Icesave – another round
The Dutch Central Bank and the British Financial Services Compensation Scheme have brought a case against the Icelandic deposit guarantee fund, TIF, at the Reykjavík District Court, Héraðsdómur Reykjavíkur. The Dutch and the British seek a confirmation that TIF was liable for the EU minimum guarantee of €20.000 (which when currency exchange etc is taken in to account amounts to €20.877 for Iceland) and/or TIF should pay out, with interest, in total ISK556bn, €3.55bn. The Dutch are claiming ISK104bn, €660m and the UK ISK452bn, €2.88bn. The case was brought to court already at end of November last year but has only surfaced now in a press release from TIF.
But was the Icesave not finished when the EFTA Court ruled on January 28 last year that Iceland did not need to pay? No, not necessarily. What the court ruled was the Icelandic state was not responsible for guaranteeing the fund. But that does not exclude that the fund was liable and that is what the two countries now want to get a ruling on.
The deposit holders of Icesave have been compensated by their respective governments. The two governments are getting a refund from the estate of old Landsbanki and have already recovered around half of the sum. However, the fact that Iceland refused to end the case with an agreement means that the Dutch and the British governments keep on seeking ways to secure a decision on the payment and the legal status regarding the deposit guarantee fund, TIF, in Iceland. Also, the Landsbanki estate is not paying interests, which is being sought here. Or this is how I understand this latest Dutch UK action.
For those who feel to revise on Icesave here are some earlier Icelogs on this topic: the EFTA Court decision; the ESA case, after the oral hearing; key issues regarding the ESA Icesave case; some reactions to the EFTA Court decision.
*Here is the statement sent out by the FSCS on November 4 2008 (sorry, in the first version it said 2014), indicating how compensation would be paid out for Icesave deposit holders. As can be seen the FSCS fully expected the payment for the first €20.877 to come from Iceland after the FSCS paid it out.
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The Guardian reports TIF has stated that its coffers are incapable of meeting the compensation claims if the claims are successful: theguardian.com/business/2014/feb/11/iceland-banking-crash-claim-fund
Does this threaten the actual deposit guarantees of the Icelandic people, or are their guarantees in a different fund?
Martin Schuurman
11 Feb 14 at 2:42 am
These are guarantees against a rainy day, i.e. against the eventuality of a bank failing later in the future. The deposits in Iceland were dealt with in a different way: no compensation but the deposits were moved from the failed banks into a new bank.
Sigrún Davíðsdóttir
11 Feb 14 at 2:21 pm
But if the Anglo-Dutch coalition obtains a judgment against TIF, will there still be a guarantee fund for domestic deposits in case of another failure?
Knute Rife
12 Feb 14 at 4:59 pm
TIF is a trustee for the Icelandic financial industry. TIF funds are not TIF’s funds, they are the trust-makers’ funds, promised by them (apart from a tiny percentum paid ahead, from which TIF maintenance expenses are disbursed) for payment to beneficiaries, in event financial failures provide beneficiaries. The financial industries of Iceland are, therefore, the geese who lay the golden eggs that TIF’s job is to distribute in crises. The British, using their regulatory ax, in 2008, slaughtered the big Icelandic geese, the only ones big enough to lay eggs big enough to provide the golden omelets the slaughter made to become required. They thought they could get away with doing that for believing they could force the Icelandic populace to pay. They failed and so they lost their bet and all the money they had placed in making it. The British and the Dutch are now coming to the trustee, who hasn’t any money and never did have, and are attempting to claim that he owes them for their loss. Their “grounds” appear to be a theory that because TIF helped them make up the contract for payment, which the Icelandic people refused to sign, TIF should be somehow responsible (for attempting to help them.
Does this make sense?
No, not to me, either. But the Icelandic courts have been producing some (seemingly) peculiar verdicts in ex-bank cases, so they hope…
RL Dogh
19 Feb 14 at 2:49 am
So RL Dogh, no mainly ex-post funded deposit protection scheme has any value whatsoever, because if ever required to pay out, the scheme administrators are just a trustee for some vague entity called the financial industry? And even if the remaining financial industry is huge and could pay easily, it could just walk away, because there is no entity which is actually responsible for paying?
My own view is that this is all legal quibbling by Iceland, and they got away with murder in the EFTA court case. It is plain to anyone reading the various official documents from Iceland that the TIF was reassuring depositors that they could get their insurance payout in the event that more than one bank defaulted, and that the possibility of the state of Iceland lending money to the TIF to allow it to pay had been considered and cleared; just not formally promised.
