Icesave
So this weekend, Iceland held a national referendum on the so-called “Icesave” issue. The basic issue was this: during the height of the irrationality sweeping through the world economy, Iceland’s banks were perhaps particularly bad — and this is from an American who is familiar with Goldmann-Sachs, so when I say they were bad, they were bad. The banks were privately held and operated, but there was supposed to be fairly stringent oversight. Unfortunately, it turns out that oversight was a joke, and the banks were engaging in all manner of activities from garden-variety bad investments to outright criminal fraud.
One of these banks in particular though had branched into high-interest savings accounts, primarily in the UK and the Netherlands. The basic idea was that they offer an insanely high return on a simple savings account (called “Icesave” — hence the name) so they could get more money up front with which to use as collateral for their more dubious activities that were netting them their real money. So lots of British and Dutch citizens put their money into these guaranteed savings accounts, and when the worldwide economy detonated in 2008, the banks simply collapsed.
Note that so far, this pretty much describes a lot of banks across the world. The difference is that in the US for example, the amount owed by the banks was able to be guaranteed by the government without major repercussions. In Iceland however, the amount owed by the banks was something like ten times the GDP of the country. Even if they’d wanted to do a US-style bailout, it wouldn’t have been possible.
So Britain and the Netherlands (and the IMF) stepped in and guaranteed the deposits of their citizens in these failed foreign banks (Icelandic citizens had already had their deposits covered by the Icelandic government). The UK and the Netherlands however now want the Icelandic government to reimburse them for the expenses they incurred in bailing out their own citizens. In practice, this means rather severe austerity measures for the Icelandic people, as the government doesn’t have enough cash by a long shot. This is the Icesave issue: should the Icelandic taxpayer take on the burden of guaranteeing debt incurred by private banks?
The debate here seems mostly to be centered on morality on one side versus pragmatics on the other. The argument for “yes” on Icesave is that it would allow Iceland to return to a normal interaction with the world economy sooner. The “no” argument is that it is not right that every man, woman, and child in Iceland should pay $15,000 USD or more to cover the sins of criminal bankers. It’s a bit more complicated than that, as you might expect, but that’s the gist of it from the standpoint of an outsider.
As of Saturday, the issue seems resolved in one way at least. There have been three previous Icesave agreements in place. The first was rejected by British and Dutch officials, the second (viewed universally as unfair to Iceland) was rejected by the Icelandic voters last year, and the third, a much more favorable set of terms, was rejected this past weekend. It seems like this is the end of attempts to reach an agreement. It seems clear that the Icelandic voters aren’t going to authorize this now, and I suppose it will be left to the courts to decide.
There are a couple of other complicating factors. In late 2008, as the Icelandic banks were failing, then UK Prime Minister Gordon Brown basically declared Iceland to be a terrorist state in order to use a little-known provision of British anti-terrorist laws that allowed them to seize the assets of a foreign state. It’s hard for me to argue that this was anything but the worst sort of abuse of power. It’s hard to imagine a less terroristic state than Iceland, and whether or not seizing assets was warranted, doing so in this manner was deeply insulting to a huge number of Icelandic citizens. I would go so far as to suggest that the outcome of this Icesave issue might well have turned out the way the UK wanted had they not taken this single step.
So where I do stand on the issue? That’s hard for me to say. Morally and ethically, I think I come down on the side of the “No”s. I do think the Icelandic government was complicit in creating the problem, but the economy wasn’t an Icelandic problem. It was a worldwide catastrophe. Had Kaupthing been a US bank instead of an Icelandic one, I can’t see the same demands being made on the US that are being made on Iceland. However, the “Yes” side here in Iceland mostly argues not that Iceland should be morally bound to pay these debts, but that pragmatically, this is likely as good as things were going to get. The international courts may well rule that Iceland is responsible for repayment under terms far worse than the just rejected agreement. And they may well be right.
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