Icesave dispute

Icesave logo

The Icesave dispute is a diplomatic dispute that began in 2008 between Iceland on one hand and the United Kingdom and the Netherlands on the other. The dispute is centred on the retail creditors of the privately owned (since 2003) Icelandic bank Landsbanki, which offered online savings accounts under the "Icesave" brand. The bank was placed into receivership by the Icelandic Financial Supervisory Authority (FME) on 7 October 2008. As a result, more than 400,000 depositors with Icesave accounts in the UK and the Netherlands were unable to access their money for at least 6 to 8 weeks, while waiting for payout from the Deposit Guarantee Schemes in these countries. Much of the public controversy arose around the UK's use of the "anti-terrorism legislation" against Iceland.

Icesave

Icesave was an online savings account brand owned and operated by the private Landsbanki bank from 2006–2008 that offered savings accounts. It operated in two countries – the United Kingdom (since October 2006) and the Netherlands (since May 2008). However, Landsbanki's 2007 annual report stated there were intentions to roll the brand out to additional territories throughout 2008 and 2009.

In the UK, Icesave's marketing slogan was "clear difference", and it offered three types of savings account: an immediate-access savings account, a cash ISA (Individual Savings Account), and a range of fixed-rate bonds. Interest rates on these accounts were over 6%, amongst the best rates offered by online banks to UK customers at the time (2006-2007). At the time of Landsbanki's collapse, the bank had over 300,000 Icesave customers in the UK, with deposits of over £4 billion (€5 billion).

In the Netherlands, Icesave's marketing slogan was "de transparante spaarbank" (English: "the transparent savings bank"). It offered a single type of account: an immediate-access savings account which initially offered 5.0% interest, later increased to 5.25%. In the five months that it operated in the Netherlands, Icesave attracted more than 125,000 customers who deposited €1.7 billion.

Icesave accounts were accounts with Landsbanki's branches in London and Amsterdam, as the logo used in the United Kingdom made clear: "Icesave, part of Landsbanki, Reykjavik, Iceland." As Icesave was marketed as part of Landsbanki, the later complaints of the United Kingdom and Netherlands related to different treatment of Icelandic Landsbanki accounts and Icesave accounts.

Kaupthing Edge

Kaupthing Edge was an online savings brand owned and operated by Kaupthing Bank and its subsidiaries from 2007–2008. It offered savings accounts only to personal savers and operated in eleven countries. One major difference between Kaupthing Edge and Icesave was that Kaupthing Edge accounts were usually held with Kaupthing's subsidiaries outside Iceland, rather than with branches of the parent bank.

However in four cases, Kaupthing Edge accounts were held in branches:

• Finland, where the brand had operated since October 2007.
• Norway, where the brand had operated since January 2008.
• Austria, where the brand had only started operating on 4 September 2008, and had gained 200–300 customers with about €3 million in deposits.
• Germany, where the brand had operated since March 2008, gaining about 30,000 depositors.

In Finland and Norway, the local financial supervisors took over Kaupthing's operations and guaranteed deposits. In Austria, a private agreement was reached between the Austrian authorities and Kaupthing's receivers, with accounts being transferred to other banks. In Germany, however, there were serious problems with deposit insurance – identical to those suffered by Icesave depositors in the UK and the Netherlands but the German authorities swiftly seized all the assets and deposits in Germany before the Icelandic managers were able to move them, thus preventing them from being transferred to Iceland or other offshore accounts. German depositors started to get their capital back on June 22, 2009, but lost any interest accrued.^{[citation needed]}

Collapse of Landsbanki

The headquarters of Landsbanki in Reykjavík.

See also: 2008–2011 Icelandic financial crisis

There had been concern about the possible weakness of the Icelandic banking system throughout 2008, especially following the decline in value of the Icelandic króna (35% from January to September 2008). Iceland's three major banks: Kaupthing, Landsbanki and Glitnir were all highly leveraged by international standards, and their combined foreign debt was more than five times Iceland's gross domestic product (GDP). With the global financial crisis of 2008, this debt was becoming increasingly difficult to refinance, especially after the collapse in mid-September of U.S. financial-services firm Lehman Brothers. Matters came to a head during the weekend of 4–5 October, with numerous comments in the British press and on discussion forums questioning the solvency of Icelandic banks: this prompted a run on deposits in the UK (and possibly in other markets).

