I'm having a barney with John Band on Twitter that is irritating me greatly and so I want to take
5 minutes three hours to try and hash out why. Here's the thread:
WOOHOO! GO ICELAND! “Taxpayers should not be responsible for paying the debts of a private institution” http://j.mp/fDrTnk via @NetNewsBuzz
@punkscience That isn't what they've done. The Iceland deal isn't an Ireland-style bailout. It's about compensating retail savers in
- the two Icelandic banks. Because the Icelandic government has reneged on this, the UK and Dutch govts had to pay instead.
- EU depositors invested in Icelandic banks in the belief that guarantee existed. Or is it fair for grannies to lose all their savings when they invest in supposedly government-guaranteed savings accounts?
@johnb78 Yeah, I'm calling bullshit on your pearl-clutching, granny-robbing hysteria. http://j.mp/pdvYbL
@punkscience No you aren't, you're proving I'm right. Iceland was obliged under EFTA rules to compensate EU depositors.
- EU depositors invested in Icelandic banks in the belief that guarantee existed.
- Instead of paying them the money it owed them, the Icelandic government reneged.
- Instead of the *people who owed the money* compensating depositors, this was done by British and Dutch taxpayers.
- The Icelandic government, whose fault it was, should reimburse the UK and Dutch governments, whose fault it wasn't.
- Yes, of course, if the government has explicitly guaranteed those private debts in advance. As Iceland did.
- Obviously not if they haven't.
- Re last link, see especially my comment #12.
- also d-squareddigest.blogspot.com/2010/01/icelan…
@johnb78 I profoundly disagree with implication that citizens are responsible for their gov's every action. That would require democracy.
@punkscience Iceland is far more democratic than the UK. Of the two main political parties, one was pro-finance and one raised concerns.
- Throughout the boom, the people voted for the pro-finance party. Only *after* the crash did they start voting for the others.
- I agree the situation, say, in the UK is as you say - with a choice between two right-wing pro-finance parties.
Note the jubilant tone of my opening comment. I am convinced that the decision by the people of Iceland to reject responsibility for this debt is a just one. John clearly thinks otherwise.
I suggest you follow the links John posted as his posts are very interesting and I learnt a few things reading them. For example, that the money at issue isn't even a fraction of the total loss but merely the sum of ~€20K for each individual (note: not for organisations such as local authorities or charities) that the Icelandic government was required to underwrite as a precondition to access to European Economic Area. This money resulted from a 1% levy imposed on all deposits and should have been stashed somewhere safe in case a bank went tits-up. All banks in the EEA must abide by these rules, which were designed to provide for situations where banks became insolvent. Unfortunately the levy was grossly inadequate as it was designed to defend against the loss of individual components and not a system-wide failure such as that which hit the global economy in 2008.
So the icelandic government found it was on the hook for more money than it had been required to put aside. Note that this is not a result of any legislative wrongdoing on their part. The Icelandic government was just as poorly placed as the rest of the world to handle the events of 2008.
Hence we have this conversation between Alistair Darling and the Icelandic Finance Minister, Árni M Mathiesen. Its fascinating to read in full but I'll only post a few choice quotes here:
AD: What about the depositors you’ve got who’ve got deposits in London branches?
ÁMM: We have the [deposit] insurance fund according to the directive and how that works is explained in this letter and the pledge of support from the Government to the fund.
AD: So the entitlements the people have, which I think is about £16,000, they will be paid that?
ÁMM: Well, I hope that will be the case. I cannot [visible] state that or guarantee that now but we are certainly working to solve this issue. This is something we really don’t want to have hanging over us.
This serves to illustrate the initial intent of the Icelanders to resolve issues cordially.
AD: Do I understand that you guarantee the deposits of Icelandic depositors?
ÁMM: Yes, we guarantee the deposits in the banks and branches here in Iceland.
AD: But not the branches outside Iceland?
ÁMM: No, not outside of what was already in the letter that we sent.
AD: But is that not in breach of the EEA treaty?
ÁMM: No, we don’t think so and think this is actually in line with what other countries have been doing over recent days.
AD: Well, we didn’t when we had the problem with Northern Rock. It didn’t matter where you saved money, we guaranteed your savings.
