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Monday, July 11, 2011

on Iceland & justice

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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:

punkscience
WOOHOO! GO ICELAND! “Taxpayers should not be responsible for paying the debts of a private institution” http://j.mp/fDrTnk via @NetNewsBuzz

johnb78
@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?

punkscience
@johnb78 Yeah, I'm calling bullshit on your pearl-clutching, granny-robbing hysteria. http://j.mp/pdvYbL

johnb78
@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.
- bit.ly/nwsJYD
- Re last link, see especially my comment #12.
- also d-squareddigest.blogspot.com/2010/01/icelan…

punkscience
@johnb78 I profoundly disagree with implication that citizens are responsible for their gov's every action. That would require democracy.

Johnb78
@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.

4 comments:

  1. I disagree that there was no wrongdoing on the part of the Icelandic government. Part of their job was to ensure that financial services were regulated. They did the opposite (and, as mentioned in tweets above, there was a genuine opposition party pointing this out at the time, which the Icelandic people rejected because they liked the concept of a free money bubble).

    It's obviously massively inappropriate in a country with 3 banks to have a bank-failure depositor compo fund with 1% of the liabilities it would have to meet. The government should (and definitely could) have told its banks to stop taking overseas retail deposits years before the collapse.

    You're obviously right that the money the Icelandic government rightly owes to the UK/NL governments is the EUR20k, not the whole shebang - sorry I implied otherwise.

    The thing about the Landesbanki assets covering the deposit insurance liabilities is that LB's assets now belong to the Icelandic government. In other words, while the fact that things have turned out OK-ish is good news for all concerned, it's *yet more* reason for Iceland to pay the UK and NL the money it owes them. Otherwise, Iceland literally gets to keep the money while the British and Dutch taxpayer bail out the victims.

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  2. Yes, to be fair there was considerable legislative wrongdoing on the part of the Icelandic government but my comment is quite specific to the context of Iceland's implementation of the DIGF.

    And answer me this, John: is Icelandic neoliberal fucktardery more deserving of opprobrium than that of the UK's or US's that lead to the far broader collapse of 2008? They are aspects of the same chronic epidemic of misgovernment that was sold to people as a get-rich-quick scheme. The thing is that with a media system so heavily propagandised by neoliberalism you can't blame the people for choosing the penthouse in the CBD instead of the organic yak-hair yurt on a small holding in Wales because our modern lives are perfused with the implication that the former is our right and our destiny. Modern sociopathy does not result from a single, specific dysfunction in one system- economic, legislative, electoral, adminstrative or informative. It is a product of synergistic interactions between several small ones.

    Besides these systemic issues, remember also that the UK government had a responsibility to oversee the conduct of foreign corporations on its soil and should share a portion of the blame for the entire crisis for failing in this duty to UK citizens. Caveat emptor is not an adquate defence of £3billion of your country's money. Also note that I haven't even mentioned the shocking and inflammatory use of anti-terrorism legislation by the UK to freeze banks' assets in the dispute. I think this alone was enough to convince a small and proud people to reject attempts to shoulder them with illegitimate debts when they were already struggling through crisis, regardless of legal obligations. Note also that Iceland desperately sought help and support from various countries in the run up to the crisis and was rejected at every turn, deepening their sense of isolation and independence.

    It's obviously massively inappropriate in a country with 3 banks to have a bank-failure depositor compo fund with 1% of the liabilities it would have to meet.

    And yet not illegal in any country in the EU. What's your point?

    TBH I'm still confused about the liabilities involved and the £2-5billion sums which get thrown around. Claims that the Icelanders had taken over the assets of the failed banks and then refused to pay out to the debtors in the UK & NDL don't stand up. The Icey government took over the bank's assets within Iceland but their operations overseas were taken into receivership by various operations and entities in those countries and their assets would have been divided accordingly. Eg:

    "The UK Financial Services Authority (FSA) also declared Kaupthing Singer & Friedlander, the UK subsidiary of Kaupthing Bank, in default on its obligations, sold Kaupthing Edge, its Internet bank, to ING Direct, and put Kaupthing Singer & Friedlander into administration. Over £2.5 billion of deposits for 160,000 customers were sold to ING Direct." -Wikipedia (emphasis is mine)

    If you can shed light on this, please do.

    ReplyDelete
  3. The difference is, KS&F plc (which traded as Kaupthing Edge) was a UK bank owned by Kaupthing but regulated by the FSA and covered by the UK deposit insurance scheme.

    It's equivalent to Northern Rock, but with only one shareholder. So the Icelandic government had no responsibility towards Edge savers, and hasn't been asked to pony up for them. Instead, the UK government took control of KS&F's assets and liabilities, just as it did with Northern Rock.

    So for KS&F, your point above is correct. But it's wrong for Landesbanki.

    Landesbanki, which traded as Icesave, was not a UK bank, wasn't regulated by the FSA, and wasn't covered by the deposit insurance scheme. So the UK government didn't have any legally defined role in sorting out its collapse - rather, it chose to compensate savers when the Icelandic government refused to, to avoid a collapse in banking confidence.

    The freezing of Icelandic assets wasn't done under an 'anti-terror law' - the law used has no mention of terrorism, but is used in general for foreign-controlled assets used against UK state interests. I wrote a whole article on this at the time. The pretence that Brown labelled the plucky Icelanders as terrorists etc is these dudes earning their keep.

    The government made the order because otherwise, the Icelandic government (in its role as Landesbanki administrator) could have sold Landesbanki's UK assets, brought the money back to Iceland, and then refused to compensate Landesbanki's UK depositors. This is also what the Icelandic government *said it was going to do* when it told the UK that it would not compensate foreign depositors.

    Making the order ensured that Landesbanki's UK assets stayed under the UK government's control, and could subsequently be used to partially offset the depositor compensation bill. I can't see why anyone would object to the UK government's conduct in this case.

    Finally, my understanding of the run-up to the crisis that the UK government was keen to help Iceland, but that the Icelandic government rejected its proposals.

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  4. John, this is purely a semantic argument but are you seriously arguing that an order issued under the Anti-terrorism, Crime and Security Act of 2001 can't reasonably be claimed to have been "done an under anti-terror law"? I mean, yes, the affair has more to do with the national security aspect but the law is called the Anti-terrorism, Crime and Security Act of 2001. I don't think a PR company is strictly necessary to get that message across.

    I appreciate your comments on Kaupthing Edge though and I can't protest at the UK freezing the assets of Landesbanki. I can object to the way in which it was done, however, and I'm also skeptical about your claim that the UK's offer of help was declined by the Icelander's. Wikipedia states that a letter from the IceyGov to the UK Gov on the the 3rd October declared that they would support the DIGF if it proved insufficient to cover minimum compensation limits of overseas deposits, contradicting one of my arguments. The conversation between Darling and Mathiesen, when Mathiesen suggested they might renege on this was on the 7th. The population may have supported their government in this if the UK hadn't taken such inflammatory action. As it was the UK's actions provoked a significant backlash and probably swung popular opposition against repayment. In fact, someone once observed:

    The effect has been to turn an entirely unremarkable and tedious administrative order over how to wind up the assets of a company that both sides agreed was bust, into a giant media furore over whether the Icelanders are terrorists and whether their assets abroad are forfeit. They aren’t and they aren’t, respectively – and the UK and Icelandic governments agree wholeheartedly on both points.

    The case that an Icey Granny was individually responsible for several thousand euros of private debt is as hard to make as the one where a UK granny loses all her savings. The people who were at fault are in government and in the financial industry. They're not hard to find. Why the obsession with people who are clearly innocent?

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