The dispute started in October 2008 when almost the entire Icelandic banking system collapsed. One of the three largest Icelandic banks, Landsbanki, had operated internet savings accounts in the United Kingdom and the Netherlands collecting large amounts of deposits by offering high interest rates. These accounts were operated with the approval of the British and Dutch authorities and their operation was made possible by EU laws.
Immediately after Landsbanki had collapsed and subsequently been taken over by the Icelandic authorities, the British and Dutch governments insisted that Icelandic state was responsible for the Icesave savings accounts. Therefore the two governments demanded that Iceland and its population of only 300,000 people compensate the billions of euros in lost savings plus interests in the UK and the Netherlands.
Responding to the demands from the British and Dutch authorities the Icelandic government in turn announced it would certainly honour its obligations but insisted that it was not clear what these obligations were exactly. The matter should therefore be resolved by a neutral court. The British and Dutch governments, however, dismissed this and instead insisted that the issue would be resolved politically and not legally.
The EU legislation in question is Directive 94/19/EC on deposit guarantee schemes which was implemented into Icelandic laws in 1999 according to the EEA Agreement between the EU and EFTA which Iceland is a member of. According to the regulation a privately run Guarantee Fund is to be operated in each country which is supposed to guarantee a minimum compensation to depositors of 20,000 euros for each account.
However, the directive does not anticipate a systemic crisis as undoubtedly occurred in Iceland in October 2008 but only a failure of a single bank. In other words there is simply no legislation in force which covers the situation that emerged in Iceland last autumn. Moreover, it should be kept in mind that the Icelandic financial sector is more or less regulated by the EU through the previously mentioned EEA Agreement.
These shortcomings of Directive 94/19/EC have been known for a long time and have on a number of occasions in recent years been recognised publicly by leading figures in the EU. This was for example mentioned in a report by the French Central Bank published in 2000 on deposits guarantee schemes which states that it is “accepted” that such schemes “are neither meant nor able to deal with systemic banking crises”.
Perhaps the most recent example of such admittance occurred on March 3 this year when the Dutch Finance Minister, Wouter Bos, said in a speech: “First and foremost, European countries need to take a close look at how the deposit guarantee scheme is organised. It was not designed to deal with a systemic crisis but with the collapse of a single bank.“ Nevertheless Bos is insisting that the scheme be applied to the Icelandic systemic crisis.
No state guarantee
Since the EU’s deposit guarantee scheme is not supposed to handle systemic crises but only the collapse of a single bank the Guarantee Fund in each country is privately run by the domestic financial institutions which are obliged to contribute a certain minimum amount of capital to it according to the range of their deposits. The individual state’s sole responsibility under the scheme is merely to see to it through legislation that such fund is established.
There is as a result no mention of a state guarantees in Directive 94/19/EC (Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes) for the obligations of the Guarantee Funds should they under any circumstances fail to fullfill them towards depositors. On the contrary the directive clearly states that the deposit guarantee scheme „must not consist of a guarantee granted to a credit institution by a Member State itself or by any of its local or regional authorities“.
Granting state guarantees for the Guarantee Funds in any form therefore quite simply violates EU laws. The idea behind this is that banks should not be discriminated whether they are from large or small countries. Nevertheless since the collapse of the Icelandic banks in October 2008 the British and Dutch governments have insisted that the Icelandic state is responsible for the Icelandic Guarantee Fund meeting its obligations.
Furthermore, despite the fact that no state guarantee for Guarantee Funds exists under the EU’s deposit guarantee scheme, the British and Dutch governments have been bullying the Icelandic authorities to accept that such a guarantee is nevertheless in place as mentioned earlier. They have demanded that Iceland passed laws granting such a state guarantee which alone is a proof enough that no such guarantee previously existed.
Leading EU people have recently admitted that at the beginning of October 2008 – at the same time when the Icelandic banks collapsed – the banking sector within the EU was facing serious collapses as well. This explains why Brussels decided that the Icelandic people should be forced to take responsibility for the faults in the EU laws. The EU simply could not admit in public that deposits in its banks were not guaranteed in the event of a collapse.
“We were a couple of days away from a complete catastrophe which would have been ten times worse than the current situation. The risk of a collapse in the European banking system was high,” admitted Finland’s Finance Minister, Jyrki Katainen, in an interview with the Finnish newspaper Savon Sanomat on September 8, 2009. The decision to sacrifice Iceland probably contributed to saving the EU banking system at the last minute.
Last summer Ingibjörg Sólrún Gísladóttir, who was Iceland’s Foreign Minister at the time when the Icelandic banks fell, said that “the main reason why it was not possible to take the matter to the courts was because there could not be any doubt that deposits were guaranteed. If it would have been agreed to get a court ruling it would have created a legal uncertainty whether there were any deposits guarantees.”
Gísladóttir said that such uncertainty would have given depositors in Spain, France or elsewhere a reason to doubt the guarantees and withdraw their savings. In other words that there would be run on EU banks. So in other words Iceland and the Icelandic people were simply sacrificed to save the EU banking system from collapses as a result of a flawed EU legislation which they are not at all responsible for.
The behavior by the British and Dutch governments towards Iceland is simply disgraceful. They have used the economic crisis Iceland is currently facing to try to suppress it. They are threatening to blockade Iceland’s possibilities to get loans from abroad if their outmost demands are not being met. They have also used their influence within e.g. the International Monetary Fund (IMF) to threaten the Icelandic government.
The British government even used controversial anti-terrorist legislation to freeze Icelandic assets in the UK after the Icelandic banks fell. Even assets owned by the Icelandic state which must be regarded as a direct attack on Iceland. The British government then put Iceland on a list with terrorist organisations such as Al-Qaida. And this they have done to a NATO ally. With allies like this Iceland obviously needs no enemies.
The question is who is responsible for EU legislation? Should a legislation formed and put into force by the European Union turn out to be a failure, who is responsible? It seems Iceland is! The EU simply has to recognise publicly its responsibility for the faults in its legislation and that the Icelandic people are not responsible for them. The Icesave dispute then needs to be solved in a civilised manner and not with larger countries bullying a small one.
The civilised way is to find a solution everyone can live with through a common agreement but not by the means of threats and oppression as has been the case until now. If such a solution cannot be found the only way is to take the dispute to a neutral court. Iceland has always maintained that it wants to honour its obligations regarding deposits but added that it first needs to be clarified which exactly these obligations are.