In 2008 diplomatic relations between Iceland and Britain fell to a low not seen since the Cod Wars of the 1970s. Iceland’s Landsbanki bank had offered British and Dutch depositors high interest rates under the brand name Icesave. When Landsbanki collapsed, the Icelandic government, under the premiership of Geir Haarde, refused to immediately reimburse Landsbanki’s foreign depositors.
Invoking the Anti-terrorism, Crime and Security Act of 2001, UK Prime Minister Gordon Brown froze as many of the banks’ assets as legally possible to unilaterally reimburse British savers their guaranteed €20,000 pounds in the meantime. “They have failed not only people in Iceland; they have failed people in Britain,” Gordon Brown told the BBC at the time. “What happened in Iceland is completely unacceptable. I’ve been in touch with the Icelandic prime minister. I said this is effectively illegal action that they have taken.”
Such unprecedented action drew harsh condemnation from Icelanders. “Gordon Brown made the calculated decision that to raise his ratings in the polls, it would be ideal to attack Iceland,” then-Iceland Minister of Health Guðlaugur Þór Þórðarson told the BBC. “This has been made very clear.”
While Iceland has begun paying back the British government, international courts continue to grapple with the legality of Iceland’s decision. No matter what the legal outcome, however, the issue remains deeply personal and is likely to have people worked up for years to come.
“Iceland acted illegally”
Michael, a retired 62-year-old company director from Devon, a coastal county in southwest England (who refused to provide his surname), had significant investments in Icesave before the crash. He said that he faced losing his life savings, savings he would have placed elsewhere had it not been for the interest schemes once advertised by Landsbanki.
“What many of us in the UK are concerned about is the unbelievable arrogance of the Icelandic government and its population for their initial failure to acknowledge that they were in any way responsible for compensating the UK government for a matter which is entirely their responsibility,” he says.
“I understand Icelanders objected to [the seizure of assets through anti-terror legislation] without any thought of the people who had invested their life savings in their banks. I have no idea where matters currently lie, but if the Icelandic government has decided to face their responsibilities then all I can say is that would be a very good thing. An apology to UK savers and taxpayers would not go amiss.”
David Hodgson, a carpenter from Lancaster, echoes this sentiment. “We bailed out our banks, why couldn’t they bail out theirs?”
“Under European law, to which Iceland is a voluntary signatory, there is no difference between a saver in Iceland and one in the UK. Both are guaranteed €20,000 in the event of a bank collapse. Yet only Icelanders got their money back from the Icelandic government. I’m no fan of Gordon Brown, but he was right here: Iceland acted illegally.”
Tough luck for charities
While the British taxpayer has compensated retail investors like the aforementioned Michael through the Financial Services Compensation Scheme (FSCS), many charities remain out of pocket for their investments in Kaupthing, Singer and Friedlander (KSF)—a subsidiary of the Icelandic Kaupþing bank—which offered interest schemes comparable to Icesave.
Organisations like Charities Aid Foundation (CAF) have spent several years campaigning for the FSCS to recognise small charities as eligible for compensation. In a report published in September 2009, 11 months after the collapse, the CAF claims that 30 UK charities involved in their campaign lost a total of £50 million in deposits with KSF. One charity—Naomi House Children’s Hospice—claimed losses of £5.7 million equating to a third of its total assets.
“In 2008, Naomi House was forced to suspend services,” the CAF report states. “Its hospice-at-home service, which provides carers for families with terminally ill children, will not be resumed until the lost funds have been returned. The charities have received no guarantees and the administration process could take years.”
Naomi House has since been compensated by local government and fully resumed its provision of care to patients. Sadly, not all charities have been as fortunate, and many continue to wait for funds reclaimed from KSF’s assets through bankruptcy proceedings.
A common theme is clear: local and national government in Britain has stepped in to compensate the banks’ British depositors, which means British taxpayers have been forced to foot the bill.
And what of Iceland’s children?
However, not all British taxpayers think Iceland should be forced to compensate savers. Peter Spooner, a charity worker from London, says: “Iceland was obliged under European law to provide compensation, but policy makers left it ill-prepared for the event and ultimately it was the British government that behaved atrociously.”
Peter argues that €£2.9 billion is a big deal for Icelanders, but is merely a drop in the pond for the UK. “To Iceland, that £2.4 billion [€2.9 billion] means 40% of GDP,” he says. “Does bankrupting Iceland’s children help Britain in any way?”
He adds: “I have nothing but respect for Iceland and to see our prime minister abusing anti-terrorism legislation against them was disgusting—I’ve yet to hear anyone who thought different. Britain and the Netherlands should have forgiven the debt for the Icelanders sake, not for their leaders—even if it created a problem for us by setting a precedent; because a small diplomatic problem like that is nothing when it is for a friend.”
United against irresponsible banking
There’s no simple answer to a question shaded by both legal and moral issues. The EFTA Court will eventually resolve the legal dispute according to the letter of the law, but no matter what the result, people like Michael will likely continue to view Iceland’s actions negatively while others like Peter will see Iceland in a more favourable light.
Ultimately, we may find that what brings us together is stronger than what drives us apart. Indeed, the question about the role banks play in society is one facing most countries. It has, for example, contributed to Occupy movements in both Britain and Iceland.
Nobody wants to see banks as highly leveraged and over extended as they were prior to 2008. Hopefully, if governments across the world address these issues, Naomi House will never again have to suspend its services, and Michael from Devon will be able to enjoy a long and happy retirement.