Icesave Issue - Basic facts

11.1.2010

The Icelandic Ministry of Foreign Affairs has released the following information on the Icesave issue:

The Icesave Issue - Basic Facts

• Icesave was an online retail bank operating in the UK and Netherlands as a branch of Landsbanki, a privately owned Icelandic bank. The bank offered high interest rates to depositors and operated under EU/EEA financial regulations. Icesave was subject to surveillance by the Icelandic Financial Supervisory Authority.
• Following the collapse of all three main banks in Iceland in October 2008, accounting for 85% of the banking system, Landsbanki went into receivership and Icesave depositors found themselves unable to access their accounts.
• As part of wide-ranging measures to address the global financial crisis, UK and Dutch authorities announced that bank deposits would be guaranteed. Subsequently, the UK authorities paid out Icesave retail depositors in full, while Dutch authorities paid up to 100,000 Euros for Icesave retail depositors.
• Following the collapse of Landsbanki, it became clear that the Icelandic Deposit Guarantee Fund, established under EU legislation to cover losses in the event of a bank failure, was not in a position to cover more than a fraction of the losses incurred by Icesave depositors. Neither the Icelandic scheme nor European regulations were meant to cover the collapse of an entire banking system.
• Talks therefore started on the practical aspects of payout by the UK and the Dutch authorities of the deposit guarantees and whether the Icelandic government was liable to cover the minimum deposit guarantees (20,887 euros per depositor).
• With the constructive support of the French EU Presidency as facilitator, the Government of Iceland, the UK, the Netherlands and several EU Member States reached a common understanding on 14 November 2008, the so-called Agreed Guidelines.
• The Guidelines recalled that the EU Deposit Guarantee Directive had been incorporated into the EEA legislation in accordance with the EEA Agreement, and was therefore applicable in Iceland in the same way as it was applicable in the EU Member States. The Guidelines allowed for the expeditious finalization of multilateral financial assistance for Iceland, including from the IMF.
• The Guidelines also stated that the unprecedented difficult situation of Iceland and the necessity to find arrangements that allowed Iceland to restore its financial system and its economy should be taken into account when resolving the Icesave issue. The EU and the EEA institutions would continue to be involved and consulted on this process.
• On this basis, formal negotiations between Iceland, the UK and the Netherlands started in February and concluded in June 2009. Under the Agreements reached on 5 June 2009, the Icelandic Deposit Guarantee Fund would take a state-guaranteed loan from the UK and the

  Netherlands to repay them a total of £2.3 bn and ? 1.2 bn respectively.

• According to estimates, most of the liability will be cleared by Landsbanki assets but the exact level will remain uncertain for a number of years. Any shortfall in covering the minimum deposit guarantees, as well as accrued interest, would be covered by the Government of Iceland through a state guarantee. To this end the Government presented a bill to the Icelandic Parliament in the summer of 2009 to provide a legal basis for such a state guarantee.

• The terms of the state guarantee were the subject of heated debate in Parliament. Even though the loan is spread over 15 years with a 7 year grace period, the 5.55% interest rate was criticized and many argued that the terms would severely threaten Iceland’s economic recovery, supported by the IMF, and put too heavy an economic burden on future generations.

• After one of the longest parliamentary debates in the history of the Icelandic Parliament, the Icesave Act was adopted in August 2009 with a number of preconditions which aimed at securing Iceland’s debt sustainability and allowing Iceland to restore its economy and financial system.

• The unilateral preconditions of the Parliament were then introduced to the Governments of the UK and the Netherlands, as required by the Act. After extensive explanations the Governments of the UK and the Netherlands indicated that they would be willing to accept the preconditions of the Parliament to the Icelandic state guarantee through Acceptance and Amendment Agreements, providing for the necessary adjustments to the June Agreements.

• The Acceptance and Amendment Agreements were signed on 19 October 2009. This required certain amendments to the Act passed in August.

• Therefore, a new proposal was presented to the Parliament. Again, en extensive and heated debate took place, specifically on whether the proposed amendments reflected the preconditions made by the Parliament in a satisfactory manner. On 30 December 2009, the Parliament narrowly passed the revised Icesave Act as law.

• On 5 January 2010, the President of Iceland decided not to sign the new law. According to the Icelandic Constitution, the Act nevertheless entered into force. A decision on whether the revised Act should remain in force should be made by the public in a national referendum to be held as soon as possible.

• One of the main reasons cited by the President for his decision was an internet petition against the Icesave Act signed by up to 25% of the electorate. The President also referred to the need to ensure a national consensus in addressing the Icesave issue.

• Public hostility to the Icesave issue relates to a number of factors. There is widespread frustration over the claim on ordinary citizens in Iceland to pay the price for the irresponsible behaviour of reckless bankers. Repeated delays in the approval of the IMF loans and the implementation of the IMF economic recovery program in 2009 were perceived as stemming from pressure from the UK and the Netherlands by the general public in Iceland.

• Last but not least, there is immense anger in Iceland due to the disproportionate, aggressive and highly damaging actions by the UK Government in the financial crisis of October 2008, most specifically when it invoked anti-terrorism legislation against Landsbanki and the Icelandic Government in order to freeze assets (The Anti-Terrorism, Crime and Security Act 2001).

• What next? In line with the Icelandic Constitution, the Government introduced legislation preparing the ground for a referendum at the end of February or the beginning of March 2010, which the Parliament adopted on 8 January. Until the referendum, the amended Icesave legislation is in force.

• The Government has been in close contact with the Governments of the UK and the Netherlands, with Nordic and other partner countries, and with the EU and the IMF, in order to explain Iceland’s position.

• The Government remains fully committed to honouring Iceland’s international obligations.

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