Posted on 09-01-2010
Filed Under (Economics, Foreign Policy) by Rashtrakut

Tiny Iceland drew unflattering world attention last year when its overheated real estate bubble burst sending the nation perilously close to bankruptcy.  It was back in the news this week for a presidential veto that infuriated the United Kingdom and the Netherlands which is reflected in the pious declarations by the British papers.

The brouhaha started with the collapse of a subsidiary of an Iceland bank Landsbanki called Icesave that offered deposits in the Netherlands and the United Kingdom.  The key question is whether the government of Iceland was supposed to back all depositor funds beyond the amounts covered by the Icelandic Depositors’ and Investors’ Guarantee Fund set up under European Economic Area rules.  The legal case on whether Iceland’s tax payers are required to back up the deposit fund is shaky as well and not expressly required by the EU.  Even the Dutch have acknowledged that the deposit fund was not intended to cover a systemic collapse as happened with Iceland’s financial system.  Even in the United States where the FDIC covers only up to $100,000 of deposits, the deposit insurance fund simply does not have the wherewithal to bail out an entire banking system.

Then came the British overreaction that still has Iceland’s citizens seething.  When Iceland agreed to cover domestic depositors, it did not cover foreign deposits (it had not agreed to do so before the crisis in any case).  The British and Dutch stepped in to cover the deposits of their nationals.  Next Gordon Brown’s government misused anti-terrorism statutes to freeze all Iceland assets in the United Kingdom, probably the first time such action has been taken against a NATO ally, sending Iceland’s reeling economy into a tailspin and even bringing down another totally unrelated Iceland bank.  Next the IMF was used to bully Iceland to pay up.  British and Dutch grandstanding on the subject is weakened by the fact that their banks benefited from the same loose passporting rules to establish foreign subsidiaries that Icesave employed.  It is hard to imagine that they would have done what they are asking Iceland to do with respect to foreign accounts in the event of a systemic collapse.

The repayment plan forced down by the IMF is  about 5 billion dollars, chump change for Britain and the Netherlands but 40% of Iceland’s GDP and about $18,000 per citizen.  Iceland’s ability to pay is doubtful as well.  Seething from Gordon Brown’s use of terrorism statutes, the Icelandic public overwhelmingly oppose the plan and deluged the President with requests to veto it.  The President obliged and the veto now sends the plan to a public referendum where it is almost certain to fail.

As a matter of policy, it is not really clear why a government should back all deposit accounts.  It seems an invitation to moral hazard and can cripple an economy in a financial crisis like Iceland’s, particularly when (as noted in the article linked earlier) the legal arguments are shaky.  Gordon Brown’s overreaction made it harder for Iceland to pay back this debt and it is not clear why the United Kingdom should not be penalized for its disgraceful misuse of anti-terrorism statutes and the collateral harm they caused to Iceland’s economy.  Given the small size of the loan by British standards and the financial stress a long term ally was under, Gordon Brown should have resisted the temptation to flex his muscles for domestic opinion and tried to work out a deal.  Instead he made a bad situation worse and now threatens Iceland with financial isolation.

The legal principle employed by the British and the Dutch is a dangerous one too.  Evidently now the taxpayers of the country of formation have to bear the burden of the obligations of a corporation abroad.  Its time for cooler heads to prevail and pull the British and Dutch back from their overreaction and threats to financially ruin a NATO ally.

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‘british real estate’ on the web « annesly on 9 January, 2010 at 12:32 pm #

[…] http://rashtrakut.com/blog/2010/01/09/tiny-iceland-cocks-a-snook-at-british-and-dutch-bullying/Tiny Iceland drew unflattering world attention last year when its overheated real estate bubble burst sending the nation perilously close to bankruptcy. It was back in the news this week for a presidential veto that infuriated the … […]


[…] http://rashtrakut.com/blog/2010/01/09/tiny-iceland-cocks-a-snook-at-british-and-dutch-bullying/Tiny Iceland drew unflattering world attention last year when its overheated real estate bubble burst sending the nation perilously close to bankruptcy. It was back in the news this week for a presidential veto that infuriated the … […]


mariakean » Blog Archive » Quick Roundup on 11 January, 2010 at 9:51 am #

[…] http://rashtrakut.com/blog/2010/01/09/tiny-iceland-cocks-a-snook-at-british-and-dutch-bullying/Tiny Iceland drew unflattering world attention last year when its overheated real estate bubble burst sending the nation perilously close to bankruptcy. It was back in the news this week for a presidential veto that infuriated the … […]


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