Sigrún Davíðsdóttir's Icelog

Yesterday, the oral hearing in the action (Case E-16/11) brought by the EFTA Surveillance Authority, ESA, was held at the EFTA Court. ESA is requesting the EFTA Court to declare that Iceland was in breach of the EU directive on deposit-guarantee schemes (Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes) since it didn’t pay the Icesave (set up as a branch of Landsbanki) deposit holders in the UK and the Netherlands – and secondly, ‘that Iceland has breached the prohibition on discrimination on grounds of nationality under Article 4 EEA.’

What the Directive stipulates is that a EU/EEA state has to set up a DGS – and that’s what Iceland did: it did set up an insurance guarantee fund, TIF and thus fulfilled the Directive on exactly this point – but when needed the scheme was underfunded. Iceland then chose another way: domestic deposits were moved from the old banks in Iceland to the new banks – but no similar salvation was done in the Landsbanki Icesave branches abroad.

Consequently, Iceland asked the Dutch to pay out the Dutch ‘Icesavers’ and indicated to the Brits if they could do the same. Which is why the Dutch and the Brits think that Iceland owes them money for this – both the Directive stipulated amount, up to €20.000 on every account – and the cost accrued by the Dutch and the Brits in funding this action.

ESA’s lawyer Xavier Lewis said yesterday that it’s never happened before in the EU/EEA that deposit holders haven’t been paid. That’s the ESA view – that ‘Icesavers’ weren’t paid. That’s not entirely correct. The Dutch and the British ‘Icesavers’ were indeed paid – but not by the Icelandic TIF or by Iceland. Authorities in these countries did pay, which is why these two countries feel that Iceland still owes them both the sums stipulated by the Directive and the cost. The EFTA Court verdict will not end the Icesave dispute between Iceland and the Brits and the Dutch.

ESA isn’t taking action on behalf of the Dutch and the Brits, and it’s certainly not asking the EFTA Court to rule on fair interest rates. The ESA is only asking the EFTA Court to rule on the alleged breach of the Directive – and discrimination.

In court yesterday, Xavier Lewis referred to this Channel 4 reporting (a masterly piece by Faisal Islam) from February 2008 – on how safe deposits in Icelandic banks would be in case of failure – where David Oddsson then the Governor of the Central Bank of Iceland says the following: “These banks are so sound that nothing like that (ie banking failure) is likely to ever happen. And if something would happen you would never be talking about the whole amount of money because it’s never like that. But even so the Icelandic economy, the state being debtless this would not be too much for the state to swallow if it would like to swallow it (my emphasis).” – In the autumn of 2008 the state did indeed swallow a lot for deposit-holders in Iceland and promised to pay the Dutch and the Brits for compensating deposit-holders in these countries.

As far as I can gauge, the discrimination part is the real danger and threat to Iceland. If Iceland is seen to have discriminated between domestic and foreign deposit-holders the ruling might oblige Iceland not only to pay the foreign deposit-holders, ie the ‘Icesavers,’ up to €20.000 on every deposit but to pay the deposits in full – because that’s what was done in Iceland. Then Iceland doesn’t need to pay out ISK650bn to the ‘Icesavers’ but ISK1150bn or ca 66% of Icelandic GDP (adjusted for growth and inflation) this year.

Iceland is claiming force majeur – the Directive doesn’t cover such catastrophic events as the collapse of a whole banking system, claim the Icelanders. ESA refutes this, pointing out that the Directive does allow for “exceptional circumstances” (when deposit-holders can be paid out over a longer period). In addition, ESA points out that it can’t be the meaning of the Directive that the greater the shock the less the coverage for deposit-holders. The report for the hearing yesterday, going through the various aspects and opinions, can be found here.

The verdict is expected in December and it can’t be appealed. – It couldn’t come at a more delicate time for the eurozone.

In today’s Europe of heavily indebted eurozone countries struggling to convince the world that they can manage, think Italy and Spain, the breach of the DGS leads the thoughts to whether there actually is a state guarantee on deposits in the EU countries. Xavier Lewis and the EU lawyer, Enrico Traversa, seemed to indicate that this was the case – and yet not quite. The message was that whatever happened, depositors in the EU/EEA should rest assured that their deposits are guaranteed and safe. Safe, because the states guarantee that yes, deposit holders will be compensated, but it doesn’t mean that there is an outright automatic state guarantee.

