The Icesave dispute

What’s at stake: Iceland held a referendum on Saturday which massively rejected the Icesave deal under which Iceland has to repay some EUR 3.8bn to the UK and to the Netherlands in the context of the resolution of the collapsed of Icesave. The money represents a portion of the losses incurred by more than 300,000 Dutch and British customers of the internet branch of Landasbanki. The current European regulation is such that the Icelandic deposit insurance scheme is deemed liable and not the Dutch nor the British. The UK and the Netherlands have been particularly aggressive in their efforts of recouping those losses despite local resistance from a population which is outraged by the idea of adding some of 40% of GDP of external debt in a move that basically equates a sovereign support of private creditors’ losses. The stance of the EU and the IMF on this issue is particularly unclear. The IMF officially states that it doesn’t think suitable for the government to take on private sector’s losses but at the same time, a large portion of the bilateral support to Greece is linked to the due payment of the Icesave debt. Given suspension from bilateral contributions to the program, the IMF hasn’t completed its second review and has suspended its program until more clarity is given to the case.

Anne Sibert argues that that the debt burden of Icesave is likely to be closer to 15% of GDP than the 50% often reported. Iceland is therefore not too small to repay. While the debt is substantial, claims that it amounts to 50% of GDP seem disingenuous. The obligation to repay is borne first by the Icelandic deposit insurance fund. If the Icesave agreement is finalised, this fund, along with the funds operated by the United Kingdom and the Netherlands, will have a priority claim on the assets recovered from Landsbanki; the Icelandic fund will receive about half. The government is liable for the rest of the claim, with repayment beginning after seven years. Recent estimates are that close to 90% of Landsbanki’s assets will be recovered. In this case, the estimated net present value of the end of 2015 Icesave debt burden is only about 14% of Icelandic GDP. This amounts to a net present value of 3,600 euros per capita and the average payment burden is less than 1% of GDP per year from 2016 until the debt is fully paid in 2024. If the asset recovery rate turns out to be only 75% then the average payment burden would be 1.2 of GDP from 2016 to 2026.

Jon Danielsson argues that responsibility for Icesave losses falls jointly on Iceland, Britain and the Netherlands. Regardless of the vote, the three governments should come to a more reasonable agreement that enables Iceland to pay its obligations without tipping the economy into the abyss. Landsbanki collapsed in October 2008 along with the rest of the Icelandic financial system. After the failure of Landsbanki, the government of the UK fully compensated all retail depositors, while the government of Netherlands compensated retail depositors up to €100,000. But the first €21,000 fell on the Icelandic deposit insurance fund, which only contained a fraction of the needed amount. Under EU law, if the deposit insurance fund is not sufficient, it falls on the other banks in the country to make up the shortfall. However, the law is unclear on what happens if all of the banks fail (see e.g. the Mishcon de Reya Solicitors report). This uncertainty is the foundation of Iceland’s reluctance to compensate the UK and Netherlands. It has not rejected its obligations but rather the terms under which Iceland compensates the UK and Netherlands, which is at the heart of the dispute.

Friðrik Már Baldursson proposes to settle on a rate that is equal to the costs of borrowing for the respective treasuries. This would leave risks for Iceland, but the UK and Netherlands would not be seen to profit from Iceland’s troubles. It seems likely that most Icelanders would judge this to be a fair offer. The demands of the UK and Netherlands that Icesave costs should not fall on their taxpayers is understandable. So, however, is the criticism that the interest rate on the Icesave loans is too high. At the current rate, which is 1-2% higher than the costs of borrowing of the UK and Netherlands treasuries, it is widely regarded by Icelanders as the most onerous part of the Icesave agreement. To be sure, it is lower than what Iceland could get in international capital markets. But given the circumstances – in particular what must be considered a shared responsibility for allowing the Icesave accounts to get out of hand and legal uncertainty as regards Iceland’s responsibilities in the matter – this is no ordinary loan agreement.

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