On 6 October, the Icelandic government pushed an emergency law through Iceland's parliament, the Althing, in response to the "unusual financial market circumstances". In a separate measure, the government also guaranteed "that deposits in domestic commercial and savings banks and their branches in Iceland will be fully covered." That evening, the Guernsey subsidiary of Landsbanki went into voluntary administration with the approval of the Guernsey Financial Services Commission. The administrators would later say that "The main reason for the Bank’s difficulties has been the placing of funds with its UK fellow subsidiary, Heritable Bank." Guernsey's Chief Minister stated "the directors of Landsbanki Guernsey took appropriate steps by putting the bank into administration."

The FME placed Landsbanki in receivership early on 7 October. A press release from the FME stated that all of Landsbanki's Icelandic branches, call centres, ATMs and internet operations will be open for business as usual, and that all "domestic deposits" were fully guaranteed. The Icesave UK website announced: "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."

That evening, one of the governors of the Central Bank of Iceland, former Prime Minister Davíð Oddsson, was interviewed on Icelandic public service broadcaster RÚV and stated that "we [the Icelandic State] do not intend to pay the debts of the banks that have been a little heedless". He compared the government's measures to the U.S. intervention at Washington Mutual, and suggested that foreign creditors would "unfortunately only get 5–10–15% of their claims". A long standing opponent of Icelandic membership of the European Union and adoption of the euro as national currency, he also claimed that "[i]f we were tied to the euro, […] we would just have to succumb to the laws of Germany and France."

Two days later, on 9 October, the Icelandic assets and liabilities of Landsbanki were transferred to a new government-owned bank, Nýi Landsbanki. As Landsbanki had been acquiring assets in Iceland with foreign loans and deposits, the assets of Nýi Landsbanki exceeded its liabilities (domestic deposits and government equity capital) by 558.1 billion krónur (€3.87bn, £3.06bn), even after Nýi Landsbanki had made provisions for over half its loans to customers. Icesave deposits, along with all foreign borrowings, remained in the old Landsbanki, which was left with 1743 billion krónur (€12.1bn, £9.56bn) in assets to face up to 3197 billion krónur of liabilities (€22.2bn, £17.5bn).

Freezing of assets in the UK

Geir Haarde and Gordon Brown in happier times. This meeting, at 10 Downing Street on 24 April 2008, was the only time the two men had met prior to the Icelandic financial crisis. Even in April, the problems of the Icelandic economy were one of the topics of discussion between the two prime ministers.

Once the Icesave dispute had got underway, it became clear that there had been several high-level contacts between the British and Icelandic governments in the weeks (and even months) before Landsbanki's collapse. British Prime Minister Gordon Brown met with his Icelandic counterpart Geir Haarde in London on 24 April 2008, where Iceland's economic problems were supposedly discussed. The British Chancellor of the Exchequer Alistair Darling had met with Icelandic Minister of Trade Björgvin G. Sigurðsson in September to discuss the problems of Icelandic-owned banks operating in the UK. It has been suggested that the UK Financial Services Authority (FSA) had agreed to take Icesave deposits under the UK Financial Services Compensation Scheme (FSCS) in return for a liquidity deposit of £200 million (€240 million): British newspaper The Independent reported that the requested liquidity deposit might have been as high as 50 percent of retail deposits (some ten-times higher), a figure which would have paralysed Landsbanki's retail operations in London. The UK FSA and Treasury have denied that there was such an agreement

Officials from the UK Treasury were in Reykjavík over the weekend of 4–5 October discussing the position of the Icelandic-owned banks operating in the UK, after Glitnir had failed to repay British wholesale depositors on Friday 3 October.^{[citation needed]} The result of the meeting was a letter on behalf of the Icelandic Minister for Business Affairs stating that "[i]f needed the Icelandic Government will support the Depositors' and Investors' Guarantee Fund in raising the necessary funds, so that the Fund would be able to meet the minimum compensation limits in the event of a failure of Landsbanki and its UK branch."