Now, the Directive doesn’t explicitly say there is a state guarantee – so the question is, if the deposits are and should be as safe as ESA and EU claim, why this isn’t said more loud and clearly in the Directive. The answer is, no doubt, that when the Directive was in the making, everyone could agree there should be a trustworthy system – but there was no agreement as to how it should be financed so the financing was left to the individual countries. The US DGSs were an inspiration, but they don’t imply an automatic state guarantee. (A state guarantee can be a moral hazard, tempting banks to be more reckless – an intriguing topic these days).

The understanding was that the banks should finance the DGS – but some states treated their banking systems with kid gloves, didn’t want to burden them and well, in a good old tradition, raced to the bottom in order to enhance their competitive stance. How the countries go about financing their schemes still varies widely as can bee seen here in this report from 2010 by the European Commission to the EU Parliament on the Impact Assessment… on Deposit Guarantee Schemes.

The discrimination part doesn’t touch anyone but Iceland – but the interpretation of the Directive is an explosive item right now. To my understanding, there is no automatic state guarantee implied in the Directive but that doesn’t mean states don’t have some obligations. They do, ia, have the obligations to regulate and supervise their banking systems in such a way as to hinder banking failure, thus hindering that a DGS needs to be used.

Since both ESA and the EU have put some emphasis on Iceland’s shortcomings in this respect, what was said and done, the EFTA judges might focus on this, instead of referring to some sort of a state guarantee on the deposits. A breach of the Directive doesn’t necessarily incur any financial cost on Iceland. Countries are found to be in breach of some Directives all the time, do sometimes get fines but often they are just told to put their house in order.

Those of us impatient to know the outcome will do doubt ponder on different outcomes. It seems that there are already those who have toyed with a possible verdict. As in a folk tale, I found the following yesterday and thought I would share it with Icelog readers, no doubt amused and impressed by the learning and understanding shown:

Justice Nurgis’s EFTA decision

Having considered the submissions of all parties, I, Chief Justice Nurgis, rule as follows in the matter of the ESA’s complaint against Iceland concerning the Icesave deposits (Case E-16/11):

1. Iceland argues that the relevant Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes requires states to put in place a deposit insurance scheme but it does not require, or even imply, a state responsibility for all claims that may be made against such a scheme. Iceland further argues that it established a deposit guarantee scheme and capitalised the scheme in accordance with EU norms (roughly 1% of the insured deposit base).

2. 85% of the Icelandic financial system collapsed and the Icelandic deposit insurance scheme was obviously unable to cover those losses. The same result, Iceland argues, would be true in any country that experienced such a massive collapse of its banking sector.

3. I hold that Iceland is correct in saying that an implicit sovereign guarantee cannot be read into the Directive. It would have been childishly easy for the authors of the Directive to require such a guarantee; they did not do so because the resulting liabilities on the balance sheets of member states would have been politically and financially intolerable. Reading a matter of such enormous import between the lines of a Directive violates every norm of statutory construction.

4. Iceland’s argument breaks down, however, on the question of whether the Icelandic deposit insurance scheme was adequately capitalised. An insufficiently capitalised scheme would fail to comply with the Directive.

5. Although Iceland is correct that its scheme was capitalised in accordance with EU norms, the depth of that capitalisation must be assessed against the background of the strength of the insured institutions. It is an inverse relationship. The stronger the financial position of the insured institutions (and thus the lower the likelihood of a bank failure and call upon the deposit insurance scheme), the less the scheme needs to be capitalised in order to be in compliance with the Directive. Conversely, the weaker the financial system, the higher the required level of the capitalisation of the scheme.

 6. 85% of Iceland’s financial sector collapsed because that sector was woefully unsupervised and regulated. This much Iceland, in its own candid evaluation of the crisis, has admitted in its SIC report.

7. Iceland therefore had two honourable choices – it could either have reined in its banks and capitalised its deposit insurance scheme in accordance with the norms of other countries that similarly curb the congenitally high spirits of bankers, or it could have let its banking sector run wild but insured that when the bubble inevitably burst the deposit insurance scheme would be robustly capitalised to bear the loss. Instead, Iceland opted to abdicate its supervisory responsibilities while instituting a deposit insurance scheme capitalised at a level appropriate for a country that did engage in prudent supervision of its banking sector.

