Should Have Stuck to Fishing

January 5, 2010 8:50 PM

Iceland blocks repayment deal, sparks global outrage. "The Icelandic people are effectively saying that Iceland does not want to be part of the international financial system," Britain's Financial Services Minister Paul Myners said. But the bill equates to £40,000 per family. Britain threatens to freeze Iceland out of EU as loan payback vetoed.

The seemingly endless saga of Icesave took a dramatic turn today when the president of Iceland, Olafur Grimsson, refused to sign an agreement to repay £3.4bn to Britain and the Netherlands. Their governments paid out the sum to Icesave account holders after the online bank collapsed in late 2008, and now want Iceland to repay it.

- IMF says Icesave not condition of Iceland program.

- How Britain failed Icesave customers.

- Iceland Should Have Stuck to Fishing

posted by KokuRyu (109 comments total)

good on them. there was no government guarantee for those accounts. they shouldn't expect any money.
posted by drscroogemcduck at 9:02 PM on January 5, 2010 [13 favorites]

One day Iceland will have to repay its debt – but first the country needs time to recover from its devastating financial crisis
posted by KokuRyu at 9:04 PM on January 5, 2010 [2 favorites]

I can't stand cold weather but damned if this doesn't make me want to move there. The only nation who's said "Buzz off" when banks have come to hose them. I think it's great.
posted by dancestoblue at 9:05 PM on January 5, 2010 [7 favorites]

The reader comments on this article are pretty interesting and are generally well written.
posted by KokuRyu at 9:07 PM on January 5, 2010 [1 favorite]

Iceland isn't a member of the E.U, they were thinking of joining.
posted by delmoi at 9:09 PM on January 5, 2010

I would have assumed getting a signed agreement to repay a loan would have been a prerequisite for lending out billions of dollars.

(I know nothing about this situation)
posted by null terminated at 9:21 PM on January 5, 2010

What's fascinating is that the population of Iceland is about 300,000. It's like a medium sized city. Half the size of Providence, RI.

I went to look up cities with about that many people and you get places like Aurora, CO, Corpus Christi TX, Lexington KY, Stockton CA, Anaheim CA and so on. Also some big places like Cincinnati, New Orleans and Pittsburgh, those those are the cities within metro areas with millions of people.

So we're talking tiny, tiny, tiny little place. Back in the day the British would have just rolled up in some steam ships and taken the place over.
posted by delmoi at 9:24 PM on January 5, 2010 [3 favorites]

My impression of the situation, as a semi-informed layman eager to be corrected if wrong, is this:

1) Lots of UK citizens put money into the UK subsidiary of an Icelandic bank. Said bank has no formal government backing (eg, no equivalent of the US' FDIC)
2) Said bank goes splat
3) UK says oh shit, and bails out those who lost money. It does so with an understanding, at some level, but no formal requirement, that Iceland will treat that bailout as a loan from the UK to Iceland; that effectively, Iceland will have bailed out the UK citizens who lost money when an Icelandic-owned bank went splat. However, the UK pays this money out without actually securing formal agreement that it's a loan, because it wants to act fast.
4) Iceland's government goes and says yes, we'll take on this debt.
5) 20% of the Icelandic voting population sign a petition demanding a referendum instead of a parliamentary agreement to take on that debt.
6) Iceland's President, for the second time ever, exercises his powers and forces said referendum.
7) EVERYBODY FLIPS OUT
posted by Tomorrowful at 9:28 PM on January 5, 2010 [21 favorites]

I can't stand cold weather but damned if this doesn't make me want to move there. The only nation who's said "Buzz off" when banks have come to hose them. I think it's great.

Er, you have it backwards. Icelandic banks took deposits from ordinary citizens in these countries (just like when you deposit money in your checking account) and then when their economy collapsed, the deposits went away. The U.K and Dutch governments are asking that their citizens be repaid

(Slightly complicating matters, the U.K and Dutch covered the claims already, so it isn't like ordinary people got screwed, But the money the Iceland took didn't belong to "banks" it belonged to regular people, and the method they used to take it was with banks)
posted by delmoi at 9:29 PM on January 5, 2010 [6 favorites]

> good on them. there was no government guarantee for those accounts. they shouldn't expect any money.

I read somewhere that there was 20,000 euro guarantee. According to wikipedia:

The arguments of the British and Dutch governments are based on their interpretation of the law of the European Economic Area (EEA), and around two positions in particular:
that the Icelandic government is obliged to guarantee at least the first €20,000 in Icesave accounts;
that Iceland's actions surrounding the collapse of Landsbanki are discriminatory against non-Icelandic creditors.
The Icelandic government disputes these positions.

posted by mulligan at 9:31 PM on January 5, 2010

delmoi
Back in the day the British would have just rolled up in some steam ships and taken the place over.

I'm sure that they're aching to do the same thing now, the problem being that the people in Iceland don't have brown skin, and aren't Muslims, and they don't have any oil, so it'd be sortof unfashionable...
posted by dancestoblue at 9:32 PM on January 5, 2010 [13 favorites]

I'm sure the EU will force vote after vote until the Icelanders get it "right".
posted by aerotive at 9:32 PM on January 5, 2010

4) Iceland's government goes and says yes, we'll take on this debt.
5) 20% of the Icelandic voting population sign a petition demanding a referendum instead of a parliamentary agreement to take on that debt.

You missed a step there, where iceland's government was overthrown (okay, so what happened is there were mass protests, and being a parliamentary system they can easily replace the PM by parties switching up)
posted by delmoi at 9:33 PM on January 5, 2010

Back in the day the British would have just rolled up in some steam ships and taken the place over.

I think they actually DID do that once or twice.
posted by blaneyphoto at 9:34 PM on January 5, 2010

I would have assumed getting a signed agreement to repay a loan would have been a prerequisite for lending out billions of dollars.

It wasn't a loan. The compensation sought by the British and Dutch governments was for the money that they voluntarily paid out to British and Dutch depositors of Icesave, an Icelandic bank that was nationalized to prevent collapse.
posted by fatbird at 9:34 PM on January 5, 2010

I don't understand why the government is supposed to be on the hook for the debts of a private company that happens to be based in that country. Not snark, I really don't get it. If I lend a bunch of money to some guy in the UK and their economy collapses and he loses his shirt and declares bankruptcy, does the government of the UK pay me back? How is this any different?
posted by If only I had a penguin... at 9:34 PM on January 5, 2010 [9 favorites]

I think they actually DID do that once or twice.

They tried in the Cod Wars of the 70s, but Iceland threatened to close the U.S. air base at Keflavik, and Uncle Sam told Queenie to back off.
posted by fatbird at 9:35 PM on January 5, 2010 [2 favorites]

delmoi: "But the money the Iceland took didn't belong to "banks" it belonged to regular people, and the method they used to take it was with banks)"

No, I'm aware of that, and it was basically said in impotent anger, really -- I still can't believe how our government rolled over and threw billions and billions of dollars at the banks. And I suspect that Iceland is on the hook for the money, I just like the spirit of this thing, that's all...
posted by dancestoblue at 9:36 PM on January 5, 2010

I don't understand why the government is supposed to be on the hook for the debts of a private company that happens to be based in that country.

I think it's because the Icelandic government nationalized the bank (the private company in question), therefore taking on its obligations. They could have simply allowed the bank to collapse.
posted by fatbird at 9:36 PM on January 5, 2010

Lots of UK citizens put money into the UK subsidiary of an Icelandic bank.

Actually, it seems that a number of public institutions such as municipalities in the UK invested in Icebank. That means that these deposits and purchases were made by "trained professionals" who didn't do their due diligence.

I don't understand why the government is supposed to be on the hook for the debts of a private company that happens to be based in that country.

The EU directive upon which the UK and the Dutch base their claim is rather unclear. It stipulates only that states are obliged to set up special deposit-guarantee schemes. It does not speak of a state guarantee. Many people in Iceland are frustrated by the fact that the British and the Dutch have refused our claim for an impartial court to rule on the issue
posted by KokuRyu at 9:45 PM on January 5, 2010 [1 favorite]

No, I'm aware of that, and it was basically said in impotent anger, really -- I still can't believe how our government rolled over and threw billions and billions of dollars at the banks. And I suspect that Iceland is on the hook for the money, I just like the spirit of this thing, that's all...

Iceland would probably have bailed out their banks if they could have, but the thing is they couldn't The Icelandic banks were enormous, because they took deposited from and did business all over Europe. Remember, the debts total $64,000 per family. There was no way they could get that much money that quickly. With a population of 315,960 the five billion dollar debt works out to $15k/person.

