The true cost of the Icesave meltdown

One MT reader had £17,000 saved with Landsbanki. Now he faces a long fight to get his money back.

Last Updated: 31 Aug 2010

We suspect many people in the UK will dismiss Tuesday’s nationalisation of Landsbanki – and the ongoing financial meltdown in Iceland – as someone else’s problem. We’ve got enough to worry about ourselves, people will undoubtedly think. But thanks to Landsbanki’s Icesave arm, about 300,000 people in the UK will be affected by the bank’s collapse into receivership – and it could well be our tax money that pays them back. We spoke to one of our readers who’s desperately trying to get his savings out of the stricken bank...

Ironically, he only opened the Icesave account earlier this year to try and spread his savings around, to avoid over-exposure to the UK banks. Already a fan of Iceland after visiting the country in January, Icesave’s highly-rated ISA quickly caught his eye when he started looking for an alternative provider. ‘It wasn’t quite the best rate, but it was always near the top of the comparison rankings – and it seemed far more reliable than all of the higher-paying options,’ he said ruefully. Between February and April he opened two ISAs and a savings account, transferring across £17,000 in total.

As rumours about Iceland’s financial trouble mounted on Monday, he went straight to the Icesave website – only to find a statement reassuring investors that Landsbanki was perfectly safe and very different to Glitnir (the Icelandic bank part-nationalised last week). The statement’s since been removed, but we tracked it down online: Iceland, it says, ‘has a strong Government fiscal position with negligible external debt’; it’s ‘driven by internationalisation and a growing financial sector, but otherwise anchored in sectors not affected by the current downturn’ and has ‘enviable long-term prospects’. And unlike Glitnir, Landsbanki's ‘sound business model’, ‘reduced reliance on capital market funding’ and ‘stable recurring revenues’ would stand it in good stead. So much for that...

Our reader was briefly convinced. But when Iceland suspended its stock market, he immediately tried to transfer out £10,000 – he’s now facing an anxious wait to see whether this money will appear in his UK account. As for the £7,000 in his ISAs, the Icesave website is now refusing all withdrawal requests (‘We apologise for any inconvenience this may cause our customers. We hope to provide you with more information shortly’, it says currently). So all he can do for now is try and get the money via a request from an alternative ISA provider.

On Tuesday, it looked as if he (and the other 300,000 UK savers) would have to go through the rigmarole of reclaiming the money from the Icelandic Depositors and Investors Guarantee Fund, which was supposedly responsible for the first £15,000, with the UK authorities picking up the tab for the next £20,000. And he wasn't confident: ‘I don’t see how the Icelandic government will be able to fund a £4bn compensation scheme based on revenues from 300,000 taxpayers,’ he pointed out, not unreasonably.

Sure enough, on Wednesday morning the UK Government revealed that Iceland was refusing to honour its commitments - but fortunately Alistair Darling promised to step into the breach (and also sue Iceland to get the money back). Either way, EU rules dictate that savers should ‘generally’ get their cash back within three months - but chances are it could take much longer.

And to add insult to injury, all our reader's UK savings are now with NatWest, a subsidiary of RBS – which of course lost a third of its value on Tuesday. Although our reader still believes RBS is ‘too big to go down’, its recent travails won't inspire any of its customers with a great deal of confidence...

In today's bulletin:
Rates slashed as bail-out fails to calm jitters
Sainsbury bucks trend with sales hike
The true cost of the Icesave meltdown
Editor's blog: What does the crunch mean for you?
MT's Little Ray of Sunshine: Pay peanuts, get monkeys

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