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A Modern Icelandic Saga: Part One

by ChrisCook Fri Oct 24th, 2008 at 04:46:30 AM EST

The current situation in Iceland is almost surreal. The Nordic nations have offered €5 billion, and the IMF €1 billion, to stabilise Iceland, but the IMF says it will not proceed until the current UK disagreement with Iceland has been resolved.

It is now becoming clear that the UK Treasury has cocked this up on a cosmic scale with a toxic mix of complacency, arrogance and simple deafness. Feelings are running high in Iceland against the UK, who appear to have precipitated the very events they were seeking to avoid, and moreover, abused the spirit, if not the letter of UK law in order to do so.

First: a piece of "Independent" polemic, full of human interest....

Who are you calling terrorists, Mr Brown?

After Gordon Brown used anti-terror laws to freeze the assets of an Icelandic bank, the Land of the Midnight Sun is fighting back. Given Iceland does not have an army, the uprising is less Viking warrior and more citizen's revolt.

Yesterday, more than 35,000 people - a ninth of the population - signed an online petition to let the world know that Icelanders are not terrorists. "Gordon Brown unjustifiably used the Anti-Terrorism Act against the people of Iceland for his own short-term political gain," the petition says.

"This has turned a grave situation into a national disaster... hour by hour and day by day the actions of the British Government are indiscriminately obliterating Icelandic interests."

Then we have FT Alphaville weighing in with the facts and the timeline

Iceland - the Darling Tapes

The crucial event was the conversation between the Icelandic Prime Minister on 7th October...

Monday October 6
The Icelandic Prime Minister's office announces the "Deposit Guarantee" early in the morning before the banks open saying that "deposits in domestic commercial and savings banks and their branches in Iceland will be fully covered. "Deposit" refers to all deposits by general customers and companies which are covered by the Deposit Division of the Depositors' and Investors' Guarantee Fund."

(The homepage of the "Depositors' and Investors' Guarantee Fund" makes it clear that the "Fund's guarantees extend to all customers of Icelandic banks and their branches, both domestic and foreign, irrespective of legal address".)

The "Deposit Guarantee" announcement is also sent to Britain concerning deposits at Landsbanki and Kaupþing Edge (the latter being protected through the UK scheme). According to a high-ranking official within one of the Icelandic ministries a letter is sent to the British government. In it the Icelandic government declares that it will honour its obligations in accordance with the directive and will further support the Depositors' and Investors' Guarantee Fund.

Tuesday, October 7
Iceland makes use of the new emergency act to nationalize Landsbanki, the country's second biggest bank. Mr. Darling talks with the finance minister of Iceland, Arni Mathiesen. The next morning he will declare that the Icelandic authorities have no intention of compensating British account holders for what they have lost through their savings accounts in Landsbanki's Icesave.

According to a transcript of that conversation (which has not been released by either of the two governments), Mr. Mathiesen did not make such a declaration. He said the following: "We have the [deposit] insurance fund according to the Directive and how that works is explained in this letter and the pledge of support from the government to the fund."

(Mathiesen is referring to the letter sent to the British Government the day before.) The Icelandic finance minister in other words pledged that the government will honour its obligations. Nowhere in the transcript can there be found any indication that the UK Chancellor is of the opinion that the Icelandic government is in the process of breaking international law. The two chancellors end the conversation on amicable terms.

Wednesday, October 8
The British Government uses anti-terrorism powers to freeze Icelandic assets in Britain. Referring to his telephone conversation with Arni Mathiesen from the day before Alistair Darling, states on BBC radio that morning:

"The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here [...] But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."

Geir Haarde, the Icelandic Prime Minister, issues a statement responding to Darling's accusations:
"The governments of the two countries will immediately review the matter in detail through official channels with a view to finding a mutually satisfactory solution. It should also be highlighted that on Monday evening changes were made to the Act on the Depositors' and Investors' Guarantee Fund strengthening the position of depositors by giving them priority when allocating assets. There is a good probability that the total assets of Landsbankinn will be sufficient to cover the deposits in IceSave. The Icelandic government reiterates that if needed it will support The Depositors' and Investors' Guarantee Fund in raising necessary funds."

Later that day Gordon Brown tells members of the press that he and his colleagues "are taking legal action against the Icelandic authorities to recover the money lost to people who deposited in UK branches of its banks".

Here is

The Transcript

Mathiesen: Hello.

Darling: Hello.

Mathiesen:  This is Árni Mathiesen, Minister of Finance.