Alistair Darling, UK Chancellor of the Exchequer during the Icesave dispute

On the afternoon of 7 October, after Landsbanki had been placed into receivership but before Davíð Oddsson's television appearance, the UK Chancellor had a telephone conversation with his Icelandic counterpart Finance Minister Árni Mathiesen in which the question of deposit insurance was raised:

[…]
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.
[…]

On 8 October, Alistair Darling announced that he was taking steps to freeze the assets of Landsbanki in the UK. Under the Landsbanki Freezing Order 2008, passed at 10 a.m. on 8 October 2008 to come into force ten minutes later, the Treasury went on to freeze the assets of Landsbanki and assets belonging to the Central Bank of Iceland, and the Government of Iceland relating to Landsbanki. The freezing order took advantage of provisions in Part 2 of the Anti-terrorism, Crime and Security Act 2001, and was made "because the Treasury believed that action to the detriment of the UK's economy (or part of it) had been or was likely to be taken by certain persons who are the government of or resident of a country or territory outside the UK." UK Prime Minister Gordon Brown announced that the UK government would launch legal action against Iceland. It was too late, however, as much of the assets had been transferred to Iceland or to off-shore accounts.

The Landsbanki Freezing Order was the first time that the UK government had used its powers to impose unilateral financial sanctions since those powers were revised in 2001. Such unilateral sanctions have never been common, but the previous version of these powers (section 2, Emergency Laws (Re-enactments and Repeals) Act 1964) had been used against Rhodesia after its Unilateral Declaration of Independence in 1965, and against Argentina during the Falklands war in 1982. The powers themselves date from the Defence (General) Regulations 1939.

Reaction

Over 80,000 people signed an online petition against Britain's use of "anti-terrorism legislation" against Landsbanki, under the theme "Icelanders are NOT terrorists". Many sent in satirical images such as this one as part of the protest.

Also on October 8, the Prime Minister Geir Haarde issued a statement saying "The Icelandic government appreciates that the British authorities are willing to step in and respond to the immediate concerns of depositors of Landsbankinn Icesave accounts" and that "There is a good probability that the total assets of Landsbankinn will be sufficient to cover the deposits in IceSave." Later that day, he said that the Icelandic government was in no way running away from its obligations and suggested that Brown's remarks were grounded in a misunderstanding.

On the following day Haarde said at a press conference that the Icelandic government was outraged that the UK government applied provisions of "anti-terrorism legislation" to it in a move they dubbed an "unfriendly act". In a statement to the Althing on 15 October, Haarde again criticized the British government, saying that its actions "had nothing to do with salvaging British interests" and were "absolutely unacceptable". He also reiterated that Iceland was considering legal action against the UK.

The next day, the Central Bank of Iceland stated that problems with international payments to and from Iceland were "directly attributable to the extremely harmful actions taken by the British authorities" a claim that was repeated on 21 October. The allegations were reiterated by Davíð Oddsson, chairman of the governors of the central bank, on 18 November:

When the bulk of our banking system collapsed in the space of a few days in October and the British placed a fellow NATO member on a list together with the most notorious terrorists on the planet – a list that included not only Landsbanki but also the Republic of Iceland – it was no wonder that foreign exchange activity between Iceland and other nations should be utterly paralysed.

Haarde, before the Althing again on 30 October, criticized the UK's "absurd decision to invoke the Terrorism Act against Icelandic interests in Britain", which became "the virulent measures of the UK authorities" in front of the Federation of Icelandic Fishing Vessel Owners the following day. The President of Iceland Ólafur Ragnar Grímsson, who normally has only a figurehead role in Icelandic politics, made comments about Britain at an informal lunch with foreign diplomats on 7 November: his comments about Britain were described as "directly insulting" by a Norwegian diplomat present.

A rare exception was Björgólfur Guðmundsson, the former chairman and leading shareholder in Landsbanki, an unpopular figure in Iceland after his bank's collapse, best known in Great Britain as the owner of West Ham United football club. On the Kastljós programme on RÚV on 13 November he stated that Landsbanki's remaining assets should be enough to cover the claims of British and Dutch Icesave depositors, contradicting statements by Geir Haarde that the UK was insisting on "conditions that would ruin our economy".