So now things become a little grittier: Mathiesen declares that the Icelanders have decided to look out for their own interests first and that this is not in breach of the terms of their deposit insurance scheme, the Depositors' and Investors' Guarantee Fund [DIGF] (this argument is a significant aspect of the Icelandic legal defence).
“The democratically elected Icelandic government, under EU/EFTA financial regulation equivalence rules, agreed long before the crisis even began that it would guarantee compensation of the first EUR20887 of deposit to retail depositors in Icelandic banks from other EU/EFTA countries.”
I disagree most strongly. The government agrees to establish the deposit fund and oversee its administration according to established EU legislation over which it has no influence. Wikipedia labels such a situation as a ‘fax democracy’ “with [participating states] waiting for their latest legislation to be faxed from the [European] Commission”. The Icelanders simply had to rubber stamp it in order to do business across the continent. They were under no obligation to ensure it was fit for purpose. The Icelandic government itself has claimed of the Depositors' and Investors' Guarantee Fund:
“the directive was never intended to cover the case of a systemic failure, and does not impose a sovereign guarantee on deposit insurance schemes.”
I've read the DIGF policy document as carefully as my brain would allow me to (YAWN!), particularly chapter 3, which deals with payments from the fund. The securities fund, from which payments are to be made, only contained ~€1 million. In the eventuality that the securities fund did not contain sufficient funds it was possible for more money to be drawn out of the general deposit fund to cover:
Should the total assets of the Fund prove insufficient, the Board of Directors may, if it sees compelling reasons to do so, take out a loan in order to compensate losses suffered by claimants. -Article 10
The Board of the Fund may authorise loans of up to ISK 50 million (~€500,000) between the Deposit Department and Securities Department. Loans shall be repaid within 36 months. The Minister may impose further provisions regarding loans between the Departments in a Government Regulation. -Article 11
The liabilities of the DIGF were £2.35 billion in the UK and €1.2 billion in the Netherlands. The fact that the entire fund, let alone the securities fund, held only €68 million serves well to illustrate the inadequate nature of this Europe-wide legislation.
That the Icelandic government decided to prioritise their own people’s deposits is unsurprising, if antagonistic. I challenge anyone to criticise it as anything other than conscientious pragmatism. There was no way the country could pay off the debts incurred by the banks’ collapse and so the pot of money it did have access to would be virtually meaningless if it were distributed among the debtors. I believe they were entitled to take this action, unpopular as it was and I challenge anyone to find a statement in the policy document to the contrary.
I also reject John’s claim that the obligation to pay depositors ~€20K is guaranteed by the government. The assumption in the policy is that there will always be enough money in the fund to cover any eventuality and no consideration is given to a systemic collapse. Once again, I challenge anyone to find evidence to the contrary.
Other points made by John that I take issue with:
“The Icelandic banks then went bust and lost their depositors’ money.”
Nope, they became insolvent due to rampant inflation in the value of the Krona and “the assets of the failed Landsbanki branches are now estimated to cover most of the depositor claims”.
“Today’s populist refusal by Iceland’s president to pay the UK and Netherlands government the US$5bn it owes as a result...represents every single Icelandic person nicking more than US$10,000 from British and Dutch taxpayers.”
This is just absurd. It could be argued that the prioritised Icelandic deposits successfully underwritten by the DIGF were a direct steal from UK & NDL taxpayers (in fact, this is part of the case that the UK & NDL authorities are putting to the European Court) but that is a much, much smaller figure. See the comment above about Landsbanki assets covering depositor claims.
Ultimately, the cause of the Icelandic banking fiasco was, reckless management of the economy and financial industry. As with the broader financial crisis and collapse of 2008, this was the fault of regulators and bankers, in Iceland and in Europe, who either administered regulation that wasn’t fit for purpose or profited grossly from the system during the neoliberal boom years. The repeated refusal by Icelanders to accept responsibility for the debts incurred by Icelandic banks hinges on this and no one has yet provided a reason why they should. They have, in fact, suffered terribly as a result of their economy’s collapse. Simple asking cui bono should provide you with the culprits of this crime and although there may well be several Icelanders amongst them there’s certainly not 320,000.