Darling: Hello, we met a few months ago, weeks ago.

Mathiesen:  No, we have never met. You met the Minister of Trade.

Darling: Alright, sorry.

Mathiesen:  No problem.

Darling: Thank you for taking the call. As you know, we have a huge problem with Landsbanki, we have a branch here, which has got four billion pounds worth of deposits and it has now been shut and I need to know exactly what you are doing in relation to it. Could you explain that to me?

Mathiesen:  Yes, this was explained in a letter we sent the night before last from the Trade Ministry. Since then, we have set out a new legislation where we are prioritizing the deposits and where we are giving the FME, the Icelandic FSA authorities, the authority to go into banks, similar legislation to what you have in England, and the Landsbanki is now under the control of the FME, and they are in the process of working out how to do these things, but I think this legislation will help in solving this problem.

Darling: What about the depositors you have got who have got deposits in London branches?

Mathiesen:  We have the insurance fund according to the Directive and how that works is explained in this letter and the pledge of support from the government to the fund.

Darling: So the entitlements the people have, which I think is about sixteen thousand pounds, they will be paid that?

Mathiesen:  Well, I hope that will be the case. I cannot visibly state that or guarantee that now, but we are certainly working to solve this issue. This is something we really don't want to have hanging over us.

Darling: People are asking us already, what is happening there? When will you work that through?

Mathiesen:  Well, I really can't say. But I think it is the best thing that the FSA be in close touch with the FME about this to see how the timeline works out in this.

Darling: Do I understand that you guarantee the deposits of Icelandic depositors?

Mathiesen:  Yes, we guarantee the deposits in the banks and branches here in Iceland.

Darling: But not the branches outside Iceland?

Mathiesen:  No, not outside of what was already in the letter that we sent.

Darling: But is that not in breach of the EEA-treaty?

Mathiesen:  No, we don't think so and think this is actually in line with what other countries have been doing over recent days.

Darling: Well, we didn't when we had the problem with Northern Rock. It didn't matter where you saved money, we guaranteed your savings.

Mathiesen:   Well, yes, that was actually in the beginning at least debated. I am sure you cleared that up in the end.

Darling: The problem, I do understand your problem, the problem is that you have people who put their money into a bank here and they are finding that you have decided not to look after their interests. This would be extremely damaging to Iceland in the future.

Mathiesen:  Yes, we realize that and we will be trying as we possibly can to make this not a problem. We are in a very, very difficult situation ...

Darling: I can see that ...

Mathiesen:  ... and just this week, since we can't cure the domestic situation we can't really do anything about things that are abroad. So we must first deal with the domestic situation, and then we will certainly try to do what we possibly can, and I am personally optimistic that the legislation that we passed last night will strengthen this part of it. And we, of course, realize what could happen and don't want to be in ...

Darling: yes ...

Mathiesen:  but the point is also, Chancellor, that we have for months been trying to talk to everybody around us and trying to tell them that we were in trouble and ask them for support and we have actually gotten very little support.

Darling: I understand that, but I have to say that when I met your colleague and these others, basically, what we were told turns out not to have been right. I was very concerned about the London banking position and they kept saying there was nothing to worry about. And you know, with the position we are now in, there will be a lot of people in this country who put money in and who stand to lose an awful lot of money and they will find it difficult to understand how that has happened.

Mathiesen:  Well, I hope that won't be the case. I wasn't at the meeting, so I can't say  ...

Darling: Well, I know that. Can you tell me this, if the insurance fund you refer to, does it have money to pay out?

Mathiesen:  They have some money, but as is with most of these funds, it is very limited compared to the exposure.

Darling: Yeah, so you don't know. See, I need to know this, in terms of what I tell people. It is quite possible that there is not enough money in that fund. Is that right?

Mathiesen:  Well, yes, that is quite possible.

Darling: Well, that is a terrible position to be in.

Mathiesen:  Yes, we are in a terrible position here and the legislation we were passing through last night is an emergency legislation and, as I say, we are just trying to ensure the domestic situation so that we can then secure other situations.

Darling: What I ... I take it therefore that the promise Landsbanki gave us, that is was going to get 200 million pounds of liquidity back into it, has gone as well.

Mathiesen:  Yes, they didn't get that liquidity.

Darling: Well, you know, I do understand your position. You have to understand that the reputation of your country is going to be terrible.