8. Accordingly, I hold there has been a breach of the Directive – not because the Directive implies a sovereign guarantee of all deposit guarantee schemes – but because Iceland’s scheme was appallingly undercapitalised in light of the bloated and unregulated nature of its financial sector.

                                         * * * *

So ordered, this 18^th day of September 2012,

Chief Justice Nurgis.

– – –

With this ruling, no delicate feathers in the eurozone are ruffled.

As the readers can see, Chief Justice Nurgis has not ruled on the alleged breach of discrimination. The wise Chief Justice is obviously fully aware that this part of the case is a tricky one and needs further contemplation. This is the part that could possibly cost Iceland dear. A propos folk tales: there is an Icelandic version of the Faust story. Sæmundur the wise is the Icelandic Faust – but unlike the German, Sæmundur actually did beat the devil, inspiring Icelanders to fight against all odds. Remains to be seen if Sæmundur’s reckless luck will prevail at the EFTA Court.

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The summer hiatus on Icelog wasn’t really planned, summer just flew away but there is still this and that newsworthy. The Office of the Special Prosecutor is still mulling over alleged fraud cases. No doubt the successful sentencing of the Byr managers will make it easier to continue. Compared to what’s happening in other countries in terms of bringing bankers to court in cases where banks pay fine for breaching the law Iceland and the OSP are doing pretty well. But Icelanders are still feeling rather impatient, would like to see more happening now that it’s almost four years since the banks collapsed.

The Icelandic economy is doing remarkably well, again compared to many other countries. The budget was presented today. Expected growth of GDP is 2.7%, inflation at 3.9% and unemployment will be down to 5.3%, from ca 8% this year. The current account deficit is expected to be 2.1% of GDP. – The weak side of the budget is the development in the eurozone. If the situation there deteriorate that could have adverse effect in Iceland.

On Tue. Sept. 18 there is an oral hearing in the EFTA Surveillance Authority case against Iceland over its breach of the EU Deposit Guarantee Directive and discrimination against deposit-holders in Icelandic bank branches abroad, heard at the EFTA Court in Luxembourg. This case might have some interesting ramification for EU countries, struggling to keep their banks afloat. (See and earlier Icelog on this case here; info from ESA on this case here.)

The outcome of this case, expected in ca two months, is a major factor of instability in Iceland in the coming year. A ruling against Iceland, especially on the discrimination issue, might burden Iceland with heavy financial liabilities. But Icelanders are always prone to believe in their luck – and perhaps signora Fortuna will side with them in this case though greater realist might be slightly more pessimistic as to the outcome in this case.

The first real storm has just swept over Iceland, burying parts of the country in snow, killing sheep and disrupting traffic and electricity. The weather has died down now but it was a reminder that summer – which in Iceland was unusually good – is now definitely over. Then winter isn’t far away. Autumn is a notoriously short and fleeting season in Iceland, usually no more than a few days. The good summer meant that blueberries were everywhere and the lucky ones will have some in the freezer to see them through winter, not to forget the unbeatable jam made of Icelandic blueberries.

The blueberries on the photo below grew on Snæfellsnes – and they tasted as lovely as they look.

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Today, the Winding-up Board of Glitnir is paying out the whole of its priority claims, in total about £500m. About half is being payed out at once, the rest are claims that are still disputed. The disputed sum now goes to an escrow account, which will collect interest rates as of today. The happy recipients of the pay-out are 55 UK local councils and universities.

After taking over the failed bank, the ResCom of Glitnir (contrary to Kaupthing) never brought its foreign currency to Iceland which means that the currency controls in Iceland don’t affect its currency holdings. The Glitnir currency holdings cover about 80% of the priority claims now paid out. The remaining 20% are paid out in Icelandic krona. Because of the currency control, this 20%, in Icelandic krona, is being held on an account with the Central Bank of Iceland. The owners of these krona can participate in the CBI’s auction – or if they are adventurous they could of course use their krona to invest in Iceland, buy goods there etc. The bids for the next CBI auction have to be in by March 28, see the CBI’s announcement here.

They payout has been widely covered in the UK press (I’ve been on three BBC interviews) and has obviously raised hopes for more money to return. Icesave depositors have been paid by the UK Government so there are no angry depositors camping outside the Icelandic Embassy – now it’s the UK Government waiting for the Icesave money from the Landsbanki WuB. Then there is of course this small matter of unpaid interest and the ESA case – yet another collapse saga.