In November, media reports indicated that the European Union and EU member states were putting pressure on Icelandic authorities to reach an agreement with Britain and the Netherlands over the Icesave dispute, and this would be a prerequisite to loans from the International Monetary Fund (IMF) and other countries. Former Foreign Minister and vice-chairman of the opposition Progressive Party Valgerður Sverrisdóttir, speaking after an outline settlement had been reached (see below), criticized the ruling Independence Party for "believing that they can get away with corresponding with other nations in such a way," while adding that she thought that Britain’s behaviour could not be excused.

Legal arguments

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.

Deposit insurance

Within the EEA, the requirement for deposit insurance is regulated by European Union directive 94/19/EC, which was incorporated into EEA law by decision 18/94 of the EEA Joint Committee. Iceland transposed the directive into national law in 1999, setting up the Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) funded by 1% of insured deposits. At the time of Landsbanki's collapse, the Tryggingarsjóður had equity of only 10.8 billion krónur, about €68 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.

As pointed out by the European Court of Justice in the Peter Paul and Others case, "Directive 94/19 seeks to introduce cover for depositors, wherever deposits are located in the Community, in the event of the unavailability of deposits made with a credit institution which is a member of a deposit guarantee-scheme". The directive does not specify how the Member States have to provide the cover, although most operate some sort of fund to which credit institutions contribute, as in Iceland. In principle, if the fund cannot meet depositors' claims in the event of a default by a member of the scheme, it is for the remaining credit institutions to make up the difference. Such a move was impossible in the case of the Tryggingarsjóður as the remaining Icelandic credit institutions were far too small in relation to the claims of Icesave depositors, and a fortiori because Icelandic law states that "Member Companies shall not be liable for any commitments entered into by the Fund beyond their statutory contributions to the Fund."

The Icelandic government has claimed that the directive was never intended to cover the case of a systemic failure, and does not impose a sovereign guarantee on deposit insurance schemes. In a speech on March 3, 2009, the Dutch Finance Minister Wouter Bos said: "First and foremost, European countries need to take a close look at how the deposit guarantee scheme is organised. It was not designed to deal with a systemic crisis but with the collapse of a single bank.“

The Icelandic government has repeatedly asked that the matter be taken to the EFTA Court, and points to Recital 24 to the directive:

Whereas this Directive may not result in the Member States' or their competent authorities' being made liable in respect of depositors if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized;

The Member States of the European Union contest the interpretation of the Icelandic government, and consider that a sovereign "guarantee of last resort", similar to the role of central banks as lenders of last resort, is the only way of "ensuring the compensation or protection of depositors" as required by the Directive. The ruling of the European Court of Justice in Peter Paul and Others, the only case to have considered Directive 94/19/EC, begins: "If the compensation of depositors […] is ensured, …". The ECJ then went on to uphold the immunity of the German authorities from civil liability for alleged failings in banking supervision (as per Recital 24) given that the depositors had been compensated up to the minimum set by the Directive.

The Directive imposes a minimum guarantee of €20,000 per depositor; moves to increase this minimum to €50,000 or even higher had been agreed politically before the Icelandic crisis, but had not been incorporated into EU law, much less into EEA law. The Tryggingarsjóður guarantees 1.7 million krónur on the basis of a fixed euro–króna exchange rate, equivalent to €20,887. The Netherlands and the UK have higher guarantee levels, €100,000 and £50,000 (approx. €60,000) respectively; Landsbanki was a member of the Dutch and British compensation schemes for the purposes of guaranteeing this difference in cover, an arrangement known in Britain as the "passport system", and commonly used by banks throughout the EEA. In addition, the UK Treasury has exceptionally guaranteed retail deposits in excess of £50,000 which were held in Icelandic-owned banks in the UK at the time of the crisis, at a cost of some £1.4 billion (€1.7bn).

The dispute over deposit insurance is not without some irony. In April 2008, Landsbanki launched a scathing attack on the UK Financial Services Compensation Scheme (FSCS) after the FSCS had implied on its website (without specifically mentioning Icesave) that depositors guaranteed under the "passport system" might have to wait longer for their money in the event of a bank failure than depositors with banks which were completely under the FSCS. Landsbanki went as far as accusing the FSCS of breaching European law "by letting savers believe this falsehood". A second irony is that FSCS had raised its guarantee level from £35,000 to £50,000 on the very day that Landsbanki went into default, a move that does not affect the liability of the Tryggingarsjóður under the "passport system" but which has considerably increased the cost to British banks and building societies (independently of any action by the Icelandic authorities).

