Sigrún Davíðsdóttir's Icelog

Icesave echoes in Iceland, EU, Britain and the Netherlands (updated and extended)

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What is the reaction to the EFTA Court’s Icesave ruling in Iceland and abroad? In Iceland, there is no gleeful victory, in Brussels people worry about the effect on perception and depositors’ protection and in the UK and the Netherlands politicians sense that there is no obvious way to recuperate their respective cost of paying Icesave depositors

I keep being asked if Icelanders are celebrating after the unexpected Icesave ruling of the EFTA Court. The answer is: no, not really. There is no victorious glee, as far as I can sense, but a huge relief. A friend who sat at a café in Reykjavik the morning after the judgement mentioned palpable relief but said people were also talking about the irresponsible behaviour of Landsbanki and the other banks.

The measured mood can be seen here where Prime Minister Johanna Sigurdardottir (the second lady from the right) took a few dance steps while waiting on Monday to go on air after the EFTA Court judgement on Monday – very small steps, no big swings.

It will be interesting to see how and if the EFTA Court judgement will influence the electoral campaign in Iceland where election is expected latest in April. After the leaders of the Progressive Party declared they would propose a vote of no confidence against the Government they then changed their mind. After all, the voters will have a say very soon.

It seems that Facebook – a much used tool in Icelandic public debate – was overflowing with unflattering comments about politicians who were in favour of earlier Icesave agreements. However, many do recognise that the judgement was truly unexpected. At the time, negotiating an agreement to end the dispute and eradicate the accompanying uncertainty seemed like the sensible thing to do at the time.

Membership of the European will be an election topic. At first, I thought the judgement would be a weapon for the eurosceptics – after all, it had paid to go against the received wisdom of negotiating. Now I am less sure. It can also be reasoned that the EFTA Court – part of the European Economic Area pillar – did save Iceland from the British and the Dutch claims. The Dutch and the British opted to use the European Economic Area, EEA, Treaty and EFTA Surveillance Authority to challenge the Icelandic position of not paying. At the end of that path lay victory for Iceland. – Suffice it to say that the judgement is not a clear-cut weapon for any one party.

The view from Berlaymont

It is no exaggeration to say that people at Berlaymont and elsewhere in EU institutions are gobsmacked and shaken by the EFTA Court ruling. So is indeed everyone else who has read the ruling. To have it black on white – albeit from the EFTA Court and not the European Court of Justice (but there should be homogeneity between the two) – that the Directive on deposit guarantee schemes does not protect depositor in a major collapse shook the ground under the whole European banking system though depositors may not have noticed it. At least not yet.

An excellent legal reading of the judgement on European Law Blog summarises the judgement regarding the Directive by saying it “might be called a lifejacket, but it doesn’t mean it’s built for emergencies.

The ruling is based on the deposit Directive as it was in 2008 – it has been changed since – but it has, as far as I can see, not been changed in such a way as to make it unequivocal that the state is the final guarantor. If the idea with the changes in 2009 was to make states guarantee deposits a short sentence saying that they did, could have been inserted. That was not done. Understandably so, because it raises moral hazards as is pointed out in the ruling.

The Directive was designed to give depositors the feeling the state did indeed guarantee the DGS and make investors think that no, of course the state doesn’t do that. This was always an impossible task, it just went unobserved – until the EFTA Court judgment on Icesave. – It is, I believe, still not clear from the Directive that the state guarantees a result.

According to the statement by Stefaan de Rynck, Michael Barnier’s spokesman, the Commission will study the judgement but so far, it has not changed an iota in the Commission’s understanding of the Directive: “The Commission maintains its interpretation of the current Deposit Guarantee Scheme (DGS) in the EU.  The deposit guarantee schemes in the 27 Member States also apply in the event of a systemic crisis, and Member States are responsible to ensure that national deposit guarantee schemes effectively pay the compensation guaranteed by EU law within the whole single market.” – I have also heard that not everyone in the Commission is unhappy with the judgement. Some think this clarification was useful because the Directive was flawed as it was and the changes have not repaired the flaws.