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The latest on Iceland from Fitch Ratings, positive this time:

-17 February 2012: Fitch Ratings has upgraded Iceland’s Long-term foreign currency Issuer Default Rating (IDR) to ‘BBB-‘ from ‘BB+’ and affirmed its Long-term local currency IDR at ‘BBB+’. Its Short-term foreign currency IDR has also been upgraded to ‘F3’ from ‘B’ and its Country Ceiling to ‘BBB-‘ from ‘BB+’. The Outlooks on the Long-term ratings are Stable.

‘The restoration of Iceland’s Long-term foreign currency rating to investment grade reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness since the 2008 banking and currency crisis,” says Paul Rawkins, Senior Director in Fitch’s Sovereign Rating Group.

“Iceland has successfully exited its IMF programme and gained renewed access to international capital markets. A promising economic recovery is underway, financial sector restructuring is well-advanced, while public debt/GDP appears to be close to peaking on the back of a robust fiscal consolidation programme” added Rawkins.

As the first country to suffer the full force of the global financial crisis, Iceland successfully completed a three-year IMF-supported rescue programme in August 2011. Despite some setbacks along the way, the programme laid the foundations for renewed access to international capital markets in mid-2011 and an encouraging rebound in economic growth to 3% for 2011 as a whole. Flexible labour and product markets and a floating exchange rate have facilitated the correction of external imbalances and contained the rise in unemployment, while the financial system has shrunk to one fifth of its former size.

Iceland has been among the front runners on fiscal consolidation in advanced economies: the primary deficit has contracted from 6.5% of GDP in 2009 to 0.5% in 2011 and Iceland appears to be on track to attain primary fiscal surpluses from 2012 and headline surpluses from 2014.

Fitch believes that gross general government debt may have peaked at around 100% of GDP in 2011 (excluding potential Icesave liabilities); net debt is significantly lower at around 65% of GDP, reflecting appreciable deposits at the Central Bank (CBI). Barring further shocks, Iceland should see a sustained reduction in its public debt/GDP ratio from 2012, assuming economic recovery continues and the government adheres to its medium term fiscal targets. Ample general government deposits at the CBI and record foreign exchange reserves ameliorate near-term fiscal financing concerns.

However, the risk of additional contingent liabilities migrating to the sovereign’s balance sheet remains high. Iceland’s unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness in the face of unprecedented financial sector distress. However, legacy issues remain, notably the protracted dispute over Icesave, an offshore branch of the failed Landsbanki that accepted foreign exchange deposits in the UK and the Netherlands, and the slow unwinding of capital controls imposed in 2008.

The impact of Icesave on Iceland’s sovereign creditworthiness has diminished over time and Landsbanki has begun to remunerate deposit liabilities. Nonetheless, Fitch considers that Icesave still has the capacity to raise public debt by 6%-13% of GDP, should an EFTA Court ruling go against Iceland. Resolution of Icesave will be important for restoring normal relations with external creditors and removing this uncertainty for public finances.

Capital controls continue to block repatriation of USD3bn-USD4bn of non-resident investment in ISK-denominated public debt and deposit instruments. Fitch acknowledges that Iceland’s exit from capital controls promises to be lengthy, given the underlying risks to macroeconomic stability, fiscal financing and the newly restructured commercial banks’ deposit base.

So far, Iceland has been relatively unaffected by the eurozone sovereign debt crisis and, although growth is expected to slow to 2%-2.5% in 2012-13, Fitch does not expect Iceland to slip back into recession. However, the private sector remains heavily indebted – household debt exceeds 200% of disposable income and corporate debt 210% of GDP – highlighting the need for further domestic debt restructuring, while the key export sector has been held back by capacity constraints and a lack of investment exacerbated in part by the slow unwinding of capital controls.

Fitch says that future sovereign rating actions will take a broad range of factors into account including continued economic recovery and fiscal consolidation and progress towards public and external debt reduction. Iceland is still a relatively high income country with standards of governance, human development and ease of doing business more akin to a high grade sovereign than low investment grade. Accelerated private sector domestic debt restructuring, a progressive unwinding of capital  ontrols, normalisation of relations with external creditors and enduring monetary and exchange rate stability would help to further advance Iceland’s investment grade status.

