Friday, May 19, 2017

After Iceland Went Broke

The Icesave dispute was a diplomatic dispute that began after the privately owned Icelandic bank Landsbanki was placed in receivership on 7 October 2008. As Landsbanki was one of three systemically important financial institutions in Iceland to go bankrupt within a few days, the Icelandic Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) had no remaining funds to make good on deposit guarantees to foreign Landsbanki depositors who held savings in the Icesave branch of the bank.

When Landsbanki was placed into receivership by the Icelandic Financial Supervisory Authority (FME), 343,306 retail depositors in the UK and Netherlands that held accounts in the "Icesave" branch of Landsbanki lost a total of €6.7bn of savings. Because no immediate repayment was expected by any Icelandic institutions, the Dutch and British national deposit guarantee schemes covered repayment up to the maximum limit for the national deposit guarantees – and the Dutch and British states covered the rest.

The Icelandic state refused to take on this liability on behalf of the guarantee fund. Originally this was because the state lost funding access at credit markets due to the Icelandic financial crisis, but later proposed bilateral loan guarantees for repayment were rejected by Icelandic voters.

The dispute centred on the demand by the British and Dutch states that the Icelandic state should repay the Icelandic minimum deposit guarantees (up to €20,887 per account holder), equal to £2.35bn (€2.7bn) repaid to the UK and €1.3bn repaid to the Netherlands.

The Icesave bill 1 was the first negotiated loan agreement, attempting to define the repayment terms for these two loans. It was enacted on 2 September 2009 but was not accepted by the governments of UK and Netherlands, due to a unilaterally attached term added by the Icelandic parliament which limited Iceland's repayment guarantee only to 2024, with automatic cancellation of any potential owing still existing beyond this year. Instead, UK and Netherlands then counter proposed a new version of the loan agreement, referred to as Icesave bill 2, where no time limit was included for the Icelandic state's repayment guarantee. This was at first accepted by the Icelandic parliament, but the Icelandic president refused to enact the law and referred approval to a referendum being held on 6 March 2010, where voters subsequently rejected the law.

After the rejection of Icesave bill 2, renewed negotiations started on the terms for the repayment agreement. The negotiations resulted, in December 2010, in an adjusted agreement named Icesave bill 3, with better terms for Iceland. This included the removal of a previous creditor priority issue, a lower 3% interest rate, an interest moratorium until 1 October 2009, and a possible extension of the "repayment window" up to 30 years. When the Icesave bill 3 was put to a referendum in April 2011, it was again rejected, by 59% of Icelandic voters. After analysing the election result, stakeholders decided not to attempt negotiation of a further improved Icesave bill 4, but instead to refer the case to the EFTA Court as a legal dispute.

On 28 January 2013, the EFTA Court cleared Iceland of all charges, meaning that Iceland was freed from the disputed obligation for deposit guarantees worth €4.0bn (ISK 674bn) plus accrued interest to UK and the Netherlands. This caused shock, as some legal experts had suggested the ESA would win.

The repayment claim still existed as a claim on the Landsbanki receivership, who one year earlier had been ordered by the Supreme Court of Iceland to repay confiscated deposits (including minimum deposit guarantees) as priority claims, totaling ISK 852bn (£4.46bn, €5.03bn) to the UK Financial Services Compensation Scheme and ISK 282bn (€1.67bn) to De Nederlandsche Bank. By January 2016, the Landsbanki receivership had, through liquidation of assets, repaid all the priority claims.

If either of the proposed deals with the UK (and Netherlands) had been implemented, Iceland would still be paying, because of high interest costs, for the Icesave guarantees

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