Surprise judgment by Luxembourg court means taxpayer will not be able to reclaim £2.3bn linked to Icesave online bank accounts
The UK taxpayer will not be able to reclaim £2.3bn in unhonoured deposit guarantees from the Icelandic government linked to online bank account Icesave, a court in Luxembourg has ruled.
The surprise judgment has delighted many in Reykjavik, some of whom still blame Britain for precipitating a flight of capital in 2008 after the UK used emergency powers to freeze the assets of Landsbanki, the bank behind Icesave.
The then chancellor, Alistair Darling, had intervened to guarantee all retail deposits with Icesave – around £5.3bn – in October 2008 after the website had been subject to a run on savings and it was clear to UK regulators that Landsbanki was spiralling towards insolvency. Landsbanki failed days later, along with much of Iceland’s banking and investment sector. The country, with a population of 320,000, was forced to seek a bailout from the International Monetary Fund.
Of the £5.3bn of deposits guaranteed with UK taxpayer funds, £2.3bn had supposedly been covered by a guarantee scheme set up by the Icelandic government in accordance with European regulations. The scheme was woefully underfunded and failed to pay out anything.
It is this £2.3bn which has been the subject of four and a half years of diplomatic and legal wrangling between London and Reykjavik. The ruling from the European Free Trade Association court rejected the position of the UK, the Netherlands and the EU. They claimed the Icelandic government was required to ensure its guarantee scheme functioned properly. Iceland successfully argued this was not possible in a system-wide meltdown.
In fact, UK taxpayers are expected to recoup all of the £5.3bn owed, though the recoveries will come from priority claims against the estate of Landsbanki. The residual diplomatic dispute effectively only related to whether the UK should be entitled to interest on the £2.3bn.
Monday’s court judgment is now expected to force the EU to look again at its rules on the relationship between member states and depositor guarantee schemes. A spokesman for the UK Treasury said only: “We note the judgment of the EFTA Court and will study it in detail.”
Before its demise, the Icesave website told UK retail depositors: “You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the UK.”
But a very different message quickly emerged as Iceland’s banks started to fall. “We have decided that we are not going to pay the foreign debts of reckless people,” David Oddsson, then head of Iceland’s central bank, told Iceland in a televised address. “Placing such a burden on our children and grandchildren would be slavery for other people’s fault.”
Between October 2006 and October 2008 thousands of UK savers had rushed to open Icesave accounts, lured by market-beating interest rates.
After Iceland’s financial crash a new government agreed repayment terms with the UK over Icesave unhonoured deposit guarantees. However, Icelandic president Olafur Grimsson called a referendum on the settlement. “Enough is enough,” he said. “It is ridiculous to heap this debt burden on a nation so small.”
The agreed payout by Icelandic taxpayers was overwhelmingly blocked by the vote in 2010, leading to further settlement talks. A second settlement – with the UK agreeing to a lesser rate of interest on the claim – was reached, but again rejected in a plebiscite a year later.
While the EFTA court said the run on Icesave accounts had come about “as part of the worldwide financial crisis”, many in Iceland acknowledge the roots of Iceland’s 2008 financial meltdown lay in insupportable expansion on the part of the country’s three leading banks — including Landsbanki — and their over-reliance on certain large customers.
An Icelandic parliamentary report found that all three banks had “abnormally easy access to loans from these banks, apparently in their capacity as owners”. The largest exposures of each firm was to the principal owners.
Iceland is not part of the EU, but is subject to many European laws – alongside Norway, Switzerland and Liechtenstein – under the European Free Trade Association.