all along).

2. It’s not particularly ridiculous; as I keep mentioning, two bills have already been passed in the Althing recognising that there is a genuine liability here. Iceland was not short of political parties which warned about the bubble and suggested that the banks’ foreign expansion should be curtailed and these taxpayers didn’t vote for them.

3. Not true at all; the entire point here is that Icesave was not a UK entity and had no UK tax liability. The UK is not claiming anything from the Icelandic government in respect of Kaupthing, which did its business through a UK subsidiary.

4. No it isn’t. It makes the difference between a debt/GDP ratio of 140% and one of 200%. High, but not impossibly so.

5. Icesave was not a subsidiary. Iceland did guarantee the deposit guarantee fund – otherwise there would be no banking system in Iceland today – but has attempted to do so on a selective basis, paying Icelandic depositors but not foreigners (and using the very spurious-looking legal argument that it’s really discriminating on the basis of the location of the branches).

6. There is not just “substantial support”, there have been two bills passed. The government of Iceland wants to conclude this agreement. It has been vetoed by the President of Iceland, an elected official but one who is not usually meant to be a political figure. The veto has only been used previously once since 1944 – by the same guy, in order to veto a law that would have prevented a member of the same political party from establishing a media monopoly.

Iceland aren’t a bunch of plucky battlers who just happened to become victims of the global financial crisis. It’s a country with a long track record of electing governments which behave in a quite greedy and unprincipled manner (Felix’s thrown-off reference to the Cod Wars is really quite misplaced), and this one has been the worst so far.

Looking through the archives doesn’t turn up Felix saying “Ecuador Stands Up to Bullies” or “Argentina Stands Up To Bullies” …

Posted by dsquared | Report as abusive

@Dsquared, the Uk´s use of terrorist controls was what put Kaupthing banki under also which was Icelands biggest bank.

I´m from Iceland and i just wanted to comment on this and how both most comments and the article are wrong.

Iceland has not said it it´s not going to pay it´s Icesave liabilitys. The law president Grimsson was rejecting on monday was about new terms of the payment details. Iceland has already accepted other terms in August, but those terms were rejected by Holland and England and resent to Iceland with new ones.

The changes in terms i´m not sure of but i do know that in the one Iceland accepted but was not in the one that came from Holland and the UK was a term saying that if the loan was not fully paid in 2025 it would appreciated. Also payment would have been connected to the countrys GDP.

Hardly unfair terms when looking at the countries size…

Posted by korbui | Report as abusive

@owe.jessen “What I was responding to was your point that Iceland shouldn’t have any leeway in deciding wether to honour prior obligations or not, and I think it is obvious and well-established that the rational thing for a creditor can.”

You’re absolutely right and I misspoke in my posts. Iceland absolutely can choose to default on these obligations (and in this case, it may even be the wiser move). I believe I suggested this in my previous posts.

My comments were more in response to the Felix’s sentiment that the U.K. was being a bully for insisting that Iceland should be obliged to make good on the implicit guarantee of Landsbanki’s foreign deposits. The implicit guarantee appears to be legitimate, and I was belabouring the fact that this obligation should be honoured and that the U.K. was in the right to press its claim.

Iceland could choose to default on this obligation, and accept whatever political and credit market consequences ensue. But this is different from having the U.K. not pressing its claim.

Posted by Kosta0101 | Report as abusive


1. It is simplistic at best to say that Landsbanki’s assets were already impaired when the UK used the “terrorist” controls. Landsbanki’s assets were somewhat impaired, not dissimilar to other financial institutions’ assets, but the terrorist controls further amplified the damage! Again – UK is partially at fault here! I also find it peculiar that you put the word terrorist into quotation marks. Are you implying that the terrorist controls were not genuine?

2. Yes, there’s a genuine liability! Yes, Iceland recognizes that! And yes, Iceland will honor its liabilities like we’ve always maintained! The amount of that liability is up for debate – i.e. to what extent is Iceland at fault and to what extent is the UK liable? The bills passed in Iceland previously – and were not recognized by the UK government, by the way – recognize the liability with certain provisions. The president’s veto on Monday means that the Icelandic nation will vote on whether the new bill that was recently passed in parliament will remain or whether the old bill (that you refer to, the one that wasn’t recognized by the UK government) will take its place.

