Icelanders are ashamed of the reckless behaviour of privately owned banks and business people from their country. They are full of guilt that people lost money due to the activities of these bankers.
Iceland is a small community with just over 317,000 inhabitants, about the size of Newcastle. Most Icelanders had never heard about the Icesave internet bank until it hit the country like a financial tsunami, an unwelcome addition to the meltdown of its economy. The amount demanded by the British and Dutch governments from Icelandic taxpayers to pay for Icesave amounts to 50 per cent of Iceland’s gross domestic product. This is equivalent to a bill of €12,000 ($17,000, £11,000) per person, all because of the bankruptcy of a privately owned bank, Landsbanki. The interest on top of this is an eye-watering annual rate of 5.55 per cent. A year’s interest equals the running cost of the Icelandic healthcare system for six months.
Most Icelanders acknowledge that the government of Iceland failed in its duties. Its banking governance failed, as did its regulatory framework; but in those failings Iceland was not alone. Ben Bernanke, chairman of the US Federal Reserve, has admitted that US financial regulations were too lax. As the Swedish Riksbank has noted, the Icelandic, British and Dutch financial regulators bear joint responsibility for the Icesave debacle.
However, the British and Dutch regulators have not acknowledged their failings – indeed, they have washed their hands of guilt. The European Union did the same – after naively assuming a local deposit guarantee scheme would protect savers in what had become a single European market. The solution for the future must lie in a pan-European guarantee scheme. As the Banque de France and others have concluded, the EU deposit guarantees were not able to tackle a systemic banking collapse.
Will Iceland honour its obligations? Yes, Iceland has for eleven hundred years honoured its international legal obligations and will continue to do so. The Althing, the Icelandic parliament – in Churchill’s words “the grandmother of all parliaments” – confirmed in December 2008 that it will take on the Icesave obligation in a resolution. The Althing approved legislation for a state guarantee for the Icesave payments in August 2009 – but with some safeguards for Iceland’s economy. These safeguards made the agreement more balanced and in greater accordance with the so-called Brussels conditions, which were agreed in November 2008 with the UK and the Netherlands and stipulated that negotiations “shall be conducted in a co-ordinated and consistent way, and shall take into account the unprecedented difficult situation of Iceland and therefore the necessity of finding arrangements that allow Iceland to restore its financial system and its economy”.
The president of Iceland signed the August 2009 bill into law with the safeguards, including a cap on payments as a proportion of GDP growth, but Iceland has not received any formal reaction from the British or Dutch governments on these safeguards. This legislation will remain in force even if the people of Iceland reject, in the forthcoming referendum, the new Icesave legislation that was amended to remove the safeguards in accordance with backroom demands from the UK and Netherlands.
It is clear to me that the new Icesave agreement is unreasonable. What would a reasonable agreement, in accordance with the Brussels conditions, look like? First, it would have lower interest rates; the British and Dutch governments profit by 1.5-2 percentage points from the new agreement. Second, the legality of the claims and the demand for a state guarantee of the Icelandic deposit guarantee scheme need to be clarified by the European Court of Justice. Third, the British government should make concessions for using the “gunboat diplomacy” of anti-terrorist legislation to freeze the assets of the Icelandic authorities (along with the Landsbanki bank), which placed them in the company of al-Qaeda. This and other actions sriously damaged the economy of Iceland. If communication between London and Reykjavik is so strained and ineffectual, no wonder there is a communication problem between London and Kabul.
The author is an economist and co-founder of InDefence.is.