Finally, the emergency powers passed by the Althing on the night of 6 October contain a measure (Art. 8(a)) stating in regard of the Tryggingarsjóður: "It shall always be permissible to reimburse the value of deposits, securities, or cash in Icelandic krónur, even though the original transactions may have been in another currency." Fortunately for the value of the Icelandic króna, it has never been seriously suggested that the Tryggingarsjóður pay out more than 600 billion krónur to British and Dutch depositors, simply to see them try to sell those krónur on the open market.

A resolution of the Joint Parliamentary Committee of the EEA adopted unanimously on October 28, 2009, notes the "lack of clarity" of EU Directive 94/19/EC over the legal obligations of governments if national guarantee funds do not suffice to cover deposit guarantees; moreover, the resolution expresses regret that "significant pressure seems to have been employed" by the IMF on Iceland to reach an agreement with the United Kingdom and the Netherlands.

Non-discrimination

The second, if not primary claim of the British and Dutch governments is that Iceland is in breach of its obligations under Article 4 of the EEA Agreement which prohibits "any discrimination on grounds of nationality", echoing Article 7 of the Treaty of Rome. The contention is that, by guaranteeing deposits at Icelandic branches but not at overseas branches, the Icelandic government is unfairly (or "illegally") favouring Icelanders, be they individuals or corporations. Iceland roundly denies the charge of discrimination.

The jurisprudence of the European Court of Justice is summarized in the García Avello case:

It is in this regard [Articles 12 EC and 17 EC] settled case-law that the principle of non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. Such treatment may be justified only if it is based on objective considerations independent of the nationality of the persons concerned and is proportionate to the objective being legitimately pursued.

Iceland contends that its actions are "based on objective considerations independent of the nationality of the persons concerned" (the consideration being the location of the branches of the collapsed banks) and are "proportionate to the objective being legitimately pursued" (the legitimate objective being the survival of a banking system – and hence a non-barter economy – in Iceland).

The situation is complicated by the position of so-called "wholesale" depositors. In the United Kingdom, 123 local authorities and other public bodies had a total of £920 million (€1.1bn) deposited with Icelandic banks. Even the Audit Commission, the independent body responsible for overseeing local government finances, admitted having £10 million deposited with Landsbanki and its subsidiary Heritable Bank. In the Netherlands, 22 local authorities had a total of €220 million deposited in Icelandic banks, with the province of North Holland being the most exposed.

The complication is that both the UK and the Netherlands exclude local authorities and larger private corporations from their deposit insurance schemes, as is possible (but not obligatory) under Directive 94/19/EC, on the grounds that larger organizations should have more capacity to judge (and absorb) risk than the general public. Iceland makes a much more sparing use of this provision, so its definition of a guaranteed deposit is wider:

"Deposit" […] refers to any credit balance resulting from financial deposits or transfers in normal banking transactions, which a commercial bank or savings bank is under obligation to refund under existing legal or contractual terms. However, this guarantee does not extend to bonds, bills of exchange, or other claims issued by a commercial bank or savings bank in the form of securities. Deposits, securities and cash owned by Member Companies, their parent and subsidiary companies for their own account, and deposits, securities and cash connected with convictions of money-laundering, are not covered by the guarantee […]

—Paras. 3 and 6 of Article 9, Act No 98/1999

This means that Icelandic local authorities and corporations had their deposits (not including bonds) guaranteed at 100% by the Icelandic government, while British and Dutch organisations in the same situation had no cover whatsoever. The Dutch government was forced to use a royal decree to prevent North Holland from attempting to seize Landsbanki assets through the courts outside the Netherlands: speaking on 7 November, Minister of the Interior and Kingdom Relations Guusje ter Horst said "Their behaviour is hindering the difficult and complex discussions with the Icelandic government."