3. I may have misunderstood this. I thought the interest on savings would taxed according to the tax residence of the account holder. If the account holder is UK resident, which most Icesave account holders were, then the interest would be taxable in the UK? Is that not the case?

4. I struggle with your numbers. Please clarify. The debt/GDP ratio is closer to 300% or even 400% (depending on the estimate of GDP as I explained before). Eva Joly, a self-proclaimed white-collar crime fighter and member of the European parliament today said she estimated the Icelandic debt to be 300%

5. The Icelandic government separately guaranteed the Icelandic deposits (and you’re right they discriminated on the basis of location of branches). The deposit guarantee fund however guaranteed all deposits (regardless of where they were) and that fund is not guaranteed by the government – and that fund has been drained.

Furthermore, it’s interesting to note that while Jean-Claude Trichet, the president of the European Central Bank, has stated that a government should guarantee deposits (or in this case, a deposits guarantee fund) when a country’s bank collapses, he also acknowledges that this regulation was not intended to require a government to guarantee deposits when a country’s entire banking system collapses.

6. Again, yes there have been two bills passed by the parliament. The first one was not vetoed by the president but that bill was not recognized by the UK government. The second one, which recognizes all the liability as being Iceland’s own fault, was narrowly passed by a very leftwing government which wants nothing more than to get this matter over and done with, regardless of the consequences, in order to be able to apply ASAP for Iceland to accede to the European Union. This bill was protested by 60,000 Icelanders (25% of voters) and subsequently vetoed by the president. Again, if this second bill will be voted on, and if this second bill will be refused by the Icelandic nation in that election, then the previous bill – the one that the UK hasn’t recognized – will take its place.

Lastly, I agree with you that Iceland aren’t a bunch of plucky battlers who just happened to become victims of the global financial crisis. I am however curious as to when, in your opinion, Icelandic governments have behaved in a quite greedy and unprincipled manner?

Posted by OliJohnson | Report as abusive

You’ve hammered the nail on its head, Mr. Felix Salmon! Having long watched this whole issue, I can see nothing erroneous in your article except that (1) some 25% of those having the right to vote signed a petition urging the president to veto that Icesave legislation, and (2) Moody’s, unlike Fitch, did not downgrade its ratings of Iceland, and left them unchanged atBaa3.

You are most accurate saying, “the Icelandic government … never guaranteed the Icesave deposits.” We were not meant to, according the EU legal framework: Directive 94/19/EC of the European Parliament and of the Council (1994), on deposit guarantee schemes, saying,

“Whereas this Directive may not result in the Member States’ or their competent authorities’ being made liable in respect of depositors if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized; …”

This is actually what Iceland, partner in the European Economic Area, did. Our Republic is thus NOT responsible for the PRIVATE bank Landsbankinn, nor for its deposit accounts. Our Deposit Guaranteeing Fund for savings’ owners and investors, set up in year 2000, is NOT state property, nor a governmental institution, but an independent one, upheld nad maintained by regular, prescribed contributions of our privatized banks.

Now, the British and Dutch cabinets have scared our own weak, incompetent Government to pieces, threatened it to the point of yielding to their demands, using several hostile actions, fraudulent arguments, unlawful demands, and scare tactics in the process, such as exerting pressure on us through the IMF, in which both the UK and the Netherlands are shareholders (which action, however, goes against the original aims and regulations of the IMF), trying to freeze all loans to us, even from kindred nations in Scandinavia who used to be our friends.

M.J. Turner’s comment on 6 Jan. at 5:43 p.m. is incorrect, as the Icelandic authorities’ declarations before the crisis were (1) only to the extent that we would “honour our obligations,” which does not transgress our rights according to the above-mentioned Directive, nor does it mean a state guarantee of those Icesave deposits; (2) even if somebody like the Minister of the Exchequer, Mr Darling, may have misunderstood the mentioned reassurance as referring to a state guarantee, or even if our own Minister of Banking, young, unexperienced philosopher Mr B.G. Sigurdsson might have intended such a guarantee, he was not in a capacity to do so, as that obligation would have contradicted the exclusive right reserved (by the Constitution) for any such undertaking for the Legislative body (Althingi) alone.

