Blog Post

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 […]

By: Date: March 10, 2010 Topic: European Macroeconomics & Governance

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.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic
 

Blog Post

The breakdown of the covered interest rate parity condition

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou and Bruegel Topic: Finance & Financial Regulation Date: July 1, 2019
Read article More on this topic
 

Blog Post

The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

By: Bruegel and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 24, 2019
Read article More on this topic
 

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou and Bruegel Topic: European Macroeconomics & Governance Date: June 17, 2019
Read article More on this topic
 

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo and Bruegel Topic: Global Economics & Governance Date: June 11, 2019
Read article More on this topic
 

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo and Bruegel Topic: Global Economics & Governance Date: June 3, 2019
Read article More on this topic
 

Blog Post

The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

By: Bruegel and Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 27, 2019
Read article More on this topic More by this author
 

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read article More by this author
 

Blog Post

Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

By: Michael Baltensperger Topic: Energy & Climate, Innovation & Competition Policy Date: May 13, 2019
Read article More on this topic More by this author
 

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic More by this author
 

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midões Topic: European Macroeconomics & Governance Date: April 8, 2019
Read article More on this topic
 

Blog Post

Secular stagnation and the future of economic stabilisation

Larry Summers’ and Łukasz Rachel’s most recent study documents a secular fall in neutral real rates in advanced economies. According to the authors, this fall would be even more marked in the absence of offsetting fiscal policies. Policymaking in a world of permanently low interest rates may be hard to navigate, especially in troubled waters. We review economists’ views on the matter

By: Inês Goncalves Raposo and Bruegel Topic: European Macroeconomics & Governance Date: April 1, 2019
Load more posts