Additional information is available at www.fitchratings.com

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In Iceland, the economic outlook isn’t too bad: a rising economic growth with unemployment falling. An enviable outlook, compared to many European countries. Yet, Icelanders are still in a bleak crisis mood – many are still struggling with the loans tied to foreign currencies that shot up after the collapse of the krona during and after 2008. The loans have in particular hit those who bought their first property in 2005-2008, in effect the 30-40 year old while other Icelanders are now again spending the Icelandic way: sales of most goods and services, from clothes to travels abroad rose in 2011.

All in all 2012 in Iceland might be even better than 2011 but that depends on the rest of the world. If the crisis and political frost in the eurozone continues, the effect will be felt in Iceland and the outlook might change.

The Government, a coalition of the Left Green led by the People’s Alliance, social democrats, ended the year with a reshuffle. The now ex-minister of fisheries and agriculture Jon Bjarnason (LG) ran a vocal EU opposition to the Icelandic EU membership talks and tensed the atmosphere in the Government. His stance is shared by his party but less vocally expressed by his fellow party-members in Government.

After criticising Bjarnason in harsh words earlier this winter, it was clear that minister of finance Steingrimur J Sigfusson and prime minister Johanna Sigurdardottir were ready to let Bjarnason go. Their strong words but no action made them seem impotent and weak. Sigfusson’s dilemma was that Bjarnason’s anti-EU position, in accordance with the party’s manifesto, made Sigfusson look too pro-EU and thus too close to the social democrats who are in favour.

Finally, between Christmas and New Year, the two party leaders had gathered political force and the time for action was ripe. Earlier election promises to cut down the number of ministries were executed. Apart from Bjarnason, Arni Pall Arnason minister of economy and trade was let go – or sacrificed, depending on the point of view.

Sigfusson was finally able to come to grips with his own party and make the shuffle without a mutiny from Bjarnason’s allies. In her party, Sigurdardottir had problems to the last moment: at the meeting in the parliamentary group where the PM set out her plan she was met with harsh resistance. It wasn’t until Arnason said he backed her, though losing his post as a consequence, that the others accepted the new plan.

In the media Bjarnson didn’t try to hide his anger and made it quite clear that his departure would be celebrated in Brussel. Whether he is seen as such a heavyweight there is uncertain but the ministerial staff might be quite pleased to see him leave. It’s difficult to imagine that Bjarnason will ever return as a minister.

Arnason was more diplomatic though he wasn’t at all happy to leave. He might have only a short break. Sigurdardottir will turn 70 in October and at some point she exits the political scene. Arnason could be a strong contender as a new leader. The Government is weak, with a majority of vote, after defections from LG during the last year and might last only because the other parties aren’t too keen on election before time. Some new parties are in sight, many voters are fed up with the four old parties but it’s still unclear what parties will rise out of the discontent and uncertainty of the voters.

The next election is due in spring 2013 and the political parties will be in election mode from next autumn. This might tempt the Government to unplanned spending, now that the IMF programme in Iceland has come to an end.

By next election it is almost certain that the social democrats will have a new leader. Bjarni Benediktsson leader of the Independence Party might face an uncertain future. He is seen by many to be tainted by investigations into the affairs of Milestone, a major shareholder in Glitnir before selling to Baugur and FL Group in 2007. Benediktsson and his relatives were in business with Milestone owner Karl Wernersson and Milestone is being investigated by Office of the Special Prosecutor.

Interestingly, Ireland voted out it political leadership after the Irish banking crash. This has only partially happened in Iceland. In 2008, the social democrats were in Government led by the conservatives. Some members of Althing, compromised by business connections took time off after the crash but have since returned. Most strikingly, the social democrat Bjorgvin Sigurdsson, minister of trade and banking in 2008, is still in Althing. His excuse at the time was that his fellow ministers had kept him in the dark. His party and his voters seem to have accepted this excuse, not questioning, like the SIC report does, whether he was really doing his job or competent enough.

The reshuffle has changed the governmental power structure. Sigfusson has created a new super-ministry, the most powerful ever seen in Iceland. It comprises fisheries, agriculture, trade, banking, economy but not his old ministry, the ministry of finance. He leaves the ministry of finance to a social democrat, Oddny G Hardardottir, who becomes the first female minister of finance. This move indicates that the stabilising of the economy is done. Sigfusson’s new goal is to strengthen the growth of economy. Hardardottir appears to be only an interim solution – Katrin Juliusdottir, the previous minister of industry, is thought to be destined for the ministry of finance after her maternity leave.