Incidentally, the current PM of Iceland, Mrs Johanna Sigurdardottir, had made a proposal in Parliament in 1999 (when we were adopting the EU Directive on Guarantee Funds) of offering the banks state guarantees, but her motion was not carried.

PS. It’s funny that “dsquared” maintained on Jan.7 at 11:33 PM that our President had been “from the same political party that caused the crisis”. Actually he had been the Chairman of a Socialist People’s Alliance that had been excluded from government for some 17 years, whereas the large, liberal Independent Party that dsquared was actually referring to was among the few political parties that Mr Grimsson had NOT joined on his long path to the Presidency!

Jón Valur Jensson, researcher and theologian, Reykjavik.

Posted by Jon_V.Jensson | Report as abusive

Thank you author for this one of the most correct written article of all the ones I have seen on the Icesave blackmail issue and our President´s VETO. This is absolutely correct, the Icelandic nation has no legal obligation to pay the Icesave debt of WEALTHY Bjorgolfur Thor Bjorgolfsson of London, England, who was the bank´s main owner. He owns other companies and his assets should have been frozen a long time ago. Has this been done??? No. Why not???

The EU and authorities of the Netherlands and the UK are misleading or lying to the world about the Icesave issue. If they believed they had a legal claim, they should have filed one in a court of law. But no, they refused to. They chose to use undue pressure. They knew there was no law obligating the Icelandic public to pay Icesave. They know they do NOT have a legal claim under the EEA directive or any other law.

These authorities forced the Icelandic government to sign a contract saying we will NOT follow a court judgment. In other words: If a judgment is in our favor, we can TALK to the British and Dutch authorities and DISCUSS the judgment with THEM. So we can have tea with them and discuss the plan THEY have for US. Outside law and judgment. Has the feel of a new colony of the Netherlands and the UK.

This is a coercion and extortion. The UK government did not demand damages from the United States´public when Lehman Brothers went bankrupt, causing a great loss to the UK. No, unlike Iceland, the United States were too powerful.

Most Iceland citizens did not even know this bank existed. It operated on a foreign soil in the Netherlands and the UK, under European law, with the permission of the Dutch and UK authorities and under the monitoring of these authorities. The EEA and EU legal authorities never issued a legal complaint against the operation of Icesave. Had they been breaking the law they would have, obviously. No, rather than taking the responsibility for the EEA Directive, the EU and the IMF, the Netherlands and the UK looked for a scapegoat to avoid run on all the European banks.


From the news 3 days ago from the Icelandic State News Broadcast Station (Ríkisútvarpið or RUV). Speaking is EVA JOLY, an investigative judge who solved the colossal ELF case in France. She currently works with the SPECIAL INVESTIGATIVE TASK FORCE on the collapse of the Icelandic banks:  /2010/01/06/6/


Iceland should not be bullied: ding-articles/leading-article-iceland-sh ould-not-be-bullied-1859930.html

One report from REUTERS bother me:


“Both Britain and the Netherlands loaned the small island nation over 5 billion dollars.

The 2 countries compensated their savers in full and want their money back from Iceland.” d=25322109





Posted by Ericsson09 | Report as abusive

CORRECTION: One report from REUTERS bothers me:

Posted by Ericsson09 | Report as abusive

@ Ericcson09: Your president is – quite understandably – lying to you; Iceland has the legal obligation to pay the first 20kEuro to Icesave customers in The Netherlands. Reason: it’s in the contract between Icesave and it’s customers. See part of the contract below, dated July 2008, so long before Icesave’s troubles. It’s the Deposit Insurance; that’s part of the game of being allowed to create bank saving account in the Netherlands (and probably other parts of the EU).