EFTA evaluation

In their evaluation of the ongoing IceSave dispute, the EFTA Surveillance Authority (ESA) decided on May 26, 2010, that the Icelandic government was bound to pay the (minimum) deposit guarantee to all Icesave customers. As the UK and Dutch governments had already paid savers in their countries, Iceland was therefore liable to reimburse these governments. Additionally, EFTA criticised Iceland for the difference in treatment of international and domestic accounts. Iceland was given two months to respond. After initially ignoring the ESA letter, Iceland formally responded on May 2, 2011.

Attempts at solution

Early attempts

The first attempts at resolving the Icesave dispute came the very weekend after the collapse of Landsbanki, when British and Dutch officials travelled to Reykjavík to meet (separately) with their Icelandic counterparts, in talks which all sides described as "constructive" and "in a friendly atmosphere". An agreement with the Netherlands was announced, while "significant progress" was made with the United Kingdom. Geir Haarde announced later that week that the agreement with the Netherlands would need the approval of the Althing.

The Dutch agreement was for the Netherlands to loan Iceland €1.1 billion, the estimated liabilities of the Tryggingarsjóður to Dutch depositors. The reason behind the loan was that the liquidation of Landsbanki could take years and, without a loan, there was no guarantee that the Tryggingarsjóður would be able to raise the necessary money within the time limits of Directive 94/19/EC. While no public comment was made concerning the content of the Anglo-Icelandic discussions, it was widely assumed that the UK would make a similar (if somewhat larger) loan to cover the liabilities of the Tryggingarsjóður to British depositors. It is likely that British and Icelandic officials discussed other topics such as payment intermediation as well.

Although the delegations "agreed to work closely on the other remaining issues over the coming days", there was no public sign of movement on the issue for the next four weeks. The Icelandic government was occupied first in deciding whether or not to take a loan from the IMF, then in negotiating that loan (€2.1 billion). However when the time came for the loan to be formally approved by the Board of the IMF, it became clear that the Icesave dispute had not been resolved at all. Dutch finance minister Wouter Bos said that the Netherlands would oppose the IMF loan unless agreement was reached over Icesave. It was rumoured that Iceland would refuse the loan offered by the Netherlands, preferring legal proceedings over the alleged failure of British and Dutch watchdogs for the financial services sector to monitor the health of Icesave and Landsbanki.

At a press conference on 12 November, the President of the European Commission José Manuel Durão Barroso said that Iceland would have to reach an agreement to resolve the Icesave dispute before it could expect any help from the European Union. Icelandic foreign minister Ingibjörg Sólrún Gísladóttir commented "We are isolated when all 27 EU member states agree that we have to reach an accord on Icesave."

Talks began almost immediately in Brussels with the mediation of France, which held the rotating Presidency of the European Council. An outline agreement was reached on 16 November, with the Icelandic government accepting to guarantee the liabilities of the Tryggingarsjóður. On 18 November, once the IMF Board had approved its emergency loan, the UK agreed to loan £2.2 billion (€2.6bn) to Iceland. The Netherlands agreed to loan €1.3 billion and Germany agreed to loan €1.1 billion. The repayment conditions were still the subject of negotiation with EU involvement. The Dutch government confirmed on 20 November that its loan to Iceland had been finalised.

On 10 December, De Nederlandse Bank (DNB, the Dutch central bank) started to refund the deposited amounts to depositors up to a maximum amount of €100,000 per person. For this operation, DNB hired sixty temporary employees who were housed on the second floor of the Bank's headquarters. With around 120,000 paper files being handled on this floor, lying around in crates, DNB realised the floor was not capable of holding this amount of weight and the entire department had to be moved.

Collapse of the Haarde government and elections

August 2009 Althing bill

An agreement was reached between UK, Netherlands and Icelandic negotiators, and a bill was presented to the Icelandic parliament in June 2009. However, the Althing opposed the conditions and added amendments which set a ceiling on the repayment based on the country's Gross Domestic Product. On 28 August 2009, Iceland's parliament voted 34–15 (with 14 abstentions) to approve an amended bill (commonly referred to as the Icesave bill) to pay Great Britain and the Netherlands more than $5 billion lost in the Icesave deposit accounts. President Ólafur Ragnar Grímsson signed the bill on 2 September.

