Reykjavík Grapevine - 19.06.2009, Blaðsíða 18

1886 1998 2002 2006 2008 September 15 Sept 22 Sept 29 Oct 6 Oct 9 Oct 10Oct 7 Oct 8October 5
Landsbankinn
founded on July 1.
Landsbankinn changed
to a common stock com-
pany, steps taken towards
privatisation. January 1.
Landsbankinn privatised
on October 19. Buyers are
Björgólfur Guðmundsson and
his son, Björgólfur Thor, for 12.3
billion ISK. Half the money is
borrowed from Búnaðarbankinn
(now Kaupthing).
Icesave opens for
business in the UK,
October 2006.
Lehman Brothers declare
bankruptcy.
Icelandic government takes
over 75% of Glitnir. Glitnir of-
ficials complain they wanted a
loan, not to be taken over.
The “Act providing for special powers in excep-
tional financial Market circumstances” is passed
in the Alþingi, the Icelandic Parliament. One of
the primary amendments to the Act on Deposi-
tors’ and Investors’ Guarantee Fund is to the
effect that deposits will “be given priority in the
event of insolvency proceedings.” Morgunblaðið
announces that British depositors cannot with-
draw from Icesave accounts. Panic ensues.
Dutch Finance Minister Wouter
Bos tells the public that the
Dutch government will cover
the Icesave deposits, with each
depositor guaranteed up to
100,000 Euros. At the time it is
estimated that 1.6 billion Euros
had been deposited by Dutch
investors into Icesave. It will later
turn out to be 59 million Euros.
The Dutch bank Fortis
expresses an interest
in taking over the
Dutch branches of
Icesave. Dutch au-
thorities demand the
Icelandic government
cover up to 20,000
euro per each Dutch
Icesave account.
The FME announces that
trading is suspended in all
Icelandic financial companies
(i.e., Glitnir Bank, Kaupth-
ing Bank, Landsbanki Bank,
Straumur-Burdarás Investment
Bank, SPRON and Exista).
Panic abroad begins to form.
The Financial
Supervisory
Authority (FME)
takes over
Landsbanki.
Then Prime Minister Geir H. Haarde announces that “there is a good chance that Lands-
banki’s assets will cover a large part of Icesave’s deposits.” At the same time, British
Finance Minister Alistair Darling says that Iceland told him that they would not cover de-
posits left by British depositors, only Icelandic ones. Haarde tries to assure people that the
Icelandic and British authorities are talking it over. Then Icelandic Finance Minister Björgvin
G. Sigurðsson tells people not to panic. Later that day, the British government evokes the
Anti-terrorism, Crime and Security Act of 2001 against Landsbanki, the Central Bank of
Iceland and the Government of Iceland in the United Kingdom. Dutch authorities contact
Iceland to get information on their own deposits, as they’re not able to withdraw, either.
Glitnir and BYR
announce they will
merge.
Icesave in the Netherlands
opens for business in April.
Icesave timeline
18
In front of the Icelandic parliament,
protesters bang on drums, blow
whistles, chant and yell while police
stand by, watching. Inside, Minister
of Finance Steingrímur J. Sigfússon is
addressing his colleagues. It's a historic
day. After months of negotiations,
Icelandic authorities have finally
reached an agreement with the British
and Dutch authorities over Icesave,
the internet banking company that
collapsed last autumn, soured foreign
relations between Iceland the rest of
Europe, ruined the country's financial
credibility, and brought about the
downfall of a government under the
pressure of protests from thousands
of Icelanders. Finally, a deal has been
made that will make it all better.
But few people in parliament look
happy. No one outside of parliament
looks happy. As the finance minister
begins to speak, a clattering sound, like
hail on sheet metal, echoes through the
hall. The protesters are throwing coins
at the windows.
Iceland used to be regarded
as a libertarian success story. Its
businessmen were compared to
Vikings, moving swiftly across Europe,
opening companies, and raking in
cash. It didn't matter that financial
experts such as Standard and Poors
were telling the Grapevine in 2005 that
Iceland's economy was “overheating”
and that “now is the time for the
Icelandic government to step in and do
something.” Conservatives scoffed at the
very idea. Why should we fix something
that isn't broken? Peoples' wallets were
bursting with cash, the country enjoyed
one of the highest standards of living in
the world, and our capitalist ventures
abroad were booming.