In his New Year address to the nation, president Olafur Ragnar Grimsson indicated he would not run for re-election in August this year, a topic of intense speculation. However, he didn’t say it very clearly. The question is whether he, the master plotter, is holding the door open for those who wish to beg him to stay. He has been in power for 16 years, a long time, but can sit at long as he is elected and wants to sit at Bessastadir.

There is nothing strange about him wanting to step down but the rumour is that he doesn’t want to be president if Iceland loses the Icesave case at the EFTA Court, a case that wouldn’t be there if he hadn’t sent the last agreement to a referendum. He has said it’s not for experts and foreigners to decide on Icesave. He might want to be out of office to lead against following the court decision. So far, no one has declared him/herself a presidential candidate.

At Christmas, many Icelanders living abroad return to the homeland. Since many of those who were earlier prominent bankers or businessmen now live abroad, Reykjavik was full of rumours of who was spotted where. A friend spotted a powerful ex-banker shopping with his coat collar turned up. A famous lawyer celebrated his birthday just before Christmas where many of the once so powerful business elite turned up, as did the president. One of the tabloids wrote of Hannes Smarason, of FL Group fame, and Magnus Armann, a Baugur business partner who still owns a property company in Berlin, working out together at the World Class fitness centre. Some things just don’t seem to change in Iceland – Christmas is celebrated as always.

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The last log, ia on the state loans to VBS and Saga Capital was timely. The EFTA Surveillance Authority has just announced that it will open an inquiry into these loans, as well as into loans to Askar Capital.

Here is what ESA announces:

The EFTA Surveillance Authority decided today to open a formal state aid investigation into loans granted to the investment banks Saga, VBS and Askar Capital.

The loans, of a total amount of 52 billion ISK (330 million EUR), were granted on favourable terms by the Icelandic Treasury in March 2009. The Authority received a complaint concerning the loans from an interested party in July 2010.

The purpose of the loans was to reschedule short-term collateral and securities loans from the Central Bank of Iceland to long-term loans. This was thought necessary because the Central Bank loans were in default.

The Central Bank collateral loans were secured amongst others with bonds issued by the three commercial banks, Glitnir, Kaupthing and Landsbanki Islands. Following the collapse of those banks in October 2008, the value of the underlying security diminished severely. The investment banks were unable to provide other security or settle the debt.

The Icelandic authorities claim that through the loan conversion, they have endeavoured to protect the interest of the state and acted in line with the conduct of a private creditor. The Authority, however, has doubts whether the terms agreed by the Treasury are consistent with commercial conditions. If  not, the loan conversion could be regarded as unlawful state aid within the meaning of the EEA rules.

VBS Investment Bank and Askar Capital Investment Bank are already in liquidation and the operating license of Saga Investment Bank has recently been revoked. The Authority nevertheless considers it appropriate to finalise its assessment of whether or not the terms of the loans are compatible with the state aid provisions of the EEA Agreement.

Should the Authority conclude that the loan conversions are to be regarded as unlawful state aid, it would be obliged to require the national authorities to recover the aid from the recipients. If the recipient of such aid is in liquidation, claims shall, if possible, be filed against the estate for recovery of incompatible aid.

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“Iceland is obliged to ensure payment of the minimum compensation to Icesave depositors in the United Kingdom and the Netherlands, according to the Deposit Guarantee Directive.” This is the conclusion in a reasoned opinion on 24 pages the EFTA Surveillance Authority, sent to Iceland Friday June 10. Further, ESA concludes:

In its emergency response to the banking crisis in October 2008, the Icelandic Government made a distinction between domestic depositors and depositors in foreign branches. Domestic deposits continued to be available after they were taken over by New Landsbanki, whereas the foreign depositors lost access to their deposits and did not enjoy the minimum guarantee. It is not possible to differentiate between depositors to the extent they are protected under the Directive. By acting as it did Iceland failed to ensure that the depositors received the compensation to which they are entitled under the  Directive.

The Icelandic Government is now requested to take the measures necessary to comply with this reasoned opinion within three months. Should Iceland not comply, the Authority will need to consider taking the case to the EFTA Court.