To put that into comparison TARP was $700 billion, or about $2,000 for every man, woman and Child in the U.S.
posted by delmoi at 9:46 PM on January 5, 2010

good on them. there was no government guarantee for those accounts. they shouldn't expect any money.

Good on "them"? Do you mean the people of Iceland? Their elected lawmakers wrote this bill that their ceremonial president vetoed. As far as I can tell from the articles, "them" the people have not yet spoken.

And to those crying about the big bad banks -- they're shitheads, yes, and this is a great moral fuck you to the governments that let them do whatever they wanted if you consider it taken on its own. But does this move jeopardize more money coming into Iceland and to "them" the people down the line? I hope they think about it along those lines and not emotionally or on short sighted terms. That's how we all got into this mess and its how we might end up staying in it.

I wish people had more passion for effective regulation and financial responsibility on an individual level, and not so much for their team to one-up the next team to stay flush in the moment without considering the future.
posted by tastydonuts at 9:48 PM on January 5, 2010 [3 favorites]

Actually, it seems that a number of public institutions such as municipalities in the UK invested in Icebank. That means that these deposits and purchases were made by "trained professionals" who didn't do their due diligence.

Due diligence is the first thing thrown out the window when someone thinks that you stand in the way of them becoming richer or more powerful; only they don't call it due diligence anymore, they say you're obstructionist.
posted by chimaera at 9:55 PM on January 5, 2010 [6 favorites]

Actually, it seems that a number of public institutions such as municipalities in the UK invested in Icebank.

Were they expecting payouts in the 15% APR range?

If not, they deserve to lose. These weren't depositors, these were investors, in a foreign corporation -- one that clearly didn't have the reserves to meet its obligations, should they be called.

Icebank was a lovely gamble -- one that, on the face, I would have considered. But it was a *gamble*, not an investment. The odds of losing the entirety of your bet were well above zero, and this was obvious to anybody even glancing at the investment.

Expecting the citizens of Iceland to bail them out is inane -- despite the fact that the citizens of the UK and US were suckered into bailing out the investors in their failed banks.
posted by eriko at 10:12 PM on January 5, 2010 [6 favorites]

Back in the day the British would have just rolled up in some steam ships and taken the place over.

I think probably Iceland at this point might be better off as a British colony. Britain would at least have some money to invest in it.
posted by empath at 10:17 PM on January 5, 2010 [1 favorite]

But the money the Iceland took didn't belong to "banks" it belonged to regular people

"Iceland" didn't take shit.
posted by rodgerd at 10:43 PM on January 5, 2010 [2 favorites]

Expecting the citizens of Iceland to bail them out is inane -- despite the fact that the citizens of the UK and US were suckered into bailing out the investors in their failed banks.

It would be inane, except that the government of Iceland nationalized the bank and took over its obligations. It's not as though the bank was just allowed to fail — although in retrospect that would have been the better thing to do, probably. But a lot of people in Iceland would have been wiped out if they'd gone that route, so the Icelandic government stepped in and took it over.

Now, the British (and others) are alleging that the Icelandic government isn't honoring their now-nationalized bank's commitments to foreign creditors, while honoring or giving preferential treatment to domestic ones. If this truly is Iceland's policy going forward, it would be like sovereign default: you may be able to get away with it once, but nobody is going to do business with you afterward. They run the risk of becoming an economic pariah.

Some here in the US may recall the dustup over last summer when it became public that a large portion of the TARP funds that were going to AIG ended up going to a lot of foreign banks that AIG owed money to. The situation has a lot of similarities to Icebank, although AIG was (nominally) an insurance company rather than a bank and it was not (de jure) nationalized: despite some crowing from the usual suspects about using US taxpayer dollars to pay off foreigners, there was very little serious consideration of blocking AIG from fulfilling its obligations to foreign creditors. To do so would have destroyed AIG — which, for better or for worse, we had decided to save.

So now the Icelanders are going to have to make a similar call; if they want to continue to play at the high-stakes table of international finance, they're going to have to pay up. But on the other hand, if they decide to walk away, they could probably go back to cod fishing and eke out a respectable standard of living without fear — invading debtor countries doesn't make much economic sense anymore, so I don't think they have to worry about HM's Navy showing up. The consequences of either path are mostly economic, and probably won't be felt for a long time, but that's not to say they're insignificant.

The Icelanders acted pretty crassly in the entire thing so I can't really root for them — as a country, they spent the last few years flying high on a credit card backed by the UK and Europe and now they're getting sticker shock at the bill. But it would be interesting to see what would happen if they just flatly refused to renumerate foreign accountholders (or the governments who previously renumerated the actual depositors) and let themselves get bounced out of the casino of international moneylending. They could probably pull off the national equivalent of a cash existence if they wanted do, and perhaps that will look appealing to voters.
posted by Kadin2048 at 10:52 PM on January 5, 2010 [44 favorites]

does anyone have any idea when the referendum will be held? My friend is heading over to Iceland on holiday in a couple of weeks, may he live in interesting times!
posted by jacalata at 11:00 PM on January 5, 2010

Same old story here. The potential profits were private , but now that there are realized losses instead, these are suddenly expected to be public. The depositors gambled and lost, period.
posted by PareidoliaticBoy at 11:00 PM on January 5, 2010 [8 favorites]

Iceland isn't a member of the E.U, they were thinking of joining.

delmoi, that's the point. After the crash they reconsidered their staunch go-it-alone consensus and now want/need into the EU for access to the Eurozone, the ECB, perhaps the subsidies and such. To get in they have to make good on this default somehow with the UK and Netherlands, where most Icesave customers were.

This is brinksmanship at its best (not necessarily its finest). I imagine some of the MPs saw their vote as doing what their country needed, falling on their swords next election be damned.

I expect a settlement between the parties might involve extending the ten-year repayment terms. There are war debts that were held on the books for decades, probably still are some. Regardless, this is going to be a boat-anchor on Iceland's economy for a long time to come.

Back in the day the British would have just rolled up in some steam ships and taken the place over.

10 May 1940: Britain invades neutral Iceland, encounters no resistance, as a response to the occupation of Denmark and Norway (the King of Iceland was the King of Denmark, in personal union).
posted by dhartung at 11:08 PM on January 5, 2010 [1 favorite]

I think probably Iceland at this point might be better off as a British colony member of the EU. Britain The EU would at least have some money to invest in it way of getting Iceland out of this mess.
posted by KokuRyu at 11:08 PM on January 5, 2010

It seems to me that Iceland made the decision to block the repayment deal for the same reason that many homeowners in the US are "walking away" from their homes as they face mortgages worth twice the amount of the homes. It's simply not worth the risk to the long term financial safety of your family, or in Iceland's case, it's citizens, to pay back something you will probably never get a return on. So, you declare bankruptcy and walk away.

Sure, Iceland won't be invited to play any more global financial reindeer games for a long time, but that's probably a good thing as they try to recover from the mess they put themselves in. Does it destabilize the global financial system? Yes, but at the end of the day, the Iceland decided its population was more important than its global reputation. As Kadin2048 pointed out above, it will be interesting to see if Iceland goes back to being a "cash" economy and will resist the temptations to jump back into the game, which has been the bane of many developing countries and has kept them locked into decades of debt and poverty.
posted by KingEdRa at 11:11 PM on January 5, 2010 [10 favorites]

Iceland's an interesting situation, and maybe not as cut and dried as it would seem on the surface.

We've actually spoken about Iceland and their problems before; market driven instruments (i.e., credit default swaps) were predicting a default long before it happened.

And, of course, there was an earlier Krone collapse, March of 2006, when Iceland's currency cratered 8% in roughly one day after Fitch downgraded their sovereign debt. Of course most of that decline was driven by professional money rapidly moving out of structured positions (i.e., traders were funding in Yen at essentially 0% and earning 12% in Iceland).

But even with these warnings professional money still pursued yield in Iceland. Well, that's what those folks get paid for so no worries there.

What bothers me, however, is all the retail money that was parked in Iceland. UK banks, for example, were offering 1% or at the same time you could get 6% or maybe a little bit more.

Sure, folks got greedy but we can't expect retail money to know all the risks. That's why we've got a regulatory system, and here is the rub that folks not living in Europe will miss: we had what for all intents and purposes were institutions from a European country marketing into the UK (and Spain, and France, and Germany, seems like everyone got screwed a little here).