Tim Young
19 Feb 14 at 10:41 pm
Tim,
Being a trustee is a responsibility. Except for the responsibility to carry out the responsibilities of the trusteeship honestly, to the full extent possible, trusteeship carries no liability. Compare to a lawyer who is trustee for an estate. If the estate property includes a house and the house burns down, reducing its value to zero (actually a liability to the estate for clean-up costs) would, or could, the lawyer be deemed responsible?
A financial industry is not a vague entity, and normally has substantial resources, greater than any one or two parts of the industry. In the Iceland case there was no “huge” remaining financial industry, hence, the problem was of catastrophe. Compare to when the Titanic sank: Who should have sent lifeboats the following year, and year after that?
Finally, in the Cyprus situation the EC defined depositor protection schemes definitively, by sanctioning depositors to be ‘haircut’. The resulting definition is that the purpose of the EU depositor protection programme was/is to inspire confidence before crash events, with responsibility ending with a crash, no follow-through after required.
RL Dogh
20 Feb 14 at 1:49 am
The practical point, RLD, is that who is SUPPOSED to be responsible for making the deposit insurance payments when a bank fails? It is that entity that the UK/Nl must sue. Actually, it is not really true that there was not a substantial financial industry left – as Iceland kept telling the UK/Nl – it was just that it was insolvent.
In my view, given the existence of the insolvency estates, it was not unreasonable for Iceland to accept the (fair) loan offered by the UK/Nl, and take its chances on how much of the roughly ISK550bn Icesave deposit insurance it could recover. Assuming a 50% recovery rate, that would have cost Icelanders about £4,600 per person. Not nice of course, but hardly a catastrophe for a such a high income country as Iceland, and, I would argue, the kind of occasional national misfortune that, along with occasional booms, should be expected and accepted by a small, undiversified country choosing independence. But not only did Icelanders refuse to accept this misfortune, but they are now trying to tap even the insolvency estate that was once their reason to dismiss the UK/Nl complaint, to avoid facing the full cost of another, only partly related, misfortune arising from their attempts to avoid bearing the costs of their own choices – I refer to the prevalence of index-linked borrowing to avoid the devaluation premium on nominal ISK borrowing.
Tim Young
20 Feb 14 at 11:15 am
Tim,
In regard to the loans and their acceptance, TIF helped negotiate the loans, and the Icelandic government accepted them, both assuming, along with the British and Dutch lenders, that the Icelandic people could be saddled with repaying. Iceland is a Republic, with a national referendum provision in its Constitution. The people of Iceland, who, for Iceland being a Republic, have the last word, said No. The EFTA Court could not really have ruled against the final decision of the people of Iceland, because to do so they would have been ordering the people of Iceland to change their government. It was foolish of the ESA to take that case to court.
Compare to a minor borrowing. He asserts emergency, the lender lends, but demands a co-signer. The minor goes to mum, she cosigns, but dad has the purse, and dad says no. Mum has to say “So sorry…” the minor has to say, “Uhm, oops…” and the lender has to kick himself for lending before getting signatures on a contract.
RL Dogh
21 Feb 14 at 1:52 am
RLD, The question of the loan should have been a secondary issue; ideally Iceland would have borrowed the money itself, as Britain did to cover its own deposit insurance payouts (now being recovered from the banks). But the UK and Nl realised that that would be very expensive for Iceland if not impossible, and did Iceland a favour by offering reasonable terms to borrow from them. To follow your analogy, the minor had already incurred the debt by asserting its independence to make mistakes and made a mistake; the question for the referendum should have been how to fund amending that mistake.
Iceland got lucky with the EFTA court, essentially because its case was allowed to be judged by a trio of other minors. But if Iceland is wise, it will take care to avoid getting into that position again. It seems to me that a small country like Iceland wishing to be independent has three choices in how to conduct its business:
(1) be open to engaging in the full range of economic activities of the states that it compares itself with, but accept paying for a disproportionately large state with sufficient specialist resources to expertly oversee all those activities
(2) be open to engaging in the full range of economic activities, but sub-contract out some to bigger neighbours (as Monaco does with France) or supranational organisations
(3) restrict the range of its activities to those in which it has some particular advantage and maintain world class expertise in them – eg in Iceland’s case, fisheries and geothermal energy.
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21 Feb 14 at 10:15 am
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