The 15 opponents of the bill argued that no clear legal obligation existed for Iceland to pay the lost deposits. The government argued that if the bill failed to pass, Britain and the Netherlands might retaliate by blocking a planned aid package for Iceland from the International Monetary Fund (IMF). Under the amended bill, up to 4% of Iceland's Gross Domestic Product (GDP) would be paid to Britain, in sterling terms, from 2017-2023 while the Netherlands would receive up to 2% of Iceland's GDP, in euro terms, for the same period. Remaining debts after this period would be cancelled.

Nevertheless, the Dutch and UK governments did not accept the August bill, as they do not accept the amendments added to the negotiated deal by the Althing, and continue/continued to block payment of the second tranch of the IMF loans.

December 2009 Althing bill

In December 2009, the Althing, voting almost strictly by party lines (with two defections from the governing parties to the opposition), narrowly (33-30) passed a version of the Icesave bill amended to agree with British and Dutch demands. The bill would make it possible for Britain and the Netherlands to recoup the €3.8bn (£3.4bn) lost by customers of Icesave. The two governments would receive payments over the next 14 years after compensating the losses of more than 320,000 of the bank's customers. In the UK, deposits of up to £50,000 were guaranteed by the Government under the Financial Services Compensation Scheme.

There was wide dissatisfaction with the new bill among the populace, and the president was petitioned by some 56,000 people, or approximately 23% of Iceland's voters, to put the issue before a referendum. On January 5, 2010, Icelandic President Ólafur Ragnar Grímsson declared that he would not sign the bill and called for a referendum. Opinion polls predicted that a sizable majority of Icelanders would vote against the bill in a referendum. The law passed in August 2009 remained in effect and would continue in effect even if the December bill were defeated in a referendum; that is, Iceland would continue to be committed to repaying the Icesave debt according to the formula agreed earlier by the Althing.

On the day that President Grímsson announced that he would not sign the new Icesave law, the UK Financial Services Secretary Lord Myners responded saying that "The Icelandic people, if they took that decision [not to accept the bill], would effectively be saying that Iceland doesn't want to be part of the international financial system," while Dutch finance minister Wouter Bos called such a decision "unacceptable" and stated that whatever the outcome of the Icelandic referendum, Iceland would still be "compelled to pay back the money". Iceland's prime minister, Jóhanna Sigurðardóttir, maintains that her government remains committed to the Dutch and UK loan agreements and the guarantees, insisting these would be integral to the country's economic revival.

Credit rater Fitch Group lowered Iceland from BBB- to BB+, making it harder for the Icelandic government to borrow money in the free market. Related to the immediate need for cash, Mark Flanagan, head of the IMF mission to Reykjavik, has commented: "The fund [IMF] has never had a formal condition on Icesave completion. Never. How Icesave affected the timing of the review was indirect and related to the broader financing for the programme. Because other creditors of Iceland made it a condition, we had to wait until they were satisfied. The dispute between Iceland, Britain and the Netherlands concerning Icesave complicated efforts by Iceland to secure additional external financing for the programme from other participating countries."

February – early March 2010 negotiations

In February 2010, attempts were made to reach a new compromise in the dispute. An Icelandic delegation was sent to London with an offer to solve the dispute. This offer focused on maximizing the Landsbanki assets received by the UK and the Netherlands.

The UK and the Netherlands, however, did not accept this Icelandic proposal. After rejecting the Icelandic proposal, UK and the Netherlands, presented a counterproposal in which they offered variable interest rates (which are lower than the previously agreed upon 5.5%) and to waive the interest for 2009-2010. This offer was estimated to save the Icelandic government 450 million euros compared to previous agreements, an offer which according to Dutch Minister of finance Wouter Bos would be the Dutch final offer.

Iceland rejected the offer by the UK and the Netherlands, but did present yet a new proposal to the UK and the Netherlands. Iceland's finance minister Steingrímur J. Sigfússon described the new Icelandic offer as a "significant step towards them [UK and Netherlands]". The UK and Dutch government officials refused to discuss this new offer by Iceland. Talks continued until 5 March, as no agreement was reached by the time the original December 2009 agreement was put to a referendum on 6 March.