No doubt, the ruling will be read back and forth over the coming weeks. But one thing could be taken as a lesson, not from the ruling but from action taken in Iceland in October 2008: make deposits priority claims in case of a bank collapse. This has indeed put the foreign Landsbanki depositors in a better place than would have been in a comparable situation with any other bank.

Another point Iceland emphasised is that a state facing a situation like the Icelandic one, will do whatever it takes to save its own interests – and it will not necessarily use a deposit guarantee scheme. Iceland moved domestic deposits to a new bank. The British Government moved Kaupthing Edge deposits to the Dutch ING (which interestingly went bust shortly after).

I can see that deposits need to be protected – but I have some aversion to DGS as I find the moral hazard too great. On this topic the Court quotes an article by Joseph Stiglitz – a first time the Court quotes anything but another judgement in its own ruling (see paragraph 167).

There are some concerns within the EU Commission that the European Court of Justice might have ruled differently on the Directive, ie that the EFTA Court’s ruling was more narrow than its rulings hitherto, leaving a sense of divergence between the EFTA and EU pillar of the single market. After all, there should be homogeneity between or within the two pillars. However this feeling will develop DGS and especially the joint one now being discussed are not a matter for courts to decide but, as Michael Waibel points out in his summary of the judgement, “a matter for the parliaments to decide.”

The Court concludes that the Directive does not apply to systemic failure like in Iceland. But that does not mean depositors are unprotected as seen from the examples of above. And the very best deposit guarantee is to regulate and supervise banks so they simply don’t fail. In any case, as paragraph 161 in the EFTA judgement reminds the reader, a state will not only use one tool to save a bank but all tools needed: “They may benefit from other provisions of EEA law regarding financial services, as well as the activities of supervisors, central banks, and governments.”

What will the Dutch and the Brits do?

The feeling is that the Dutch are most unwilling to forget the Icesave dispute, the British less so. Therefore, the Dutch are no doubt seeking and searching for ways to recuperate the costs accrued by paying out Icesave depositors. The deposits themselves will come – and are coming – from the Landsbanki estate. Not the cost.

As far as I can sense there is no willingness in the corridors of Berlaymont to support Dutch Icesave grievances. The Berlaymontians are worried but neither for the Dutch nor the British but for the EU financial system, EU consumers and depositors.

There are all sorts of rumours as to what the Dutch are mulling over. It is even being mentioned they are looking at the nuclear option – of leaving the EEA. (Normally, the EEA countries are said to be Iceland, Norway and Liechtenstein but since the EU is part to the EEA treaty so are the EU member states.) As the Grexit debate clarified there are no provisions for leaving the EU. With the EEA it is different. If the Dutch left it would put the EEA – already a bit of an eyesore in the EU landscape for some – it would put that construction in jeopardy. The question how much political goodwill the Dutch would reap from an action that does look more like a tantrum of a spoiled kid than a carefully planned policy. The EU does not much need yet another event to challenge its equilibrium.

At the beginning of the Icesave dispute the Dutch and the British had two options to pursue their goal of recuperating costs. There was the EEA/ESA route, eventually chosen and, since the two states were of the opinion that Iceland had promised to pay but later retracted an earlier promise, there was the option to sue Iceland for contractual breach.

For the British there was no single contract but what they consider a string of broken promises. For the Dutch, in addition to a similar string, there is a Memorandum from October 11 2008, signed by the then Dutch Ambassador and two Icelandic civil servants – the director of the Icelandic deposit guarantee fund, TIF and the permanent secretary of the Ministry of Finance.

In to the Memorandum the Dutch Government declared it would lend Iceland what amounted to EUR20.887 (the European minimum guarantee of EUR20.000 with added currency cost) – there was no total amount mentioned – against 6.7% interest (quite hefty at the time of low interest rates). This money would then be put at the disposal of the Dutch Central Bank and used to pay out the Icesave depositors.

That Iceland never paid according to the agreement can be explained by the fact that the loan was never issued. Further, these civil servants signed on behalf of their Governments but no further governmental contract or agreement was made. However, the Dutch might still try to use this – as far as I can see rather feeble ground – to sue Iceland for contractual breach. The Dutch may claim they have some further documentation but I find it difficult to believe there are still unknown documents related to Icesave (though I would not exclude it).

