The Icesave Issue. Basic Facts
1. 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.
2. Following the collapse of all three main banks in Iceland in October 2008, representing 85% of the banking system, Landsbanki went into receivership and Icesave depositors found themselves unable to access their accounts.
3. 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 paid out to retail depositors in full, while Dutch authorities paid up to 100,000 Euros.
4. 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 bank failure was not in a position to cover more than a fraction of the losses incurred by Icesave depositors; it was not able to cover the collapse of an entire banking system.
5. Talks therefore started on the extent of the Icelandic Government’s liabilities with respect to deposit guarantees in the EU/EEA and its obligations vis-à-vis the UK and the Dutch Governments for their reimbursements to depositors.
6. 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 18 November 2008.
7. This resulted in the so-called Agreed Guidelines which established that the Government of Iceland would cover deposits of insured depositors in accordance with EU/EEA law. The Guidelines allowed for the expeditious finalization of multilateral financial assistance for Iceland, including from the IMF.
8. The Guidelines also stated that the unprecedented difficult situation of Iceland and the necessity to find arrangements that allow 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.
9. On this basis, formal negotiations between Iceland, the UK and the Netherlands started in February 2009. Under the agreement reached on 5 June 2009 the Icelandic Deposit Guarantee Fund would repay the Governments of the UK and the Netherlands a total of ?3.8bn (£3.4bn). Any shortfall would be covered by the Government of Iceland. To this end the Government presented a bill to the Icelandic Parliament in the summer to provide a legal basis for such a state guarantee.
10. The terms of the state guarantee was heatly debated in Parliament. Even though the loan is spread over 15 years with a 7 year grace period, the 5,55% interest rate was heavily criticised and many MPs argued that the terms would severely threaten Iceland’s economic recovery and put too heavy an economic burden on future generations.
11. After the longest parliamentary debate in the history of the Icelandic Parliament, the Icesave Act was adopted with a number of conditions which aimed at securing Iceland’s debt sustainability and allowing Iceland to restore its economy and financial system.
12. The amended Act which emerged from the intensive parliamentary debate, with the conditions inserted during the process, was then introduced to the Governments of the UK and the Netherlands. All parties signed new agreements in October 2009 that took into account most of the parliamentary preconditions, with some major exeptions, and this required an amendment to the Act passed in the summer.
13. The Government introduced a new Icesave bill in the fall to amend the earlier legislation. On 30 December 2009, following again an intensive debate both in Parliament and among the public, the Parliament narrowly passed the amendment as law.
14. On 5 January 2010, Iceland’s President decided not to sign the new law, thus referring the decision on whether the amendment should stand to a referendum. The background to the President’s decision includes a widely supported internet petition urging him not to sign the bill. The President referred to the need to ensure a national consensus in addressing the Icesave issue.
15. Public hostility to the Icesave issue relates to a number of factors, besides the widespread frustration over the fact that ordinary citizens in Iceland have to pay the price for the irresponsible behaviour of reckless bankers.
16. These include delays in approval of the IMF loans and the implementation of the IMF economic recovery program, perceived as being due to pressure from the UK and the Netherlands.
17. Furthermore, there is anger in Iceland due to the disproportionate actions by the UK Government in the midst of the financial crisis of October 2008 when it invoked an anti-terrorism legislation (The 2001 Crime and Security Act) against Landsbanki and the Icelandic Government in order to freeze assets. .
18. What next? Following extensive consultations within Iceland, the Government has introduced legislation preparing the ground for a referendum at the end of February or beginning of March. Until that time the amended Icesave legislation is in force.
19. 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.
20. The Government remains fully committeed to honouring Iceland’s international obligations.