2010 Icesave referendum

Main article: Icelandic loan guarantees referendum, 2010

The referendum was held on 6 March 2010. The referendum was resoundingly defeated, with 93% voting against and less than 2% in favor.

The referendum was held to approve the terms of a state guarantee on the debts of the Depositors' and Investors' Guarantee Fund (Tryggingarsjóður innstæðueigenda og fjárfesta), in particular a €3.8 billion loan from the governments of the United Kingdom and the Netherlands to cover deposit insurance obligations in those countries. The referendum was held under article 26 of the Icelandic Constitution after President Ólafur Ragnar Grímsson refused to counter-sign the corresponding Act of Parliament (known as the second Icesave bill) into law on 5 January 2010.

The referendum was the first to be held in Iceland since independence in 1944, and required special legislation. The Althing (Iceland's parliament) approved a motion on 8 January 2010 which called for the referendum to be held by 6 March at the latest. The motion passed by 49–0 with 14 abstentions. The date of the referendum was later set for 6 March.

2011 agreement

Main article: Icelandic loan guarantees referendum, 2011

After the referendum, new negotiations commenced. On 16 February 2011 the Icelandic parliament agreed to a repayment deal to pay back the full amount starting in 2016, finalising before 2046, with a fixed interest rate of 3%. The Icelandic president once again refused to sign the new deal on 20 February, calling for a new referendum. A referendum was held on April 9.

After preliminary results suggested that the deal was rejected, with 58% of voters voting against it and 42% voting in favor, both the Icelandic and the British government expressed their disappointment at the preliminary result. Iceland's prime minister Jóhanna Sigurðardóttir stated that "the worst option had been chosen"; UK treasury minister Danny Alexander described the decision as "obviously disappointing", and further said that "we tried to get a negotiated settlement. We have an obligation to get that money back, and we will continue to pursue that until we do... We have a difficult financial position as a country and this money would help".

Alexander further stated that the matter would be referred to an international court, the EFTA Court. Dutch minister of finance Jan Kees de Jager announced legal actions against Iceland, stating that the time to negotiate had come to an end, while Iceland is still obligated to refund the Netherlands Icelandic finance minister Steingrímur J. Sigfússon ruled out a third referendum, saying that "I think we're getting a very clear sign from this referendum, that further negotiations are ruled out. No use in trying that again".

The final result of the referendum was announced on April 11, 2011; 39.7% of voters voted in favor of the agreement (69,462 votes), while 58.9% voted against it (103,207 votes). A further 1.4% of the ballots cast were invalid, consisting of 2,039 empty ballots and 406 spoiled ballots. The voter turnout was 77.2%.

The EFTA Surveillance Authority released the following statement after the result of the referendum became known:

“	The Authority has taken note of the outcome of the Icelandic referendum concerning the Icesave issue. We now expect a swift answer from the Icelandic government to our Letter of Formal Notice of May last year. We will assess the government's reply before we take further steps in the case. Unless the letter from the government contains arguments that alters our preliminary conclusions in the case, the next formal step would be to send Iceland a final warning, a Reasoned Opinion. This final warning will give Iceland two months to rectify their breach of the EEA Agreement. If Iceland continues to be in breach of the agreement, the case will be sent to the EFTA Court.	”
—EFTA Surveillance Authority

On 2 May 2011, the Icelandic Ministry of Economic Affairs published a response to the EFTA Surveillance Authority's letter of 20 May 2010, maintaining that Iceland "did not fail to comply with its obligations under Directive 94/19/EC." On June 10, 2011, the EFTA Surveillance Authority ruled that Iceland should take steps towards paying the full amount to the UK and the Netherlands within 3 months after the ruling. The Icelandic Minister of Economic Affairs Árni Páll Árnason made a statement to the Icelandic Parliament on the same day rejecting this ruling.

On 14 December 2011, the EFTA Surveillance Authority lodged a formal application with the EFTA Court.

See also

• Glitnir (bank)
• Kaupthing Bank
• Icelandic loan guarantees referendum, 2010
• Icelandic loan guarantees referendum, 2011

External links

• Icesave UK website
• Icesave Netherlands website
• Landsbanki website
• Icelandic Government's Official Information on the Icelandic banking crisis
• Icesave loan agreements and related documents (21.3 MB)