Countries not being able to pay back bailout money is, these days, becoming proverbial. But in the latest instance, a European court has ruled that the Icelandic government has been right all along, in refusing to repay the bailout money contributed by the UK and Netherlands to savers in the failed Icesave bank.
The court of the European Free Trade Association (EFTA) found that the Icelandic government did not break depositor protection laws in deciding not to refund the money to the UK and the Netherlands. It came to this decision on the basis that the country’s financial crisis was so severe, and also that depositor protection rules do not require a country to fund such guarantees directly.
Icelandic government officials said: ‘It is a considerable satisfaction that Iceland’s defence has won the day in the Icesave case; the EFTA Court ruling brings to a close an important stage in a long saga.’
So what caused this court case in the first place? Well about four years ago, when Iceland’s main lenders collapsed amid the credit crunch, the UK and the Netherlands got right in there offering to pay savers back for their lost funds from Icesave (an online service run by Icelandic bank Landsbanki). They agreed to do this on the condition that the Icelandic government would reimburse them at a later date.
Predictably (for a country in grave financial difficulty), Iceland did not come through on the deal, and a row between the governments erupted. Furthermore, the dispute threatened to derail Iceland’s bid to join the EU.
The Icesave ‘saga’ has been politically significant for Iceland as a whole, as the Icelandic people twice rejected in referendums the demands for repayment by the Netherlands and the UK.
It is worth noting that the estate of the now-collapsed Landsbanki has paid off roughly half of the debt, separately from the case with the government, and its executors think there is a good chance that the rest of it will be paid off over the next couple of years, too.
So the UK and Netherlands governments may not have lost out at all, except that had they got the payments from the Icelandic government, it would have been in once chunk. Now, it will have taken almost a decade to recoup the cash…