Now the EU banking system operates on what's called a member passport; if an institution is licensed and regulated in one member state they don't have to apply for regulation when they enter a foreign market.

Iceland was a weird case. I remember lots of regulatory people asking about Financial Services Compensation Scheme (for you 'Mericans, think FDIC) and Iceland didn't have an answer. The UK regulators didn't have an answer.

I was at a seminar in 2007 when this topic came up and the UK rep said they "were studying the issue".

So retail money, thinking (incorrectly) this wasn't any different that us dropping our cash into a Spanish or German bank account, happily deposited their (in some cases life) savings into Icelandic banks.

And got screwed.

So no, its not as cut and dried as it might appear on the surface, and here is what it comes down to:

It seems that the Icelandic government seriously needs to take a hit here. They didn't regulate those banks properly, it really comes down to that. They let them get totally out of control, scaling up their asset base in excess of 12 TIMES ICELANDIC GDP!

Now I'm very comfortable with regulation in the US and UK, have presented business plans to both The SEC as well as The FSA. They ask questions. We answer. They ask more questions. We get more answers.

Nobody really knows what the Icelandic regulators were up to here, what they did or didn't do. And guess what? They ain't talking now. The Dutch papers had lots of stories yesterday about their forensic accountants being snubbed. Iceland seems to be operating in CYA mode.

So I'm not so sure that Icelandic taxpayer shouldn't take a hit here. They sure as hell weren't complaining when those banks were splashing cash out on "acquisitions" or accepting deposits from all across Europe.

And defaulting isn't an option. They'll get frozen out of the global capital markets very quickly. For a long time all international trade will be cash only. When we've seen these situations develop in the past the sovereign currency quickly disappears, and is replaced by something else.

In fact, with yesterdays downgrade of Iceland's sovereign debt to junk rating the signs are on the table that if Iceland doesn't play very carefully and very honestly and very consistently from this point forward, they're gonna be frozen out; folks are increasingly nervous about lending to any Icelandic based counterparty now.

Iceland is very interesting for a couple of reasons: first, we haven't seen a mainstream European nation approach the IMF in about thirty years.

Second, looks like Greece and Latvia will also be visiting the IMF soon. So Iceland is leading the way in that regard, and that makes it an interesting case to watch.

Third, that tumbling Krone? High inflation rates? Higher interest rates? All blowback from the collapse of structured positions and there are many other sovereign currencies out there that are just as shaky.

And just to clarify - I don't have any exposure to Iceland; I certainly was attracted to the high interest rates, but their own regulators waffling on deposit insurance put me off.
posted by Mutant at 11:18 PM on January 5, 2010 [86 favorites]

KingEdRa: "It seems to me that Iceland made the decision to block the repayment deal for the same reason that many homeowners in the US are "walking away" from their homes as they face mortgages worth twice the amount of the homes.

... but at the end of the day, the Iceland decided its population was more important than its global reputation. As Kadin2048 pointed out above, it will be interesting to see if Iceland goes back to being a "cash" economy and will resist the temptations to jump back into the game, which has been the bane of many developing countries and has kept them locked into decades of debt and poverty."

Thanx for articulating some of the thoughts I've had as I've followed this post, right to the heart of them, KindEdRa...
posted by dancestoblue at 11:19 PM on January 5, 2010

It has come to the point that gamblers believe they have a right to a return on their investment gamble. The other week we had a series of letters to the editor in our local paper, a bunch of people pissy that the Lottery pays out a few big prizes instead of many small prizes. Because, y'see, they deserve to win. Just like the people who jumped on sketchy investment schemes.
posted by five fresh fish at 11:25 PM on January 5, 2010 [2 favorites]

I think it's time to post one of my favourite articles by Tory loudmouth and euroskeptic, Daniel Hannan on Iceland's Economic Miracle
posted by quarsan at 11:28 PM on January 5, 2010 [6 favorites]

OK, I've been pretty knee-deep in this story for the past year now. Let me try and condense the situation as best I can.

First of all, when the Icelandic government took over the banks, they said they were going to pay back all Icelandic depositors. Only problem is, you can't do that. Depositors are depositors, regardless of national origin. The UK, which already had egg on its face from an American bank fleeing the country, taking lots of money with it, used an anti-terrorist law to freeze Landsbanki (Icesave was in essence a branch of Landsbanki) assets. Cue much haggling and debate and finally one deal, which failed, and then finally the current deal, which is clearly not without controversy, in particular the 5.5% interest rate, which even British lawyers have called extraordinarily high.

With regards to the EU: while the coalition government of the Social Democrats and Leftist-Greens applied for EU membership (the former party being very pro-EU, the latter, not so much), the vast majority of Icelanders are still against joining the EU. So the EU carrot on the stick isn't particularly tempting for the average Icelander.

Second, in two separate opinion polls taken last fall and winter, 70% of the nation was against the passage of the Icesave deal in its current form. An online petition calling for the president to veto the bill garnered about 50,000 signatures of a country of about 300,000.

When parliament passed the Icesave deal into on the 30th of December, it was by a very thin majority. Two MPs from the ruling coalition actually voted against its passage. Last weekend, the president met with the organizers of the petition. And so yesterday, the president made a statement to the press, saying in part, "It has steadily become more apparent that the people must be convinced that they themselves determine the future course. The involvement of the whole nation in the final decision is therefore the prerequisite for a successful solution, reconciliation and recovery." You can read the full statement here.

HOWEVER, keep in mind that the whole national referendum thing is very up in the air. Here is what Article 26 of the Icelandic constitution has to say about the president's veto powers:

If Althingi has passed a bill, it shall be submitted to the President of the Republic for confirmation not later than two weeks after it has been passed. Such confirmation gives it the force of law. If the President rejects a bill, it shall nevertheless become valid but shall, as soon as circumstances permit, be submitted to a vote by secret ballot of all those eligible to vote, for approval or rejection. The law shall become void if rejected, but otherwise retains its force.

This means that the Icesave deal is still law, until such time as a national referendum is held AND the law is defeated by simple majority. That's how and why the Prime Minister was able to promise the UK and Holland that the government is still going to fulfill their financial obligations, despite the veto.

As to when a referendum will happen: no one knows. There are actually no laws with regards to how a referendum is conducted, so parliament will need to create those first. This is only the second time in Icelandic history that a president has vetoed a law. The previous time, in 2004 over a controversial media bill, parliament opted to withdraw the law rather than put it up for referendum.

As far as public opinion goes, I can tell you basically what two sides of the argument are saying. On the one side, there are people saying that we need to honor our obligations, that to not do so would ruin our economic reputation, and that the economic consequences of failing to pay on Icesave could prove worse than actually paying it. On the other side, there are people saying that Icelandic taxpayers should not foot the bill for unsrupulous businessmen, and that the current deal - with its previously mentioned interest rate, payments extending to 2024, and the fact that it will chomp off 40% of Iceland's GDP - is too harsh for the country.

In the end, parliament now has to hammer out the rules for a referendum, and somehow convince a large chunk of the bloc against the deal to vote in its favor. So it's very possible a referendum will kill the law, whenever it's held. What does that mean? That means there will be new negotiations with the UK and Holland, pretty much. Maybe a fairer deal will arise from it. So really, the end result of all the shouting from the Icelandic people and the British government (the Dutch have been actually pretty level-headed throughout the process), is just that there will be more talkstalkstalks. So those of us living here who were sick to death of hearing about Icesave will now have to hear about it for yet another year.
posted by Marisa Stole the Precious Thing at 11:46 PM on January 5, 2010 [51 favorites]

Actually, it seems that a number of public institutions such as municipalities in the UK invested in Icebank. That means that these deposits and purchases were made by "trained professionals" who didn't do their due diligence.

I'm pretty sure that these weren't part of the government bailout though. IIRC, the only people who had their money paid back by the government were regular investors who'd deposited their pensions, savings, etc. in there.
posted by PeterMcDermott at 11:46 PM on January 5, 2010

It seems to me that Iceland made the decision to block the repayment deal for the same reason that many homeowners in the US are "walking away" from their homes as they face mortgages worth twice the amount of the homes. It's simply not worth the risk to the long term financial safety of your family, or in Iceland's case, it's citizens, to pay back something you will probably never get a return on. So, you declare bankruptcy and walk away.

The problem is that the analogy doesn't hold. At the level of nations, there isn't any equivalent of bankruptcy -- in the sense of a standardized process supervised by a judge, which liquidates the assets that still are available and distributes them among the creditors etc. The closest there is to that is IMF supervision, but it isn't the same.