I’ll try to translate this sentence

“Het IJslandse garantiestelsel (Icelandic Guarantees and Investor-Compensation Scheme) garandeert aan Icesave rekeninghouders bescherming tot minimaal € 20.887 van het totale bedrag op de spaarrekening.”

to this:

“The Icelandic deposit insurance (Icelandic Guarantees and Investor-Compensation Scheme) garuantees to Icesave account holders protection up to at least € 20.887 of the total amount of the savings account”.

So, it’s in the contracts. If your president denies that, he’s lying.

In the days immediately after the Icesave bankrupty, the Dutch government has approached the Iceland government about the Iceland deposit insurance. The two governments have agreed that the Dutch goverment would give a loan to Iceland for the time beging. If your president denies that, he’s lying.

Let’s look at it the other way round: if Iceland had no obligation to pay, why would the Iceland *parliamant* agree to pay back?

So, IMHO that’s part of the problem: the Iceland president denying it’s obligation: that makes it not only a financial problem, but also a moral one. That’s like a friend who *denies* he owes you money; he will not be a friend anymore.

Text from the Icesave contract:

Is mijn geld veilig bij Icesave? (Wat houdt het depositogarantiestelsel in?)

Het depositogarantiestelsel is een regeling die de belangen van de rekeninghouders waarborgt. Particulieren en kleine ondernemingen (te weten ondernemingen die een verkorte balans mogen publiceren) kunnen een beroep doen op het depositogarantiestelsel.

Landsbanki is genotificeerd door De Nederlandsche Bank voor het voeren van een bijkantoor in Nederland. Alle activiteiten van Landsbanki in Nederland vallen volledig onder toezicht van de IJslandse toezichthouder FME. Daarnaast voert De Nederlandsche bank liquiditeitstoezicht op de activiteiten van Landsbanki in Nederland.

Buitenlandse banken die in EU-landen of de Europees Economische Ruimte gevestigd zijn, vallen onder de deposito garantieregeling van dat betreffende land. Daarnaast neemt Landsbanki deel aan het Nederlandse deposito garantiestelsel.

Het IJslandse garantiestelsel (Icelandic Guarantees and Investor-Compensation Scheme) garandeert aan Icesave rekeninghouders bescherming tot minimaal € 20.887 van het totale bedrag op de spaarrekening. Naast deze bescherming door het IJslandse garantiestelsel garandeert het Nederlands depositogarantiestelsel het bedrag tussen de € 20.887 en € 40.000. Voor de aanvullende bescherming vanuit het Nederlands depositogarantiestelsel geldt een eigen risico van 10%. De vergoeding die van de depositogarantiestelsels verkregen kan worden kan dus niet meer bedragen dan € 38.000 per persoon ongeacht het aantal rekeningen.

Posted by appelboor | Report as abusive

To appelbor: You said: “Your president is – quite understandably – lying to you; Iceland has the legal obligation to pay the first 20kEuro to Icesave customers in The Netherlands.”

Our President is NOT lying about anything. Our President simply vetoed a coercion and extortion bill demanded by the EU and the governments of the Netherlands and the UK. ICELAND has the legal obligation to pay, you say. No, ICELAND DOES NOT have a legal obligation to pay for a private bank operating on a foreign soil under European law with the legal permission of the host states and under the legal monitoring of the host states. The bank´s insurance fund has the obligation to pay. Not the Icelandic public. NO LAW obligates the Icelandic nation to pay this. Jon Valur has put in the EEA Directive under which the bank operated and I will put it in again and you should look into the law closer, rather than distorting the facts like the colonial governments do:

The EEA Directive 94/19/EC:

“Whereas this Directive may not result in the Member States’ or their competent authorities’ being made liable in respect of depositors if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized.”

We have thoroughly explained this above and Alain Lipietz, who headed the committee that wrote the law, stated 2 days ago publicly that we had NO LEGAL OBLIGATION TO PAY.