Mathiesen:  Yes, we do understand that. We will try our utmost to avoid that. We need to secure the domestic situation, before I can give you any guarantees for anything else.

Darling: Obviously, I would appreciate any help you can give.

Mathiesen:  Obviously ...

Darling: Sure ... We would have to explain to people here what has happened. It will, of course, no doubt, have repercussions for others. It really is a very, very difficult situation where people thought they were covered and then they discover the insurance fund has got no money in it.

Mathiesen:  Yes, as we said in the letter ...

Darling: OK, I will appreciate whatever help you can give.

Mathiesen:  Yes, we will need for the FSA and FME to be in touch on the ...

Darling: Oh, I know the most certainly will. I know you were not at the meeting and weren't part of it. We doubted what we were being told then and I am afraid we were right.

Mathiesen:  Yes, that can be.

Darling: Anyway, please keep in touch. Whatever you can do to help, that will be very helpful indeed.

Mathiesen:  Yes: if there are any areas on your side, please be in touch.

Darling: Alright. I will do that. Thank you very much indeed.

Mathiesen:  Thank you.

Darling: Goodbye.

M. Bye.

Did the Icelanders repudiate the debt?

Are they Economic Terrorists?

Is this revenge for the Cod War?

A simple misunderstanding?

Or simply

Treasury Complacency?

My take on it is that Darling appears to have gone into the conversation on the premise that Iceland as a sovereign nation were planning to repudiate any debts in excess of the limited compensation fund.

While Mathiesen reasonably assumed Darling knew that they would not.

...and a Dialogue of the Deaf thereupon took place...

There is material for another Diary in this underlying mismatch of assumptions.

Iceland, like her Nordic brethren, take for granted that people stand behind their obligations. A key component of the Anglo Disease is the underlying assumption that has crept in (remember when a chap's word was his bond....?) that it is expected that people will try and wriggle out of any obligation not set in stone.

Meanwhile, at the BatCave, the Norwegians are showing how it should be done...

Norway sends financial expert to Iceland

...Kaupthing are holding a global fire sale of assets...

Kaupthing Property Sale

....while it appears that Germany's banks are on the hook....

Icelandic Banks owed $45.9 billion to foreign lenders

....to the tune of $21 billion, or almost half of the Icelandic debt....another case of German banks' search for returns following recent withdrawal of German state guarantees, perhaps?

The Iceland Central Bank governor, for his part,is saying that he warned the banks of the risk

Bank chief says he warned of risk

and more to the point...

Mr Oddsson also blamed international central bankers, saying he had requested help in the summer to boost Iceland's foreign exchange reserves from the Federal Reserve, the European Central Bank and the Bank of England but was rebuffed.

Mr Oddsson believes their refusal contributed to the collapse.

"If we had had more capacity then we would have been in a better position to pressure the banks to downsize. We would have had both carrots and sticks, but in reality we had neither." He gave only lukewarm support to the IMF-led rescue package, saying he hoped it would not be a "humiliation".

But this does not excuse the Icelandic Central Bank and indeed the Icelandic government to whom it is responsible, from allowing the banks under its control to build such an extraordinary international pillar of credit in the first place.

Iceland was an accident waiting to happen, and I have been saying so for years.

Finally, what happens next?

Iceland collateralises loans

The domestic situation is addressed as follows

Following the insolvency of Iceland's three commercial banks, new banks have been established to handle domestic commercial banking activities, and domestic deposit activity was transferred to these new banks.

Consideration was also given to transferring the liabilities for securities pledged to the central bank to the new banks, so as to provide support for continued domestic banking activities

This still leaves open the question of Iceland's relationship with the rest of the world.

Only the maverick Mahathir of Malaysia has had the guts to stand up to the global markets by instituting capital controls.

Since that is ideologically unacceptable to the IMF etc, we'll have to see what transpires instead...

.....my googling partner-in-crime....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Oct 24th, 2008 at 04:47:53 AM EST
Icelanders are not terrorists...

...but they are pretty web-savvy and creative......

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 24th, 2008 at 06:04:39 AM EST
Savvy enough to provide working links? ;-)

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 24th, 2008 at 11:26:37 AM EST
[ Parent ]
by Solveig (link2ageataol.com) on Fri Oct 24th, 2008 at 12:05:44 PM EST
[ Parent ]
"Only the maverick Mahathir of Malaysia" - I thought he had retired?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 24th, 2008 at 06:50:25 AM EST
He has. But he hadn't when he put two fingers up to the financial system, implemented capital controls etc and Malaysia came through unscathed....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Oct 24th, 2008 at 11:01:55 AM EST
[ Parent ]
Here's a recent, relevant story about this from the Washington Post, Malaysia's Self-Prescribed Rescue Debated.

