News & Analysis
Iceland to Europe: Drop Dead
In the national referendum Saturday, Icelanders sent a resounding message to the rest of the world: We are not paying the debts of reckless financiers. While we are few and powerless, we refuse to be bullied by our European neighbors. Some 93% said "No" to a recent deal negotiated by their government with its British and Dutch counterparts; only 7% voted for it. The deal concerned the so-called Icesave accounts that an Icelandic bank, Landsbanki, operated from 2006 in the U.K. and later also in the Netherlands. When the Landsbanki collapsed in October 2008, the British and the Dutch governments rushed in to pay depositors in their respective countries the amount insured under EEA (European Economic Area) regulations. They then demanded reimbursement from the Icelandic government, which reluctantly agreed to pay, against the wish of the great majority of Icelanders. The Icelanders argued that there was no legally binding government guarantee of the deposits. The Icelandic government had fully complied with EEA regulations and set up a Depositors' and Investors' Guarantee Fund. If the resources of that fund were not sufficient to meet its obligations (which was almost certainly the case), then the Icelandic government was not legally bound to step in with additional resources. Thus the British and the Dutch governments had no authority to create new obligations on the part of the Icelandic government by paying their nations' depositors. This legal position is indeed also that of the Norwegians, who are, with Iceland and Liechtenstein, the only non-EU members of the EEA. Arne Hyttnes, chairman of the Norwegian Depositors' and Investors' Guarantee Fund, is adamant that there is neither by law nor international agreements a government guarantee of deposits in Norwegian banks; there is only the guarantee of the fund itself. Moreover, Jean-Claude Trichet (pictured left), president of the European Central Bank, and Wouter Bos, the Dutch minister of finance, have both publicly admitted that European regulations on depositors' guarantees were not designed for the collapse of a whole banking sector – such as occurred in Iceland in 2008. – Wall Street Journal
Dominant Social Theme: A few more votes will be needed before Iceland falls in line.
Free-Market Analysis: Let's try to boil down the Iceland saga. Iceland was a fairly socialist entity until the 1990s when its government went on a privatizing spree and sold off almost everything under the theory that Iceland would be more prosperous if the government ceased to interfere with every Icelandic entrepreneurial decision. This was perhaps a very good idea. But in practice what happened was that Iceland's three big banks were privatized as well and this has proven more questionable, mostly because of the timing and because of the global financial system itself.
Privatizing Iceland's banks was a bad idea, then, if it was, because the fiat money system that the West operates under is an unforgiving and unfair model. If Iceland's banks had been privatized in the 1980s or even the early 1990s, Iceland would have enjoyed more prosperity and its financial entrepreneurs would have attracted the legendary status of, say, Dubai's most brilliant economic minds. But Iceland's big three banks were unfettered in the late 1990s and really only got on their feet in the early 2000s. And then, like Icarus, they brushed the sun.
What happened to Iceland? Well, first the country's central bank kept interest rates high to attract money from overseas. Second, Iceland refused to join the European Union, which likely gave both business and the banks some significant flexibility when it came to pursuing economic opportunities at home and abroad. Finally, Icelanders with their creativity unleashed by privatization went on a phenomenal business acquisition and business-building spree. And Icelanders themselves indulged for more than half-a-decade in the finer things that life had to offer, courtesy of all the hot money pouring into Iceland.
It had to end of course. But it WAS NOT, so far as we can tell, Iceland's fault that it did. The financial crisis was a crisis of fiat money and the latest trigger was first pulled in America, perhaps the most profligate, militant and badly run Western power in the world (and that's saying something). Iceland was pulled into the crisis because it had stayed out of the euro, because its banks had been really active in building up business around the world and because its central bank had been efficient about attracting foreign funds.
