Icesave was the name of internet savings accounts available in Britain and the Netherlands, they were provided by the Icelandic bank Landsbankinn. The bank ran into trouble in the financial crisis in 2008 and mass withdrawals began. The British and the Dutch governments decided to pay out depositors, up to a certain maximum, but most depositors got all their deposits back. This was decided because the bank was regulated by Icelandic authorities and the deposit insurance fund in Iceland could not handle these large amounts and neither could the bank at the time. The British and the Dutch then wanted the Icelandic government to guarantee that they would get the money back but the Icelandic government did not want to impose such a guarantee. This was a private bank after all, was said.
It was tried for many years to resolve the matter by negotiations but eventually the dispute landed before the EFTA court, and the court acquitted Iceland of all charges last Monday. The assets of the defaulted bank will however cover the principal, but disputes were about interest rates and if Iceland had lost the case the country might have had to pay large interest payments.
The Telegraph wrote (http://www.telegraph.co.uk):
"UK taxpayers have been left more than £100m out of pocket after a European court ruled that the Icelandic government had no obligation to repay Britain and the Netherlands for rescuing depositors in failed bank Icesave."
"The judgment obliterates any hopes the UK government had of pursuing Reykjavik for interest on the £2.35bn bail-out. It also raises grave questions about Europe’s cross-border banking arrangements, which allow overseas lenders to “passport” into a country without being subjected to local financial regulation."
A hot potato
The Icesave matter has been the biggest issue in Icelandic politics ever since it started in 2008. It is interesting that the parties in government always aimed at solving the matter through negotiations but the opposition has always wanted to go to court. The Social Democratic Alliance has been in government for the whole five years and always wanted to negotiate. The Independence Party was in government in 2008 and wanted to negotiate, but they have been in the opposition since 2009 and have mostly been against the negotiations since they left government. The Left-Green Movement was against the negotiations in 2008 when they were not in government but ever since they got in government in 2009 they have mostly been in favor of the negotiations. The Progressive Party was not in government during this period, and maybe not surprisingly, has been against the negotiations the whole time.
It sometimes seems that people don´t want to take big risks themselves, but want others to do so for them.
The reason why the debate landed before the EFTA court in the end, even though the government(s) wanted to negotiate, is because the nation declined the contract in a referendum (twice). The president of Iceland, Mr. Olafur Grimsson refused to sign the Icesave laws (twice) and sent them to the nation for a referendum.
A big surprise
Many experts said that it was likely that Iceland would lose before the EFTA court, which is likely the reason why the government tried hard to negotiate. It is for example interesting that Per Sanderud, the president of the European Free Trade Association Surveillance Authority from 2007–2011 won 27 out of 29 cases before the EFTA court, against countries that had supposedly violated the EEA agreement.
When The Financial Times wrote about the recent EFTA ruling they wrote that the ruling was a huge surprise. Lee C. Buchheit the main negotiator for Iceland for the third Icesave contract said today that he was a bit surprised but very happy, about the Icesave ruling.
It is not long ago that the IMF estimated that the cost of the Icesave case, if Iceland would have lost before EFTA, could have been up to 20% of GDP. That would have put Iceland into or close to a default. It is understandable that the Icelandic government did not want to take such a risk. If the last Icesave contract had been approved by the nation then the cost of that contract would likely have been between 3% - 5% of GDP.
However, the Icesave dispute has been ongoing for five years and caused a lot of uncertainty, especially about the finances (solvency) of the Icelandic government. The dispute has been very damaging for the economy during this period. The cost of this uncertainty is very difficult to estimate but it is likely to be quite high.
If the Icesave dispute had been solved quickly or if it would not have been existent then the credit rating of Iceland would likely have been higher. The rating agencies often mentioned the uncertainty related to the Icesave dispute as an important factor in their credit ratings. Better credit ratings come with lower interest rates and the interest rate expenses of the government are huge.
Access to foreign financial markets has also been difficult for the government and for the private sector, and therefore the dispute has likely slowed down the economic growth in Iceland. The dispute might even have prolonged the capital controls currently in place. The Icesave dispute for example delayed the loans to Iceland from the IMF.
It will be interesting to see what happens to the credit rating of Iceland, interest rate premiums and access to foreign financial markets during the next few months. That development might possibly give a glimpse of what the Icesave dispute for the past five years has cost.
Disagreements not over yet
Those who were against the Icesave negotiations are now claiming victory following the EFTA ruling and many people even say that their opinion was the correct one. People are also arguing about who supported what Icesave contract and so forth. But this does not seem that clear cut to me and if I had been in government I would have felt uncomfortable with taking such a huge bet on behalf of the nation. There was always a big uncertainty regarding the EFTA ruling and it could have gone both ways, and the cost to the Icelandic government could have defaulted the country. But Iceland won the lottery this time.
The opposition is now considering to file a Motion of no confidence against the government, but if they do it is unlikely that it will go through and a few members of the opposition have said that they would back up the government. Also, the next parliamentary elections are only about three months away, and the Independence Party has over 40% support according to recent polls.
But it looks like Icesave arguments are finally coming to an end. A happy ending for Iceland. Sometimes it pays to gamble.
The author is an economist and an editor at News of Iceland.