Sovereign default isn't the same thing, and that's what Iceland seems to be looking at.
posted by Chocolate Pickle at 11:52 PM on January 5, 2010

Mutant and Marisa have it. This is a case of Iceland being asked to honour a government guarantee to depositors in failed banks. It is exactly what would happen if Bank of America went bust: people with deposits in BoA would get compensated by the government (the FDIC). It's got nothing to do with 'gambling', as some people have suggested. Icesave went bust, so depositors should get compensated.

Key points from Mutant's post that bear repeating IMO:

"I'm not so sure that Icelandic taxpayer shouldn't take a hit here. They sure as hell weren't complaining when those banks were splashing cash out on "acquisitions" or accepting deposits from all across Europe."

Right. Iceland did very well for the last decade, based in a large part on its over-extended financial sector.

"And defaulting isn't an option. They'll get frozen out of the global capital markets very quickly. For a long time all international trade will be cash only. When we've seen these situations develop in the past the sovereign currency quickly disappears, and is replaced by something else."

Mutant obviously knows more about this than me, but for what it's worth I agree. Who on earth would trust Iceland if they renege on this deal? They'd also get blocked from joining the EU (which they really really need to do, as an aid to stability).
posted by Infinite Jest at 12:10 AM on January 6, 2010

The people who 'invested' in Icesave weren't gamblers in a casino, or investors in the stock market; they were people who put their savings into a UK retail bank, i.e. checking accounts.

There are a number of retail banks operating in the UK, some of which are european owned; but the man on the street assumes that all the retails banks operating in the UK are covered by the Financial Services Compensation Scheme which UK operating banks pay into (and backed by the UK government), which covers the first £50,000 of retail deposits entirely. when Northern Rock went under in feb 2008, the UK government stepped in and nationalised the bank to guarantee 100% of retail deposits entirely. People losing money when retail banks collapse tends to cause knock-on effects on other banks as people rush to withdraw their money (causing bank runs), and bank runs are bad, so thus the FSCS.

As it turns out, Icesave may well not be covered under the scheme, as a non-EU owned bank. However, as part of the EEA, there is an argument that the Iceland government still being responsible under EEA financial rules to provide a minimum of 20,000 euro coverage.

When Landsbanki went under, Iceland nationalised it, and started withdrawing all overseas assets of the bank, such as icesave, in order to pay back icelandic citizens with foreign deposits. That is, UK retail deposits in a UK operating bank were going to pay off icelandic deposits.

The UK government stepped in and froze the Icesave and landsbanki assets in the UK (using anti-terror legislation, which caused a bit of a rucus). The UK government then guaranteed UK retail deposits in Icesave under the FSCS (but not those from corporate or local government bank accounts), with the plan of persuing iceland under EEA responsibilities to make good. Presumably if they don't, the UK will simply keep the frozen UK assets of Icesave, though they'll still make a loss on the compensation they've already paid out.

Also, Iceland wants into the EU - there are strict regulations for EU retail banking, and part of that is having a government backed compensation scheme if a retail bank goes under. If the Icelandic gov show now that they're happy screwing non-icelandic retail banking customers (and fixing their regulators failings) they can likely kiss goodbye to becoming part of the EU, and gaining the help of the European Central Bank and EU subsidies.
posted by ArkhanJG at 12:32 AM on January 6, 2010 [8 favorites]

Infinite Jest,

There is nothing that could happen, not even war reparations, that would consume 40% of the American GDP for fifteen or so years.

Investors *should* be afraid of throwing this kind of money into this sort of sovereign. Lets call things what they are; this was a scam against the state system, not against Iceland specifically. There should be enough pain to make sure this doesn't happen again.
posted by effugas at 12:46 AM on January 6, 2010

Chocolate Pickle, thanks for pointing out that sovereign default isn't the same as bankruptcy. My understanding of finance is limited and what I do know has largely been gleaned from listening to Planet Money podcasts and trying to pay attention when smart people are posting & commenting here. What I was trying to get at with my analogy (and what dancestoblue seems to feel the same way about) is that Iceland feels that the terms of the repayment are too steep for their population to adequately handle over the long term. Like homeowners who cannot get loan mods from their banks, Iceland is willing to take the risk of being a financial pariah (while bankruptcy may be structured and limited, it's still no walk in the park for the people who have to live through it) in order to make sure they can take care of themselves. I'm not necessarily condoning either activity, and it may wind up making the problem worse but its perfectly understandable why they happen.

The real lesson, for me, anyway is this: Your house is not designed to be an "investment." Neither is your country. They are designed to be your Home. We all seem to have forgotten that.
posted by KingEdRa at 1:05 AM on January 6, 2010 [3 favorites]

In the UK we piss away more money than that each year on failed IT projects for our public services. Not to mention the fact that we stuff tens of billions into our failed banking system - and then some.

Mis-direction is an artform. Give them a break.
posted by the_very_hungry_caterpillar at 1:41 AM on January 6, 2010 [1 favorite]

Its a bum deal and the Icelanders are right to reject it. Hold out for a lower rate, longer payment terns and hope for sterling inflation.

Foreign depositors being stupid is not Icelandic taxpayers problem. People who aren't suspicious of a risk free 7% also probably have a fabulous collection of bridges they've bought over the years.

Yes, the average Icelander benefited from a higher standard of living than they should have but the British and Dutch can't really get on their high horses when it comes to profiting from the work of others thousands of miles away.

Petty electioneering from Labour, giving all depositors a 100% bailout then asking Iceland to pay for it is mighty suspicious especially in light of the treatment given to people involved in the Equitable Life or Trinity Mirror scandals, who had to battle for years to get even a % of what they were owed and they had a vastly better legal positions than this. That said stories of how war veterans/orphans/retired cols losing their life savings looks bad in an election year.

The maximum they should offer is the deposit insurance minimum to retail investors at the time the account was opened (before UK and Ireland started bidding up each other for deposits)
posted by Damienmce at 1:44 AM on January 6, 2010 [1 favorite]

For the love of Jebus can we stop talking about "Iceland" doing this or wanting that. "Iceland" as a nation does not have one will. Also, arguing for the invasion and colonization of Iceland is, well, not cool.

The Icelandic parliament passed a law which sets in motion payments to the UK and Dutch governments.

The president of Iceland then refused to sign this law, largely because of an internet petition signed by a quarter of the Icelandic voting population, which was followed by a demonstration outside the president's residence.

Now that the president has refused to sign the law there is supposed to be a referendum on the law but there are actually no laws in place to say how such a referendum should be held, though a law to remedy that is before the Icelandic parliament.

In Iceland the president is supposed to be apolitical, like the Queen in the UK, but the current president has been much more politically engaged than any previous presidents.

The debate in Iceland has been ridiculously vituperative. To quote myself from an AskMe question about the Icesave accords back in June:

There's been a lot of crazy talk in the Icelandic media about this deal, a very good chunk of it coming from the right-wing politicians who enabled the banking sector insanity in the first place* (they are now out of power). They have stoked and mongered fear about the deal in an effort to score cheap political points against the current left-wing government. The poster's Icelandic friend is right to say that it's hard to get any sense of what's going on. Icelandic media's default reporting style is reporting opposing viewpoints and not providing anything in the way of facts to help people figure out what the truth is. It's a lot worse even than American media in this regard. One widely disseminated opinion was that the Icelandic government could simply refuse all negotiations and send the matter to the courts (presumably EU ones) and somehow** not have to assume any debt from the collapsed banks beyond the very minimum required by pan-European banking regulations. This was presented as a consequence free option. Presumably once we'd dragged this through the courts for a number of years Britain and Holland would be more than happy to present us with the same deal we'd walked away from.

But the main issue here is that Icelanders (I am including myself) are touchy about issues of sovereignty. That is part and parcel of having been a colony for hundreds of years. Anything that is perceived to threaten Icelandic self-determination is taken very, very seriously. Since the deal affects some issues that are the prerogative of the Icelandic government it feels like a lessening of independence.

The right-wing parties formerly in power have stoked nationalistic fervor in a psychologically wounded nation. This has resulted in largely the same dynamic as with the Teabaggers in the US. The president went against the will of parliament and decided that this matter should be decided by referendum. The rhetoric against the agreement has been very, very strong, with accusations of treason flying thick and fast. I fear that the debate in Iceland will continue to operate at that level.