When the crisis hit and Iceland's big banks began to feel pinched, Iceland's leadership did whatever it could to find the euros it needed because its own currency ceased to be in demand worldwide. The leadership apparently had just about figured out how to save two of the three large banks when Gordon Brown, prime minister of Britain, froze overseas Icelandic assets and basically put Iceland – and its banks – out of business. Not only that but both the British and Dutch governments then reimbursed their own citizens illegally for the "failure" of Icelandic banking enterprises and insisted that Iceland's government pass a law requiring all Icelandic citizens to repay the costs of bailing out British and Dutch citizens.
So let us try to sum up. Iceland privatized its banks, which immediately began to pursue global business and were so good at it that the banks soon became world-spanning entities. Once the global financial crisis hit – a fiat money crisis that ruined companies and damaged governments and banking systems throughout the Western world – the British and Dutch illegally seized Icelandic bank assets overseas, causing a failure of Iceland's banking system. It was then demanded that Iceland's citizens reimburse the British and Dutch governments for the costs of illegally seizing the assets.
Judging from the above summation, accurate to the best of our knowledge, Iceland's citizens are right to vote against the demands made by the British and Dutch. It is a mercantilist system of fiat money and Gordon Brown's illegitimate actions that caused Iceland's collapse. Thus, we wish the citizens of Iceland would go further than voting against taking responsibility for British and Dutch debts. We would love to see Iceland's voters address the core of the problem. What's that? It is not free-banking but an obscenely irresponsible fiat-money system linked to a mercantilist private/public international banking cartel/network that enriches a handful of "controllers" while impoverishing hundreds of millions and even billions.
Of course, we don't know if the voters will get that far. They will probably be bought off. Faced with Icelandic intransience, we have read that the British and Dutch governments are suddenly becoming more reasonable. One gambit already underway is to try to involve Iceland in the EU, which doubtless would result in the entire matter of Iceland's insolvency being efficiently dealt with at the highest levels of European diplomacy and with the most secrecy possible. However, we are not at all sure Iceland is going to join the EU. Nor are we sure the IMF will step in quickly.
So ... we are not sure how this saga will end. Does Iceland repudiate its debts (as Argentina once did)? Does it somehow remove them legally as an encumbrance. An Iceland unencumbered by Dutch and British banking debts might get back on its feet fairly quickly – especially if the government collapses and there are few funds to pay for additional government activism.
Maybe, just maybe, Iceland could collapse all the way back to a private communal status. The government would essentially be bankrupt and those in Iceland would soon discover that they really didn't need the government for much if anything – not second rate schools, not roads that are built but not kept up, not health care that degrades, not misguided energy investments including funds invested in green technologies to keep global warming at bay, certainly not overlarge policing and "security" forces or even a public court system and the resultant gulags it inevitably spawns.
This is no doubt the nightmare at the fringes of possibility that keeps some farsighted EU politicians up at night and the reason something will probably be negotiated sooner or later. The last thing the EU really wants to do is turn Iceland into a private society – unless it is one well-encumbered by debt. But stripped of its current leftist government, stripped of any government at all, Iceland would be free to be the West's first true entrepreneurial state.
Conclusion: If those in Iceland have really learned their lesson, they might consider backing a new currency with gold. They could emerge as an arctic Switzerland! Yes, this is the "real" leverage that those in Iceland have, even if they don't know it. If those in Iceland make the right privatizing noises, watch how fast the "crisis" is resolved. We'd love to see Iceland declare a gold-backed currency and go its merry way. We would eat cod for breakfast, lunch and dinner.
Posted by Angus on 03/10/10 10:34 AM
Defend Brown? For what that perverted man has done to my country, I'd gladly cheer at his hanging!
Was I alone in seeing the bemused then Icelandic Prime Minister on TV thanking the UK for stepping in and covering the EEA portion? Perhaps a Government-created fund should have been equal to the number of insured depositors...?
I have previously stated "rightly or wrongly" over the use of the "Terrorist" legislation. Better legal minds than mine can opine on that point of law. For "political advantage" read "to save his own skin."
