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Last updated: January 28, 2013 4:30 pm
Iceland won a legal battle to avoid being forced to pay back the British and Dutch governments for not honouring deposit guarantees for savers in failed online banking operation Icesave.
The victory in the court of the European Free Trade Association has raised questions over the effectiveness of bank deposit guarantee schemes at times of systemic crisis, according to some legal experts.
The court ruled in Iceland’s favour over Icesave, the online offering of collapsed bank Landsbanki, because it said the country suffered such a large financial crisis.
Michael Waibel, a law lecturer at the University of Cambridge, said Iceland had argued that a systemic banking crisis should be dealt with using different tools to deposit schemes:
“The court sided fully with Iceland on the crucial legal and policy question that resonates far beyond Iceland: whether the state is and should be liable for liabilities of a national deposit insurance scheme,” he said.
However, the European Commission said EU members still needed to meet their deposit scheme obligations.
The EFTA court, which has one judge each from Iceland, Norway and Liechtenstein, only issues rulings for those countries and its judgments are not binding on the EU’s European Court of Justice.
Its ruling made clear that the decision could have been different under the latest version of the deposit guarantee directive issued in 2009 after the Icesave case with the European Commission now working on another update.
The ruling was greeted with jubilation in Iceland where the public has twice rejected repayment terms for the British and Dutch governments, in part spurred on by anger at the use by the UK of antiterrorist legislation.
The Icesave saga has dragged on for four years after Iceland refused to compensate UK and Dutch depositors lured by high interest rates. The UK and Dutch governments instead paid the savers and claimed the money back from Iceland.
“Having this issue unresolved has hampered the economic recovery of Iceland, where steady progress has been made nonetheless.” said Katrín Júlíusdóttir, the Nordic island’s finance minister. “This ruling removes uncertainty and I firmly believe that our credit rating will reflect this outcome and our strong economic performance.”
In any case British and Dutch governments are still likely to get most, if not all, of their money back. Landsbanki’s estate has already paid back IKr585bn ($4.6bn) of the IKr1,166bn claims from Icesave, equivalent to more than 90 per cent of the minimum deposit guarantee that the two governments were obliged to pay.
It intends to repay the full amount but will only pay interest for about six months, because of an Icelandic supreme court ruling, rather than the full length of time that the two governments demanded.
Additional reporting by Brooke Masters and Alex Barker
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