An overview of the opinion is found in the ESA press release that also has links to earlier documents regarding Icesave.

As stated above, Iceland now has three months to fulfil the Directive. All this had been negotiated and settled in the Icesave III agreement. Now there is the order to pay, in addition to the interests on the loans to the UK and the Netherlands as they paid out their Icesave depositors.

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Earlier, the EFTA Surveillance Authority had indicated that it would answer Iceland by the end of the May. It now seems that this time will be stretched until after the coming weekend.

In my reporting for Ruv in Iceland, I have indicated that to some ESA experts the Icelandic answer seemed feeble. I find it unlikely that ESA will be convinced by Iceland’s answer, which I found to be short on legal reasoning and long on beside-the-point arguments. In the end, it matters what the ESA lawyers think. We will know next week.

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Tonight, the Althingi Foreign Policy Committee will discuss the Icelandic answer to the EFTA Surveillance Authority, ESA. To Icelandic media minister for trade Arni Pall Arnason the indicated that the answer will be sent to ESA tomorrow.

As reported earlier on Icelog, ESA is inquiring into the Icelandic handling of the Deposit Guarantee Directive, both regarding the minimum guarantee and the fact that Icelandic authorities guaranteed all deposits in Iceland but not in Icelandic branches abroad, ie Landsbanki’s Icesave deposits in the UK and the Netherlands.

As ESA opened up its inquiry in May last year it stated:

The EFTA Surveillance Authority has the task to ensure that Iceland, Norway and Liechtenstein comply with the terms of the EEA Agreement. The Deposit Guarantee Directive forms part of that agreement. According to the Directive, Iceland was obliged to guarantee for EUR 20.000 per depositor after Landsbanki and its Dutch and British branches, called Icesave, collapsed in October 2008. …

The Icelandic Government has in a letter to the Authority argued that it considers setting up a guarantee scheme to be enough to fulfill its obligations under the Directive. It has also argued that that the Directive may not be applicable if deposits are unavailable because of a major and general banking crisis. The Authority disagrees on both points. …

In its emergency response to the banking crisis in October 2008, the Icelandic Government made a distinction between domestic depositors and depositors in foreign branches. Domestic deposits continued to be available after they were taken over by New Landsbanki, whereas the foreign depositors lost access to their deposits and did not enjoy the minimum guarantee. It is not possible to differentiate between depositors to the extent they are protected under the Directive. By acting as it did and leaving the depositors in Icesave’s Dutch and UK branches without even the minimum guarantee, Iceland acted in breach of the Directive.

The Icelandic answer will be made public once it’s been sent to ESA.

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Moody’s has announced that it’s not lowering but affirming Iceland’s credit rating  at Baa3/P-3 and maintains a negative outlook. The rating agency is not making any changes post-referendum.

(1) Despite the rejection of the revised agreement to resolve the dispute over the Icesave offshore bank deposit scheme, the British and Dutch governments are now expected to receive initial payments from the Landsbanki estate soon for the costs they incurred in covering their citizens’ Icesave deposits. In addition, the Landsbanki estate now expects to be able to make significantly higher payments to priority claimholders as asset recoveries have been much higher than expected earlier. The outstanding Icesave obligation and potential liability to the government might therefore be reduced significantly in the coming months regardless of the referendum outcome.

(2) Moody’s also expects Iceland’s programme of support from the International Monetary Fund (IMF) to remain on track. The fifth review was scheduled for 27th April and there will certainly be a delay while the IMF assesses the implications of the referendum outcome. However, it seems unlikely that there will be a significant delay or blockage of the programme as occurred in 2009.

(3) Public statements indicate that the Nordic governments will likely continue to provide funding to the Icelandic authorities under their loan agreements. Apart from the IMF, the Nordic governments’ financing has been an essential external funding source for the Icelandic authorities.

The outlook on the rating remains negative given the ongoing uncertainty. Moody’s understands that the underlying issue of whether the Icelandic government has a liability under the EU directive on deposit-guarantee schemes will now most likely be resolved through the court of the European Free Trade Association (EFTA). This legal process may take at least a year. There are also uncertainties regarding the timetable for the relaxation of the capital controls and the economic outlook, in particular related to investment.

See here IMarketNews reporting on the Moody’s affirmation.

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