Instead of taking tens of billions of dollars in aid from the IMF, Malaysia did what was viewed then as a radical move: it self-prescribed its recovery. It stopped outflows of capital for one year, stabilized its volatile currency rate by fixing it to the U.S. dollar and refused to rein in spending.

"We were criticized by everybody but we believed strongly we only had the people of Malaysia to answer to," said former Finance Minister Daim Zainuddin yesterday in a phone interview from Kuala Lumpur. "We had seen what had happened with African nations that had taken aid from the IMF; they never are freed."

by Magnifico on Fri Oct 24th, 2008 at 11:07:55 AM EST
[ Parent ]
state, then what does that make the United States of America?

If Iceland, alone, created the housing bubble, the mortgage backed derivatives, the whole solvency problem itself, then what would have been the collateral damage have been? Likely, the collapse would be much more limited to Iceland. They owe, what, $45 billion?

Rather, Iceland bought in to the get rich scheme the American banks had created. Didn't the U.S.A. just pass a $700 billion bailout that was on top of earlier bailouts? The U.S. bailouts have surpassed $1 trillion and will continue.

I think Brown's terrorist accusations are being directed at the wrong country.

Second, is it the state or the few individuals who had the responsibility to provide oversight and regulations and failed to do so due to ideology, incompetence, or negligence?

by Magnifico on Fri Oct 24th, 2008 at 11:05:40 AM EST
what does that make the United States of America?

An Economic Suicide bomber

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 24th, 2008 at 11:15:54 AM EST
[ Parent ]
Total value of notional derivative contracts increased slightly from 31 March - 30 June 2000. That is among the Top 25 commercial banks (dominated by US-UK firms) from $179T to $181T, while swaps declined.

30 June annotated table courtesy of Jesse

31 March annotated by myself in re: WB-WFC merger; source document here

Note the shift by bank name and value in activity between quarters.

My unofficial theory of low-hanging, over-ripe fruit suggests that HSBC (rivaling HBOS-Lloyds semi-part-nationized merger) is about to make the government of Iceland and offer it can't refuse.

Diversity is the key to economic and political evolution.

by Cat on Fri Oct 24th, 2008 at 11:51:15 AM EST
[ Parent ]
So we'll be seeing people who are citizens of HSBC turning up at airports? extradition to the arctic circle for people with problem overdrafts?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 24th, 2008 at 11:54:30 AM EST
[ Parent ]
Are there citizens of HSBC? In the US, HSBC and BOS were deeply invested in expanding sub-prime mortgage origination here. HSBC in secondary and BOS in primary markets.

My interest (above) was in UK citizens who are customers of Iceland's part-nationalized banks. They have rights to their frozen assets. But of course you know that Mr Darling will do his best to protect their property. If that assurance requires the Exchequer to purchase a controlling interest in any or all of those troubled banks, well, then, bully for Britain.

Diversity is the key to economic and political evolution.

by Cat on Fri Oct 24th, 2008 at 12:52:17 PM EST
[ Parent ]
An Economic Suicide bomber
The US is more like a Suicide Bomber who is Admiral of a fleet of a bulk freighters full of ammonium nitrate fertilizer simultaneously sailing into the major harbors of North America, Europe and Asia.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 24th, 2008 at 10:34:46 PM EST
[ Parent ]
... when the US does it. "There is no alternative".

Or perhaps, in light of Bubbles Greenspan's admission this week, "Operation to Obliterate Prudence and Security".

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 24th, 2008 at 10:25:07 PM EST
[ Parent ]
Yes, the U.S. is too big to fail!
by Quentin on Sun Oct 26th, 2008 at 07:01:43 AM EST
[ Parent ]

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sun Oct 26th, 2008 at 07:57:47 AM EST
[ Parent ]
The real take-away here is that it demonstrates in graphic fashion what kind of weapon we've handed our governments with these absurd "anti-terrorism" laws we allowed them to pass.  I can't wait for Iceland to haul the UK before international tribunals for this significant violation of international law.  Russia and Germany both have substantial funds riding on a solution to the Icelandic problem.  If the UK is in the way, just how does Brown think that will play out?
by rifek on Fri Oct 24th, 2008 at 12:54:19 PM EST

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