Icelanders have been arguing about Icesave for most of last year and it looks like it will continue well into this one. I wish it would just go away. What's especially crazy is that it it's only about a third of the Icelandic government's total debt obligations. The Central Bank is debt-laden up the wazoo, so badly, in fact, that at one point they couldn't service their debts, and this is an institution that literally prints money.

So Iceland's pretty much fucked and this latest twist in the Icesave mess is probably yet another screw in the toilet that Iceland's being flushed down.

Fuck.


* Am I bitter? Yes, yes I am.
** Through magic, perhaps.
posted by Kattullus at 1:48 AM on January 6, 2010 [14 favorites]

I had some money in Icesave as a retail depositor, well below the UK FSCS compensation limit mentioned by ArkhanJG, above. Although I have no financial qualifications, I like to think that I'm a little less ill-informed than the average retail punter. Thinking the Icesave rates looked too good to be true, and having heard a few murmers about the over-extended Iceland financial sector, I went to the FSCS website to check them out. In Mutant's detailed-as-ever post above makes clear, Icesave was covered by a different system than UK banks. However, on the FSCS' own website, they listed Landsbanki as having 'topped up' the coverage to the full FSCS level. That FAQ still exists on the FSCS website. I would submit that to a non-professional, that would seem like an assurance that you'll get your money back if things go tits up. So (interest already declared), I think it's a bit harsh to suggest that the retail depositors should take a haircut on this.
Goes to show, though, that if something looks too good to be true, it usually is.
posted by Jakey at 2:10 AM on January 6, 2010 [7 favorites]

I'm sure that they're aching to do the same thing now, the problem being that the people in Iceland don't have brown skin, and aren't Muslims, and they don't have any oil, so it'd be sortof unfashionable...

Plus, that last time we had a shooting match with Iceland we lost. :)

Good on you, people of Iceland. The larger part of me wants you to wave an appropriate number of fingers in our direction, but I sure hope doing so doesn't hurt you more.
posted by vbfg at 2:25 AM on January 6, 2010

Foreign depositors being stupid is not Icelandic taxpayers problem.

Yes it is, since the banks are nationalized and access to reasonably priced credit will be a nice thing to have in the future.

I have a feeling there is going to be quite the generational fiction in iceland about 15 to 20 years from now.
posted by afu at 2:36 AM on January 6, 2010

I would note in passing that a) the Icelandic banks were offering interest rates higher than any other deposit account available in the UK and b) the UK government chose to bail out the full value of all deposits, when the FCSC limit was £32k or so.

The former (combined with the cost of CDS on Icelandic debt at the time for professionals) should have made investors very nervous: it certainly put me off. The latter means that a sizable chunk of this debt is money that would not normally have been the responsibility of the Icelandic government.

The obvious effect of all this on the moral hazard of investing in shaky banks should be clear to all: why care about how safe the bank is when you know the government will always bail you out! In the long term this will only stoke the next round of bailouts.
posted by pharm at 2:38 AM on January 6, 2010 [1 favorite]

that would consume 40% of the American GDP for fifteen or so years

It's 40% compared to one year's (pre-crash) GDP, so over 15 years the repayments are more like 3%.
posted by cillit bang at 2:44 AM on January 6, 2010

Kattullus touches on an excellent point with regards to the rhetoric here. The conservatives, the same people who got us into this mess, pretty much had no choice but to talk loud and long against paying Icesave. They also happen to own a substantial bulk of the media - Morgunblaðið, one of Iceland's most respected newspapers, has as its co-editor former Central Bank chairman and conservative Prime Minister Davíð Oddsson. Talk radio has also helped fan the flames.

Left out of the GRAR ICESAVE discussion are little details such as the Prime Minister's own conditions to Gordon Brown, among them that a) the Icesave deal would not be an admission of legal obligation, but rather a gesture of goodwill towards the UK and Holland, and b) that if the burden became to great to bear, she would expect re-negotiations.

But no, none of that gets brought up. The same conservatives who don't actually want the president to have veto powers, the same conservatives who rejected the idea of national referendums when it came to the Kárahnjúkar dam project and the Iraq war, are now the same guys jumping up and down about direct democracy and actively misinforming the public.

Ah well. At least Kattullus gets to fly back to Rhode Island.
posted by Marisa Stole the Precious Thing at 3:14 AM on January 6, 2010 [3 favorites]

And by the by, THANK YOU for this post, KokuRyu.
posted by Marisa Stole the Precious Thing at 3:17 AM on January 6, 2010

The conservatives, the same people who got us into this mess, pretty much had no choice but to talk loud and long against paying Icesave.

Yes.

Because this week's news from Iceland seems to involve speculative investors not being cushioned from the effects of their own risk-taking, it's tempting to view it, as many commenters above appear to do, as the opposite of developments in the US, where freewheeling capitalists decry regulation then turn around and demand a customized form of socialism for the rich when things turn bad. In fact, though, this appears to be basically the same thing, with the addition of an extra factor — nationalism, and foreign demands against which the right can attempt to unite Iceland.
posted by game warden to the events rhino at 3:21 AM on January 6, 2010 [1 favorite]

Yeah. Thanks for the post, KokuRyu.

I've read the Icelandic papers and the main thing I've learned is that this particular bill that the president decided should be voted on in a referendum is only an alteration to a previous bill that the parliament passed last summer (Wikipedia article) which had slightly different repayment conditions. So, in fact, the referendum will be on how to repay the UK and the Netherlands, not whether repayments should happen at all.
posted by Kattullus at 3:25 AM on January 6, 2010

It's 40% compared to one year's (pre-crash) GDP, so over 15 years the repayments are more like 3%.

Ah. Important distinction.

That's actually pretty reasonable.
posted by effugas at 3:55 AM on January 6, 2010

But the bill equates to £40,000 per family.

Given that every family in Iceland appears to own a £40,000 SUV, that doesn't sound like an enormous sacrifice.

From those well-written comments linked above:

I live on a university campus and two students in my complex drive RR (Range Rovers) because they have children and it was cheaper that similar family cars.

WTF?
posted by PeterMcDermott at 4:06 AM on January 6, 2010

delmoi: "Back in the day the British would have just rolled up in some steam ships and taken the place over."

Have our Russian friends* weighed in on Iceland's decision yet?

Why would Russia promise $5.4 billion to bail out Iceland, when Iceland's traditional allies weren't offering the money? ... this act of benevolence is being viewed as a way for Russia to help secure a bridgehead for an advance into the Arctic regions to claim the vast hydrocarbon and other mineral deposits there. Iceland also happens to possess a once vital NATO base, which has been in mothballs since 2006, and the Russians may be eyeing that as well.

* Sarcasm? Da. Some of us still remember the real Red Dawn, you know. Wolverines!
posted by Joe Beese at 4:45 AM on January 6, 2010

Russia actually decided not to lend Iceland anything.

Given that every family in Iceland appears to own a £40,000 SUV, that doesn't sound like an enormous sacrifice.

Don't let appearances deceive you. According to the last Gallup poll on the subject, the average Icelandic household earns about £1,800 per month. Of this, household expenses take in about £1,600. I've seen food prices double here, while salaries have stagnated.

On the other hand, unemployment has levelled out (to about 7 or 8%), we still have the lowest taxes in Scandinavia (only 38%!), and economic forecasts were starting to turn around.

Sigh.
posted by Marisa Stole the Precious Thing at 5:11 AM on January 6, 2010 [2 favorites]

Breaking news: if a submitted bill about referendum rules passes easily, the tentative date for a national referendum on Icesave is 20 February.
posted by Marisa Stole the Precious Thing at 5:17 AM on January 6, 2010

Given what and where Iceland is, perhaps it wouldn't be a bad idea to turn off the lights and leave. I mean Is there really enough of anything there to sustain a nation?
posted by MrLint at 5:34 AM on January 6, 2010

Good for Iceland.
posted by dunkadunc at 5:35 AM on January 6, 2010

>: I mean Is there really enough of anything there to sustain a nation?

A huge amount of renewable energy and a convenient location between North America and Europe.
posted by dunkadunc at 5:46 AM on January 6, 2010

pharm suggests that investors could have been more careful, pointing (correctly IMO) to the too-good-to-be-true interest rate and the CDS prices.