“The whole Icelandic financial world
outgrew its proper place in society,”
historian and author of the best-selling
book Hrunið (“The Collapse”) Guðni
Th. Jóhannesson told the Grapevine.
“It's not that the people in the Financial
Services Authority (FME) were stupid or
weak; they just didn't have the resources
to make it work. One person from the
FME described it to me this way: she'd
go into a meeting with these financial
giants, and it'd be her at one side of the
table. On the other side of the table,
there'd be a team of financial lawyers,
aided by experts from abroad with years
of experience, who specialized in what
she'd just graduated in a few months
ago. This image, I think, summarizes
the fight between the financial world
and the authorities in Iceland.”
In such an environment, Icelandic
businessmen had free range to do
more or less as they pleased. One such
venture was Icesave, a privately-insured
internet banking company founded in
2006 that promised higher returns
on deposits. Icesave was effectively
a branch of Landsbanki; a person
in the UK or Holland logging onto
their Icesave account was entering a
Landsbanki account. It became wildly
popular. By some estimates, as many
as 300,000 Brits deposited 4 billion
pounds into Icesave. Business was good.
But September 2008 would herald a
series of events that would drive Iceland
to the brink of bankruptcy, and make
“Icesave” synonymous with financial
ruin.
How fear snowballed into panic
Certainly, there was economic trouble
elsewhere in the world. On September
15th, Lehman Brothers declared
bankruptcy and, among other things,
moved their assets out of the UK.
This move would end up having
consequences for Icesave down the
road. Here in Iceland, we were also
starting to feel the pinch. Banks and
other financial institutions that had
invested so heavily abroad were on
shaky ground. The ISK had devalued
by 35% over the course of the year. At
the time, it was estimated that Iceland's
banking system had grown to 13 times
the size of the country's GDP. Financial
opinion pieces running in the BBC,
the Times and the Telegraph began to
openly question the solvency of these
institutions, and whether peoples'
money was safe in them. Like everything
else in the financial world, the solvency
of the Icelandic banks was based largely
in the confidence of others. And that
confidence was faltering fast.
Then, on September 29th, the
Icelandic government announced it
was taking over 75% of the Icelandic
bank Glitnir. Some, such as Glitnir
CEO Bank Lárus Welding, complained
that the move shook the confidence of
investors, saying that it “had a negative
impact on current shareholders.” The
chairman of Kaupthing Bank, Sigurður
Einarsson, told Icelandic news show
Kastljósið that the takeover was “ill-
advised”. The following week, on
October 5th, the FME announced that
trading was suspended in all Icelandic
financial companies – Glitnir Bank,
Kaupthing Bank, Landsbanki Bank,
Straumur-Burdarás Investment Bank,
SPRON and Exista. The following day,
parliament passed a law that essentially
nationalized the Icelandic banking
system.
This did not go unnoticed in the UK,
especially as Icesave depositors awoke
on the morning of October 6th to see
the following message on the Icesave
homepage:
“We are not currently processing
any deposits or any withdrawal requests
through our Icesave internet accounts.
We apologise for any inconvenience
this may cause our customers. We hope
to provide you with more information
shortly.”
Panic ensued. The world turned to
Iceland, demanding answers. Then
Icelandic Central Bank chairman Davíð
Oddsson, appearing on Kastljósið, had
one for them: “We [the Icelandic state]
do not intend to pay the debts of the
banks that have been a little heedless,”
and said that foreign creditors could
expect to only get about 5% to 15% of
their claims.
And that's when things got ugly
Despite assurances from numerous
Icelandic authorities that the banks
were stable, British authorities were not
so certain. They'd been badly burned
when Lehman Brothers pulled up their
stakes and left. And they were not going
to let that happen again. On October
8th, the British government evoked the
Anti-terrorism, Crime and Security Act
of 2001 against Landsbanki, the Central
Bank of Iceland and the Government
of Iceland in the United Kingdom,
freezing all assets of Landsbanki in the
UK.
“The City of London is full of
foreign-owned banks,” political scientist
Eiríkur Bergmann Einarsson explained
to the Grapevine. “The Icelandic banks
comprised only a small amount of all
the operations that have been taking
place there. London had become this
big financial hub. And they were afraid,
that if Landsbanki closed their accounts
and just left the country, it could set a
precedent for other banks to f lee out of
the UK with their assets, leaving their
debts in London. So I think they were
making an example of Iceland and
Landsbanki.”