Icesave – the end?

Is the January 28 EFTA Court judgment the end of the Icesave saga? As far as I can see it is the end to the dispute between the three countries – Iceland, Britain and the Netherlands. It also seems the EU has come to the same conclusion.

However, the effect of the judgement on the Directive will rumble on for a while with EU’s legal heads and other studying it closely. The EU Commission must figure out how to respond. It won’t be easy to reach the same opaque equilibrium as previously now that the EFTA Court has spoken. A drastic rethinking on DGS, also in terms of a pan-European scheme in a planned banking union, would be desirable. But that is perhaps hoping for too much.

Addita: In response to an FT Editorial on Icesave here is a letter of mine to the FT, published January 31:

A misleading version of Iceland’s recovery

From Ms Sigrun Davidsdottir.

Sir, After all the excellent FT reporting on Icesave it is astounding that your editorial should have turned the history of Iceland’s recovery into a heroic saga of a small island challenging the big powers and the bankers of this world.

This is a highly misleading version of the recovery saga. Correct, it didn’t bail out the three banks but smaller financial institutions were bailed out, to the exorbitant cost of 20-25 per cent of gross domestic product.

What Iceland has, however, done wisely is to write down debt, both of companies and private individuals, as well as easing its bankruptcy law, thereby avoiding a zombie economy. This part, not the Icesave saga, is “the victory for law and economic sense”. That is what debt-ridden countries could learn from the Icelandic recovery.

In general, not only in Iceland, voters tend to vote for the future by evaluating what the various political programmes means for them instead of focusing on the past. Voters can punish politicians for their policy but I rather doubt they will punish the parties for their stance on Icesave – I would guess their perspective is broader.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

February 3rd, 2013 at 12:35 am

Posted in Iceland

3 Responses to 'Icesave echoes in Iceland, EU, Britain and the Netherlands (updated and extended)'

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  1. Sigrún,
    I have not had time to fully read the EFTA Court’s ruling in the ESA v. Iceland case, so I haven’t a final judgment of the ruling. As far as I have read I am fairly impressed with the judges of the court and their sorting out the essences of the issues, and their judicious address to the relevant ones (no pun, or pun and no-pun, as you wish to read ‘judicious’). I was, of course, disappointed by the judges’ ruling, since I was enthusiastic for the fireworks that would have followed a court (any court) issuing a finding that would effectively tell the elected government of a Republic to overthrow the Republic they were elected to serve, to tell the people of the Republic they must submit to their elected servants as the servants would be obliged to to the extra-national court that ordered them…Of course, the EFTA Court did not make the case that carried that “revolutionary” potential, it was the ESA. The EFTA Court was, instead, the one set up. The EFTA Court handled the situation well, and appear to have crafted their judgment well. There are a number of nuances in it that make it better than average court judgment reading.

    The EFTA Court judges confined their adjudicative findings to the minimum the case required. This is normal, and safest, and reasonable, especially in cases like the ESA v. Iceland one. The judgment is not a ‘victory’ for Iceland. The case is still open. What the resolution of the ESA’s foolishly undertaken case has done is open the case up fully. It has clarified some aspects of the situation. It has knocked down a few of the mirrors and blown some of the smoke away. The question on the table now is not ‘Who may now go after Iceland?’, it is ‘Will Iceland go after Britain?’. Also, ‘Will Holland go after Britain?’ I will add one of my own: “Will people now begin to read the EEA Agreement?”

    As for infighting amongst the political factions in Iceland, it is good that the inclination has ebbed. None are clean in Iceland. Even the people behaved reprehensibly in their panic and rancor in the immediate wake of the tumult Britain’s assault to oust the competitive and healthy branches of competitive and healthy Icelandic banks from her markets, where their contrast was making the colluding and bent banks who were victimizing their British patrons show for as twisted as they were. One of the side-advantages of the EFTA Court’s ruling is that it leaves the Icesave assets recovery repayment of Icesave depositors standing stark and unadorned, without any covering of aid from other sources, which showcases, very starkly, that Icesave’s Landsbanki was not a failing bank when it was failed by coordinated British financial sector, regulatory, and, in the end, with the slam of the terror-legislation implementation, government actions.