Even so, I think UK and Dutch depositors had a clear right to expect that the Icelandic Depositors' and Investors' Guarantee Fund would reimburse them - it says so in their FAQ. And the DIGF offers a minimum of 20, 877 euros, with no maximum (unless the Fund runs out of money). Capping UK compensation at £32,000 (the same terms that applied in the UK) could be reasonable, though.

pharm also wrote "The obvious effect of all this on the moral hazard of investing in shaky banks should be clear to all: why care about how safe the bank is when you know the government will always bail you out! In the long term this will only stoke the next round of bailouts". This is definitely a good point. It seems like there needs to be some way of passing some risk onto the depositor: you choose to invest in a bank that's offering very high interest, then you should receive less compensation if the bank goes wrong. But how you could make this work in practice is beyond me.
posted by Infinite Jest at 6:00 AM on January 6, 2010

And defaulting isn't an option. They'll get frozen out of the global capital markets very quickly. For a long time all international trade will be cash only. When we've seen these situations develop in the past the sovereign currency quickly disappears, and is replaced by something else.

I respect Mutant's opinion a lot, but I disagree with the speculation that Iceland will get frozen out of capital markets for defaulting. Iceland will get frozen out if they don't clean up their half-assed regulatory system. But the country has a highly educated, stable, peaceful population with a market oriented economy. The country plays an important role in North Atlantic natural resource acquisition and extraction projects. People will invest in Iceland to access that, and especially now that it can be accessed at a discount. I can assure you that everyone doing business in Iceland will paper every transaction with a hefty coating of contractual fail-safes and insurance, but they'll still want to access the country.

Because Iceland's true asset is it's people - an educated, technologically advanced peaceful society. And a further benefit is that it isn't in the EU. I think the people of Iceland know this, perhaps more than their government does, and their prepared to stake their future on this asset.

This isn't Nigeria. It isn't Greece or Latvia.
posted by Pastabagel at 6:32 AM on January 6, 2010 [3 favorites]

Given what and where Iceland is, perhaps it wouldn't be a bad idea to turn off the lights and leave. I mean Is there really enough of anything there to sustain a nation?
posted by MrLint

Assuming you're asking this in good faith and not trolling.

Hydroelectric, geothermal, fish, aluminium, ecotourism, etc. Not to mention those pesky things like culture, heritage, and people not wanting to move out of a country just because of some economic troubles they had no control over...
posted by haveanicesummer at 6:40 AM on January 6, 2010 [1 favorite]

The UK, which already had egg on its face from an American bank fleeing the country, taking lots of money with it, used an anti-terrorist law to freeze Landsbanki (Icesave was in essence a branch of Landsbanki) assets.

NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO!

Can we please slay this myth forever? We used a civil remedy once called a Mareva injunction (named after a test case), later called a freezing order (with no ironic intent!), and formalised in an Act of Parliament updating a whole hotchpotch of laws which happened, amongst words like crime and security, to include the word terrorism in its title because a small part of that act was also about terrorism.

For details see Hansard extract here where Lord Goodhart foresaw just this kind of problem. More from Wikipedia on use against Iceland.

Otherwise, good stuff from Marissa, Mutant (as always) & Kattullus.
posted by i_cola at 6:50 AM on January 6, 2010 [3 favorites]

The Icelandic people are effectively saying that Iceland does not want to be part of the international financial system," Britain's Financial Services Minister Paul Myners said.

Nobody wants to be part of the international financial system. It's something that gets done to you.
posted by enn at 6:54 AM on January 6, 2010 [3 favorites]

NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO! NO!

Umm. The law you're defending was rushed through after 9/11, and pretty much everything in it concerns the specifics of that event and the anthrax scare. Doesn't seem to be any lack of blind nationalism on the UK side of things either.
posted by effbot at 7:40 AM on January 6, 2010

Ok, let's be reasonable here. I think the first step in working out a deal will involve the sweaters. It's time the UK pays up. Now presumably they're good woolen sweaters. Let's be generous and value them at 100£ each. Ok, so that's 30,000£ payed back already.

But those were sent a year ago and the UK still hasn't paid for them. So at a reasonable (as agreed upon by the UK) interest rate of 5.5%, that's another 1,650£. That leaves 3.39 billion and change still owed. That's 0.125% of UK's GDP or .5% of annual government expenditures.

So if we take into account initial deflation on the sweaters..Oh, wait...forget the sweaters for a second... .5% of annual expenditures? This is what the UK government is willing to bring Iceland to its knees over? Really? This just makes them sound like petty jerks. Why don't they just put this in the "aid" column of their budget and walk away?

What kind of jerk lives a multi-mansion estate and demands to that the family living under the bridge return the quarter he dropped? Even if it's yours, can't you just let it go once you see how much they need it and how little the marginal benefit is for you? You're obviously not obligated to. It is your quarter. You do own it. He is legally obligated to return it. But are you really going to make him?
posted by If only I had a penguin... at 7:51 AM on January 6, 2010 [1 favorite]

ÁFRAM ÍSLAND! Ég elska þig.
posted by functionequalsform at 7:57 AM on January 6, 2010

Iceland has its own currency, they should just mint a £3.4bn coin and stick it in the post.
posted by Damienmce at 7:57 AM on January 6, 2010 [6 favorites]

They're not 'the family living under the bridge', they're Bernie Madoff. The size of the UK's GDP is irrelevant.
posted by Phanx at 8:17 AM on January 6, 2010

effbot: I'm not defending the law, I'm complaining about the journalist in the post referring to it solely as an 'anti-terror' law so get extra OMG! they treated their ally, plucky little Iceland, like terrorists! points. It's hard enough to get through to the actual facts (as Kattullus points out) without wading though journalistic embellishments.

Doesn't seem to be any lack of blind nationalism on the UK side of things either.
Not sure what you mean by this.
posted by i_cola at 8:21 AM on January 6, 2010

I don't understand the idea that Iceland in saying fuck you to the UK and NL is a Romantic notion. I also don't understand the idea that the private investors were gamblers. Icesave was everywhere in the UK and was offering the best rates. I'm pretty sure that the pensioners and all the other regular every day people thought that they were gambling. For a lot of them this was the first time that they had ever invested in a foreign bank. No one comes out looking good here. People and institutions in the UK and NL have suffered and Icelanders are suffering and will continue to do so for a long time.

It's clear that there are posters here who know what they're talking about and those that don't. Before looking at this as Iceland vs. the world and making cheap shots about Britain's bellicose imperial past (it's not as if any Brit is unaware of this -I notice that no one has thought to mention NL's imperial past...) maybe reading the posts of people who actually know something about this might be a good idea. If you want to blame someone here, blame the respective governments. Iceland's has fucked its people over at least twice in this whole affair.
posted by ob at 8:24 AM on January 6, 2010 [4 favorites]

I actually see very little downside to Iceland not paying up.

If there's one thing we've learned in the banking crisis is that bankers are short-sighted, have short memories, and are desperate to loan. If Iceland reneges, it'll be in the dog-house for a year or two, but then some bright boy will say, "Gee, Iceland is an untapped market for debt, let's rewrite the contracts to make sure we won't get screwed this time and do it again!"

This is particularly true if the government acts as if it was forced into doing it. "Sorry, international community, our nasty citizens made us do it! We'll pass laws to make sure this doesn't happen again."
posted by lupus_yonderboy at 8:34 AM on January 6, 2010 [5 favorites]

I'm complaining about the journalist in the post referring to it solely as an 'anti-terror' law

My point is that the whole thing was very clearly introduced as an anti-terror law. So at what point did it stop being that? When Browne decided to use it against a neighboring country, or later when they complained about it?
posted by effbot at 8:45 AM on January 6, 2010

enn: "Nobody wants to be part of the international financial system. It's something that gets done to you."

You have to be part of the international financial system in order to borrow enormous sums of cash from entities like the IMF, which at least some people in Iceland apparently want to do. And that's the rub, really: is having access to that system, with its capital and trade deals and possible membership in the EU, worth 3 or 4% of GDP for perhaps a generation?

I don't really have an answer to that, which is why I find the question so interesting. As an American, we never really had the same choice, not in any serious way; the US is so intertwined with the international financial system at this point that there'd be no way of extracting ourselves without destroying both. We're lashed to the wheel of that particular ship, wherever it happens to be headed. But it's not entirely clear to me that Iceland is in the same position; they probably could bow out of the whole business if they were willing to take the hit to their standard of living (imports would probably become extremely expensive). I don't think they'll actually do that, but the fact that it's even an option, however remote, is interesting.

Damienmce: "Iceland has its own currency, they should just mint a £3.4bn coin and stick it in the post."

Er, Iceland can mint all the ISK it wants, but it can't mint GBP. (Or I guess they could, if they wanted to get into North Korea-style banknote forgery, but that's sort of frowned upon internationally, even more than defaulting on sovereign debt is.)