British Chancellor of the Exchequer
Alistair Darling reiterated that
sentiment when he told the British
press that, in a conversation he'd had
with then Icelandic Finance Minister
Árni Matthiesen, he'd been informed
that Iceland would not be guaranteeing
deposits made into Landsbanki by
people outside of the UK. A transcript
of their phone conversation, published
by the Times, does indeed show that to
be the case. In part:
“Darling: Do I understand that you
guarantee the deposits of Icelandic
depositors?
Mathiesen: Yes, we guarantee the
deposits in the banks and branches
here in Iceland.
Darling: But not the branches outside
Iceland?
Mathiesen: No, not outside of what
was already in the letter that we sent.
Darling: But is that not in breach of the
EEA Treaty?
Mathiesen: No, we don’t think so and
think this is actually in line with what
other countries have been doing over
recent days.”
Reaction in Iceland was not exactly
positive. PM Geir H. Haarde railed
against the “absolutely unacceptable”
behaviour of the British government.
Darling's citing of the EEA Treaty is
also interesting, as Einarsson believes
the invocation of the anti-terrorist law
was in itself a violation of the treaty:
“It's not only illegal, but also politically
very hostile. I think that the Icelandic
authorities made a devastating mistake
in these early days. When the UK
authorities used these illegal means
to seize the property of Landsbanki,
the Icelandic authorities should have
said, that the UK government by that
also overtook the bank’s obligations.
Therefore, it would be the obligation
of the UK government to pay out of the
Icesave accounts and to liquidate the
assets of the bank. Not the other way
around, like it is now.”
Daniel Gros, Director of the Centre
for European Policy Studies, told the
Grapevine that the Icelandic government
was indeed under no legal obligation to
pay back the Icesave accounts. “These
were privately insured deposits. They
could have just said, 'Sorry, you should
have known what you were getting
into.' It is, however, unfortunate that
they decided to let Icelandic depositors
withdraw their money, but not those
abroad.” Jóhannesson agrees, calling
the move “discrimination”, adding,
“either you pay back all the money to
everybody, or you don't pay it back to
anyone. It doesn't matter what country a
bank branch is in. Icelandic authorities
said they had to rescue the financial
situation here, but that they were in no
position to do it abroad. But every legal
expert that the British, Dutch and EU
consulted was of the same opinion –
that this distinction was not allowed.
There is no distinction allowed based
on geography or nationality.”
In the wake of Britain's move, a protest
group called InDefense was founded.
Setting up a website bearing the slogan
“Icelanders are NOT terrorists”, the
group gained fame through a project
whereby people were encouraged to take
photos of themselves holding a message
for Brown and Darling. 80,000 people
signed a petition objecting to the use of
the anti-terrorism law. The group also
travelled to the UK and met with British
parliamentarians. Ólafur Elíasson, one
the group's founders, told Grapevine,
“The British reaction was very heavy-
handed. The terrorism law was used to
protect British interests. I had British
officials tell me, 'How could we look our
voters in the eye if we let another bank
move its assets out of the country?'”
Ironically, many in the British
government wound up agreeing with
the Icelandic take on the invocation
of the anti-terrorist law - the financial
committee of the House of Commons
in the UK published a report recently
saying that there was no legal ground
for this action.
Of course, Britain was not alone in its
Icesave frustrations. Dutch authorities
also got involved, as depositors in their
country found themselves unable to
make withdrawals. The Dutch assured
their citizens that every Icesave account
would be ensured by their central bank
for up to 100,000 Euros, but naturally,
this wouldn't mean Iceland was off the
hook. On October 10th, Dutch Minister
of Finance Wouter Bos stated that the
Icelandic state would be taken to court if
it did not honour its obligations towards
Broke,
Busted,
Disgusted
How Icesave fell
apart, and why
the current deal
with the British
and Dutch will
never work.
“We are not currently processing any deposits or any
withdrawal requests through our Icesave internet
accounts. We apologise for any inconvenience this
may cause our customers. We hope to provide you
with more information shortly.” - Banner message
on the Icesave website, October 6th, 2008.
PAuL NIkOLOV
With reporting by Irina Domurath
The Reykjavík Grapevine
Issue 8 — 2009