    There was, and is, in the EEA Agreement, outline for appropriate course of action in the event an EEA State should appear to be failing, or potential to fail, in adhering to Directives. Britain’s FSA, in spring or summer of 2008, had it acted properly, would have notified the EC that it had concerns about Iceland’s banks. The EC would then, properly, have contacted the ESA, who would have contacted Iceland (the government), who would have been responsible to coordinate a resolution, engaging all parties, TIF, the ESA, the EC and Britain’s FSA, to resolve the worries causing the worrisome situation. The ‘Icelandic banks crisis’ that resulted in early October, with freezing of assets, terror-invocation and destruction of Iceland’s economy, precipitated by Britain taking ‘law’ into her own hands, would have been headed off by the summer’s resolution, and would not have occurred. Britain is responsible for taking an alternative course that allowed her financial players to insider-trade against Icelanders’ assets and to steal Icelanders’ properties and assets, and cause hardships to Icelanders whose well-being depended on the economy supported by the assets that were stolen and wrecked.

    The ESA’s wikipedia website has touted the ESA and EFTA Court as a “second pillar”, with the EC and EU Courts of Justice, holding (or, rather, drawing) a canopy of EU law over all of Europe, the EFTA States (except Switzerland) as well as the EU states. If you check the ESA’s recent activities you will see an increase of enforcement aggression, with enforcement actions taken to coerce implementation of EU law, not to rectify an incorrect application situation. One in each EEA EFTA nation. The indication is the ESA pulling the ‘canopy’ of EU law over the EFTA States, attempting to pull them into the EU by a back door. The “two pillars” concept is in violation of the EEA Agreement. It is an aggrandizement by the ESA of its powers. The ESA dealing directly with Britain and Holland is the same, both in violation and aggrandizement. The EC’s appearing in EFTA Court was also a violation. What else it might have been would depend on the EFTA Court’s reason for allowing the EC to over-step into EFTA jurisdiction. In the ESA v. Iceland case, for the nature of the case, the allowance was akin to allowing a tourist to stand next to the guy tied to the post in front of a firing-squad. If the tourist insists, the officer in charge can shrug and say, “If you think you have to…” Which is what the EFTA Court did with the EC, I assume knowingly, which, in my opinion, is a point for the EFTA Court: It’s sometimes best to let the foolish experience to learn.

    Holland cannot quit the EEA, because Holland is not a party to the EEA. Holland is an EU State. It is the EU that is party to the EEA, along with the three EFTA States, who, each sovereign, not being members of a union, each have the sovereignty to be signatory. Holland does not have that sovereignty, because Holland gave that sovereignty to the EU, to be a member. It is for this that Holland had no standing to deal directly with the ESA. The ESA should have known, but it seems to have aggrandized itself to a ‘partner’ status with the EC. Dealing directly with Britain and Holland, instead of through the EC, the ESA did the same the EC did intervening in EFTA Court jurisdiction.

    If Holland was a neutral party, only becoming involved in the debacle Britain cause after Britain had caused, accepting broken parts and responsibility for helping to clean up after, without having participated in the acts of taking the Icelandic banks down (I have not investigated this aspect), Holland should have recourse, with Iceland, not against Iceland, against Britain, who violated laws and treaties to maneuver to slam down the Icelandic banks, instead of seeking timely resolution for a situation that caused it concern.

    As for deposit guarantee schemes, their purpose in the EU and EEA, as the Directives say, is to enhance consumer confidence. It is not to swaddle savers or provide a sure and certain safety-net. For this purpose DGS will, like seat-belts, continue to provide protection, and will not be expected to insure against any injury at all.

    And so, the Icesave saga continues, as Icelandic saga do, going on for more chapters and generations.


    4 Feb 13 at 1:52 am

  2. […] I am told that Greek and the Cypriot officials did ask the European Commission informally if the Icesave judgement – where the Icelandic state was not deemed to be obliged to guarantee the Deposit Guarantee Fund […]

  3. […] decision; the ESA case, after the oral hearing; key issues regarding the ESA Icesave case; some reactions to the EFTA Court […]

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