If they tried to just print enough ISK to cover their debts (so enough ISK to buy 3.4B GBP), it would be inflationary — they'd run the risk of a Weimar Republic scenario. I don't think they're that dumb, but the lure of hiding taxes via inflation has been a tempting one for governments from time to time.
posted by Kadin2048 at 8:50 AM on January 6, 2010

I actually see very little downside to Iceland not paying up.

what if every country decided to do that?

hell, what if the united states decided to?

there are those who would probably say that iceland is the us 5, 10, 20 years down the road - i'm not sure about that, but it seems to me that people might be worried about other countries getting the idea they could do the same

that's something that the finance community doesn't want to face
posted by pyramid termite at 8:56 AM on January 6, 2010

If I'm understanding this, the £20,000 figure is what banks in the EU/EEA have to guarantee and the £50,000 figure is what banks in the UK have to guarantee. Did the British and Dutch governments cover their respective citizens' losses in full or at one of the limited amounts, and is the proposed repayment to those countries for the full loss? Did Icesave cover Icelandic citizens in full?

If the Icelandic government is being told to cover the losses of the Brits and Dutch in full I don't blame them for holding out for negotiations or some sort of cramdown.
posted by Challahtronix at 9:00 AM on January 6, 2010

They're not 'the family living under the bridge', they're Bernie Madoff. The size of the UK's GDP is irrelevant.

The people being asked to pay (Icelandic government) are broke. The money would be received by the government of the UK ( the people who deposited their money in the bank have already been paid). The realtive wealth of debter and creditor, relative to the size of the debt, is absolutely relevant to the judgement of whether demanding payment at whatever cost is possibly legal but surely petty.
posted by If only I had a penguin... at 9:03 AM on January 6, 2010 [1 favorite]

effbot: Read the discussion in my original Hansard link.
posted by i_cola at 9:06 AM on January 6, 2010

They tried in the Cod Wars of the 70s, but Iceland threatened to close the U.S. air base at Keflavik, and Uncle Sam told Queenie to back off.

The US air base is closed now. Don't know how that changes things, but the US pulled out three years ago.
posted by grapefruitmoon at 9:39 AM on January 6, 2010

That leaves 3.39 billion and change still owed. That's 0.125% of UK's GDP or .5% of annual government expenditures.

So if you made $50k a year you wouldn't mind someone stealing $250? It's like the U.K is just blowing all that money on party boats and champagne. They're paying for things like national health care for tens of millions of people and lots of other social welfare.
posted by delmoi at 9:43 AM on January 6, 2010

There is a way out. Iceland goes on Craigslist offering itself for sale. As soon as Russia, China, Saudi Arabia or whoever shows interest, they approach us (U.S.) and for a 'nominal' fee remove themselves from Craigslist and agree to remain an independent but now debt free nation. We U.S. taxpayers won't mind. We have lots of experience at bailing out institutions that have failed at economic gaming tables.
posted by notreally at 9:44 AM on January 6, 2010 [2 favorites]

I've only just been reading about this today, so take anything I'm saying with a grain of salt.

My understanding is that Icebank deposits were only guaranteed via a requirement for there to be some kind of national account that all Iceland banks paid into. However, this account was only required to exist; it was not required to actually be capable of fully covering the failure of any given institution. Such would be unreasonable, as the money passing through Icebank was a large chunck of the GDP of the country. Either way, the guarantee was only for 21,000 EUR, NOT the full deposit amounts.

Britain decided to bail out their own private citizens (not companies) for the FULL amount. What's not clear to me is whether they asked Iceland if it would take responsibility for this ahead of time. Many people are saying no, it was a handshake agreement, if anything. Iceland at somepoint also nationalised Icebank, but the timing is not clear to me.

But that doesn't matter, as Iceland officially passed a bill where they agreed to pay Britain back in Sep 2009. As far as I understand, this referendum can't change the obligation to pay. What it CAN change is whether to accept this particular payment agreement.
posted by cseibert at 9:53 AM on January 6, 2010

As far as I understand, this referendum can't change the obligation to pay. What it CAN change is whether to accept this particular payment agreement.

Yeah, no one on any side of this is saying Iceland isn't going to pay. The referendum is for the rejection of the current law. Re-negotiations - as is the government's perogative - would likely follow.
posted by Marisa Stole the Precious Thing at 10:03 AM on January 6, 2010

The first poll is out and 51% of Icelanders are against the president's decision to not sign the bill into law and call for a referendum (41% support his decision).
posted by Kattullus at 10:09 AM on January 6, 2010

I hate that this is leading to such bad blood between the UK and Iceland. I'm sure the media is to blame for blowing the whole thing up after the fact, but neither country was exactly securely regulated against the kind of financial industry that caused the problem in the first place. I would like to see Iceland in the EU, and more reasonable payment terms if that is what it takes to sort the issue.

Maybe Iceland can partly pay with some kind of access rights? Like give the UK the right to build a hydroelectric/geothermal/whatever electricity plant or mineral rights, which the UK can then auction. I don't know, but it seems easier than money.
posted by Sova at 10:18 AM on January 6, 2010

Great comments, fascinating stuff. Thanks to Kattulus et al.
posted by Blazecock Pileon at 10:31 AM on January 6, 2010

Maybe Iceland can partly pay with some kind of access rights? Like give the UK the right to build a hydroelectric/geothermal/whatever electricity plant or mineral rights, which the UK can then auction. I don't know, but it seems easier than money.

Interesting, Sova, but would probably result in a different kind of backlash. The most fascinating quote in this story, to me, was: "One disgusted resident summed it up. "We have zoning against clotheslines," she said. "But not gas wells.""
posted by bitter-girl.com at 10:33 AM on January 6, 2010

There is a way out. Iceland goes on Craigslist offering itself for sale...
posted by notreally at 5:44 PM on January 6 [+] [!]

Kraft could buy them, 3.4 Bn is a fraction of the price they are bidding for Cadbury, and then they could rename the country as Kraftland!
posted by Lanark at 11:00 AM on January 6, 2010

"Kraftland" in Icelandic would mean something like "Powerland", but apart from that I don't think a lot of people would go for it.
posted by Marisa Stole the Precious Thing at 11:03 AM on January 6, 2010 [1 favorite]

"Kraftland" in Icelandic would mean something like "Powerland"

Just for the record, I would like to live somewhere called "Powerland". That is all.
posted by ob at 11:18 AM on January 6, 2010 [1 favorite]

The solution is obviously to convert the country to the Eve Online currency -- ISK. Should be a fairly seamless transition.
posted by empath at 11:34 AM on January 6, 2010

Iceland is a country not Bernie Madoff. Do you think Britain would accept extradition of the guilty regulators and bankers in lieu of payment?

All countries pay off big debts by devaluing their currency. Investors must accept inflationary risks when they invest in tiny countries. Iceland should presumably repay the 21,00 euros per account in krone, preferably at the exchange rate when Britain froze Landsbanki's assets. Conversely, those assets should presumably pass to Britain. So "you help break it, you bought it rules." Ideally, Iceland should attempt to pay the value of Landsbanki's British assets to the Dutch, just for being nice guys. See that's the nationalistic solutions.

I think everyone wants some more relaxed repayment over time, but Iceland really should veto those deals until they get a good interest rate.
posted by jeffburdges at 11:43 AM on January 6, 2010

dhartung: This is brinksmanship at its best (not necessarily its finest)

Brinksmanship at its finest.
posted by stonepharisee at 12:21 PM on January 6, 2010 [4 favorites]

despite some crowing from the usual suspects about using US taxpayer dollars to pay off foreigners, there was very little serious consideration of blocking AIG from fulfilling its obligations to foreign creditors. To do so would have destroyed AIG — which, for better or for worse, we had decided to save.

The problem is that the AIG obligations were in US$ and the US just printed some to fulfill the obligations. Icelands obligations are in Euro and they can'ts print EURO.

Lesson for the future for any country: If you default on debt then preferably default in your own currency. ;-)
posted by yoyo_nyc at 12:58 PM on January 6, 2010

So if you made $50k a year you wouldn't mind someone stealing $250? It's like the U.K is just blowing all that money on party boats and champagne. They're paying for things like national health care for tens of millions of people and lots of other social welfare.