Iceland can refuse debt servitude:

Olafur Ragnar Grimsson, Iceland’s president, has created uproar with his decision to block legislation that would have repaid €3.9bn ($5.6bn) lost by British and Dutch savers in a failed Icelandic bank, triggering a referendum that the government is expected to lose. The initial response by credit rating agencies was to downgrade Icelandic bonds, as if Iceland were repudiating its debts, Argentina-style. But opponents of the bill have no intention of reneging on their legal obligations: 11de-94d8-00144feab49a,dwp_uuid=a36d4c40 -fb42-11dc-8c3e-000077b07658.html


British Academy Postdoctoral Fellow,
Lauterpacht Centre for International Law,
University of Cambridge, UK

Iceland has no clear legal obligation to pay up: 11de-9c29-00144feab49a.html?catid=97&SID =google&nclick_check=1


Iceland should not be bullied:

The British Government has behaved like a bully in its treatment of Iceland. First, when the country’s banking crisis broke, it froze Icelandic assets in Britain using legislation that had been introduced to target the funds of terrorist groups. And then, when the Icelandic President ratified legislation last summer that would have seen the country compensate Britain for its losses, the Government effectively vetoed the plan, insisting it could not accept the various caveats that applied to Iceland’s plans.

Since then, Britain has used every avenue possible to pressure Iceland. It is clear the government has used its influence within the European Union and at the International Monetary Fund to block aid packages that hold the key to Iceland escaping its ongoing economic crisis. Good old fashioned blackmail, one might call it. ding-articles/leading-article-iceland-sh ould-not-be-bullied-1859930.html



How Britain failed Icesave customers:

The biggest villains in this story, however, are to be found closer to home. The UK Treasury and the Financial Services Authority utterly failed in their duties to protect British savers by letting Landsbanki and its UK subsidiary Icesave (and several other European banks) operate here in the way it did.

Even before Northern Rock collapsed (the happy days when the possibility of bank failures seemed remote), that would not have been a satisfactory arrangement. But at the time I was explaining the rules to readers of The Independent, several months after Rock had gone under, the FSA and the Treasury were not in any way concerned. ss/comment/david-prosser-how-britain-fai led-icesave-customers-1858952.html



From the news 3 days ago from the Icelandic State News Broadcast Station (Ríkisútvarpið or RUV). Speaking is EVA JOLY, an investigative judge who solved the colossal ELF case in France. She currently works with the SPECIAL INVESTIGATIVE TASK FORCE on the collapse of the Icelandic banks:   /2010/01/06/6/



Iceland says ‘Can’t pay, won’t pay’ — and it is right:

Iceland is right. Britain (and the Netherlands) should give way on the demand that it should pay them back in full for losses in the collapsed Icesave online bank.

President Grímsson’s decision to block a Bill that would repay Britain and the Netherlands the £3.6 billion their savers lost has triggered a storm of abuse.

When Landsbankii, the parent of Icesave, collapsed in 2008, Iceland questioned whether it was obliged to compensate foreign savers. To cool the panic and demonstrate leadership, the British and Dutch governments decided to pay the savers right away, and try to get the money back from Iceland: rld/europe/article6981623.ece



Why Iceland Does Not Want to Pay:

The deal was forced on the Icelandic government mainly by the British, who, during the first months of the international financial crisis of the autumn of 2008, used London’s position as one of the financial centers of the world to hinder money transfers to and from Iceland, so as to slowly strangle its small economy.

The British also turned the IMF on the Icelanders, as if it was a bounty collector. Despite strenuous denials by the IMF, it is clear that its financial assistance to the small island nation was on condition that it would reimburse the British and the Dutch for their payments to depositors.

By his refusal, the Icelandic president was responding to the fierce opposition of the vast majority of his nation to the deal with the British and the Dutch. But why does Iceland not want to pay? 052748704842604574641913812666516.html#m g%3Dcom-wsj%26articleTabs%3Darticle

Posted by Ericsson09 | Report as abusive

Bravo Iceland. AT least your policticians didn’t cower and acquiesce likee the United STates. Our Congressional leaders surrendered faster and gave the Fed Trillions of dollars (why not, it’s not like they have to pay the bill). Wake up world. The IMF, the World Bank, and the Fed are a criminal mafia, stretching their teneatacles around the world. I’m embarrassed, that we in the United States did’t put up a valiant fight. I support Iceland all the way. Jail time, not Bail time is what is needed.

Posted by chronic | Report as abusive