If I were making 50K a year and I did a friend a favour and paid out $250 that he might otherwise have chosen to pay with some vague understanding that he would probably reimburse me that money at some point, I would expect to be paid back at some point. If that friend later came suddenly upon very hard times and assured me that he would pay me back -- figuring he and his family could just stop paying rent and live in his car, then I'd shuffle my feet a little and study my shoes when payment was offered. If that friend later came back and said that his family had refused to give up the apartment and live in the car, then I wouldn't haul my friend off to small claims court. Instead, I would think "Wow, I just lost $250 and that sucks, but I'm not going to make a big stink about $250 that won't make or break me just so I can force a friend and his family to live in their car. I guess next time I won't pay other people's quasi-debts for them unless I'm willing to write off the money."

Now I know one can't draw strict analogies and there are other things to consider like the fact that if the UK decides it no longer does favours for foreign governments until it has rock solid contracts in place that might cause more hurt than the forced repayment of this debt. But I don't think it's absolutely crazy to suggest that one option for the UK is to write this off. THey chose to reimburse their citizens for a loss that was created by their own lack of banking regulation (allowing a foreign bank to operate without deposit insurance) and now they lost some money over it. Sure it hurts to lose money but this would no more cripple the UK than $250 would cripple your median-ish income earner. It sounds like it could cripple Iceland, however.

Oh, and I assume the government of Iceland isn't blowing its money on party boats and champagne either. They also ahve social welfar programs to pay for.
posted by If only I had a penguin... at 1:18 PM on January 6, 2010 [2 favorites]

yoyo_nyc: "The problem is that the AIG obligations were in US$ and the US just printed some to fulfill the obligations. Icelands obligations are in Euro and they can'ts print EURO. "

This is true, but the effect is the same, it's just more subtle and avoids the domestic political messiness associated with taxing your populace to pay off foreign debts. Running the printing presses to pay off creditors is inflationary; this is in effect a "stealth tax" because it undermines the purchasing power of anyone holding the currency.

It's actually pretty nasty, because rather than taxing income, you tax savings; it ends up being a fairly regressive tax when measured against incomes, falling especially hard on the elderly or anyone else living off of savings or dollar-denominated fixed incomes. (Ironically, I've heard a lot of people basically say "well, fuck savers" at this point, as though "savers" are "the rich." Rich people generally don't sit on hordes of cash, Scrooge McDuck-style, they have their wealth invested in ways that often shields or even allows them to benefit from inflation. Actually, come to think of it, McDuck was a precious metals guy; he'd do fine.)

There's also the issue in the US of quantitative easing (fancy word for "printing money") being used as a check against deflation, which a lot of people were concerned about; it's not a one-dimensional issue. However, the general rule that inflation is more politically palatable than new taxes holds, I think.
posted by Kadin2048 at 1:40 PM on January 6, 2010

Wouldn't paying the debt back in 21,00 euros worth of hákarl per account? Seems like a win-win situation. Well, if you like fermented shark.
posted by misterpatrick at 1:44 PM on January 6, 2010 [1 favorite]

Q: If Britain and Iceland enter hostilities over this issue, which state will the rest of NATO support?
A: NATO? You're so funny, don't ever change.
posted by infinitewindow at 1:51 PM on January 6, 2010 [1 favorite]

Jesus, this Ólafur Ragnar Grímsson guy (president of iceland) is a cock.

Recently, I have often found myself cornered at various functions, especially here in London, and pressured to explain how and why daring Icelandic entrepreneurs are succeeding where others hesitate or fail, to reveal the secret behind the success they have achieved.

It is of course tempting to let it remain a mystery, to allow the British business world to be perplexed. This mystery would give my Icelandic friends a clear advantage, a fascinating competitive edge – but when my friend Lord Polumbo asked me to speak on this subject at the distinguished Walbrook Club, I could not decline the challenge.

He then talks about Icelandic fondness for risk-taking, the "absence of bureaucracy in Iceland and a lack of tolerance for bureaucratic methods", and "the strong element of personal trust, almost in the classical sense of 'my word is my bond'" as some of the 13 (!) key factors in Iceland's success.
posted by I_pity_the_fool at 4:12 PM on January 6, 2010 [1 favorite]

Hardly anybody comes out of this smelling of roses. There has been a mix of greed and incompetence at various levels:

The foreign depositors were greedy and naïve if they thought such interest rates on mere bank deposits were sustainable. However, to their discharge, they can hardly be blamed for putting their money in Icesave just as (ironically enough) British banks were folding and the British government was insisting every other day that bank deposits were guaranteed and bomb-proof, no matter what happened to the bank. This wasn't some kind of hyper-sophisticated investment, this was sold as just another online retail bank, albeit a very efficient one. US commenters should be aware that trans-European retail banking is quite widespread and accepted these days.

The Icelandic population (or at least a very significant part thereof) was at least as greedy and thoroughly reckless when they put their trust in politicians who assured that their economic future was based on an oversized, almost completely unregulated banking sector. In retrospect, this was even more reckless when you consider that the Icelandic financial sector had been privatised hardly a decade ago and certainly lacked the know-how to handle such enormous sums of money. And many Icelanders further compounded their plight by taking large loans in foreign currencies. Face it, taking foreign currency loans or deposits when your earnings are in a midget currency such as the Icelandic krona is about as stupid as placing all your savings in a penny stock. With the difference that in the latter case, all you can lose are your savings. The Icelanders have lost their savings several times over.

The previous Icelandic government was even greedier and showed an almost unfathomable level of incompetence in their handling of the boom, and then of the subsequent bust. They overlooked every single rule of economic governance and then of damage control. They're lucky that the Icelanders appear to be a thoroughly civilised people: in another time and place, these politicians would have found themselves hanging from lampposts.

The British government is being relatively greedy (but then it is bleeding money elsewhere) and rather shortsighted in failing to see that it'll be counterproductive to put Versailles Treaty-type conditions on such a puny economy as Iceland's. It should rather be cooperating with the Icelandic authorities to bring those most responsible to account. Speaking of which:

The Icelandic bankers were greediest of all. I wouldn't call them incompetent, though: I haven't yet heard of any of them living under a bridge, or, even better, in jail.
posted by Skeptic at 4:15 PM on January 6, 2010 [2 favorites]

The Icelandic bankers were greediest of all. I wouldn't call them incompetent, though: I haven't yet heard of any of them living under a bridge, or, even better, in jail.

Not yet. The Special Prosecutor's report is due out on 1 February, likely with a list of suspects. But everyone already knows who they are. They're essentially broke, despised by lefties and righties alike, no longer revered but loathed. One of the minor players was yesterday stopped at the international airport trying to flee the country with a suitcase full of cash. I am not making that up.

Yes, they are incompetent.
posted by Marisa Stole the Precious Thing at 5:01 PM on January 6, 2010 [1 favorite]

One of the minor players was yesterday stopped at the international airport trying to flee the country with a suitcase full of cash. I am not making that up.

Hahahaha. Please name names.
posted by I_pity_the_fool at 3:08 AM on January 7, 2010

Grrrr... in the papers this morning the leaders of the right-wing parties, who are in opposition, spoke out against the idea of holding a referendum even though they voted to hold a referendum on this law just one week ago. They argue that there's no contradiction.

Incidentally, the reason they gave for being against the referendum was that they, the parties in opposition, were worried that the sitting government would fall.
posted by Kattullus at 4:53 AM on January 7, 2010 [2 favorites]

I think they're more worried that (in a great example of "be careful what you wish for" regret) now that 67% of Icelanders say they prefer a re-working of the existing bill instead of holding a referendum, and estimated costs for a referendum are up around 200 million ISK, the conservatives are left with the sudden realization that they have absolutely no alternative to offer the people. It's easy to be all blustery and rhetoricky and junk. Having an actual plan is another thing altogether.
posted by Marisa Stole the Precious Thing at 9:49 AM on January 7, 2010

Iceland's President Trolls Europe:

Our illustrious president, Ólafur Ragnar “Epic Lulz” Grímsson, decided to purge himself of his reputation as Icelandic Venture Capitalist Cheerleader Numero Uno and vetoed the Icesave bill, thereby refering the bill to national referendum.

The president, citing among his reasons the overwhelming opposition to the bill in two separate opinion polls, and the 50,000 signatures on an online petition calling for the bill's veto, issued a statement, saying in part, “It is my sincere hope that this decision will lead to permanent reconciliation and prosperity for the people of Iceland, at the same time laying the foundations for good relations with all other nations and by the way I TROLL UUUU LOLOLLOLO :D:D:D:D:D !!!11!”

From the Reykjavík Grapevine, Iceland's free English-language magazine. Full disclosure, the writer of the article is a friend of mine.
posted by Kattullus at 8:27 AM on January 9, 2010