As far as that [subscription-only] WSJ piece is concerned; it appears to be about as accurate as the content of some UK tabloids - and they make-up their "news" on the spot!
The Icelandic people have taken an astonishingly honourable position over their deposit liability. In their shoes, I'm not at all sure that I'd want to pay the losses of a Mafia-riddled bank; particularly as their entire population is about the size of an English town and the sum involved can only be described as onerous.
They most certainly did NOT vote against "paying the debts of reckless financiers" - merely rejecting the terms of an, already-superceded, repayment agreement that their President, rightly, had disagreed with and had refused to sign.That's what the referendum was about; the time-scale and interest on a debt that they are not only happy to pay, but actually keen to agree quickly.
To suggest otherwise is nothing but a further insult to some of the world's nicest people - as anyone who has been to Reykjavik can testify.
Reply from The Daily Bell
OK, we certainly agree with you about Brown. Not so sure about Iceland's willingness to pay, but time will tell. Also, we're not sure that tiny nation is as enthusiastic about joining the EU as has been endlessly reported.
We do agree with you that the people in Iceland do seem good-hearted, hard-working folks, so this entire episode is very sad for all concerned.
Posted by Angus on 03/09/10 09:52 PM
The depositor compensation paid was exactly as defined under UK law for all banks registered in the UK - as IceSave and Kaupthing Edge were.That level of guarantee - very broadly totalling 50,000 each - was comprised of two elements.
The first was approximately 20,000 Euro guaranteed by the Icelandic Government's scheme and the remainder of the 50,000 was from the Financial Services Compensation Scheme, which is a contributory depositor-protection fund established collectively by the UK banks.
As the shell-shocked Icelandic Government were not in a position to immediately deliver their portion; the UK funded the whole amount on their behalf. The negotiations now underway are simply to settle the terms of that repayment.
The UK Treasury also decided to fully compensate the few account-holders who had more than the 50,000 guarantee limit. As had previously happened with Northern Rock, this was their own decision to bulwark shaken public confidence and the Icelandic Government have no liability for those sums.
Given the hundreds of billions that were being doled out to the UK banks at the time, this was, comparatively, pocket change.
Reply from The Daily Bell
"The first was approximately 20,000 Euro guaranteed by the Icelandic Government's scheme and the remainder of the 50,000 was from the Financial Services Compensation Scheme, which is a contributory depositor-protection fund established collectively by the UK banks."
Regarding the above ... You seem like a very reasonable sort and well-versed in this issue. However, you also seem to be trying to defend Gordon Brown who may have acted very badly, perhaps trying to turn this sad chapter to his political advantage.
Again, Brown confiscated assets using a dubious "terrorism" legislative clause (which basically broke Iceland's economy) and then decided along with the Dutch to reimburse overseas Icesave depositors at a high rate.
According to the Wall Street Journal:
"The British and the Dutch governments had no authority to create new obligations on the part of the Icelandic government by paying their nations' depositors."
See here ...
Click to view link
Fuller excerpt below ...
In the national referendum Saturday, Icelanders sent a resounding message to the rest of the world: We are not paying the debts of reckless financiers. While we are few and powerless, we refuse to be bullied by our European neighbors. Some 93% said "No" to a recent deal negotiated by their government with its British and Dutch counterparts; only 7% voted for it.
The deal concerned the so-called Icesave accounts that an Icelandic bank, Landsbanki, operated from 2006 in the U.K. and later also in the Netherlands. When the Landsbanki collapsed in October 2008, the British and the Dutch governments rushed in to pay depositors in their respective countries the amount insured under EEA (European Economic Area) regulations. They then demanded reimbursement from the Icelandic government, which reluctantly agreed to pay, against the wish of the great majority of Icelanders.
The Icelanders argued that there was no legally binding government guarantee of the deposits. The Icelandic government had fully complied with EEA regulations and set up a Depositors' and Investors' Guarantee Fund. If the resources of that fund were not sufficient to meet its obligations (which was almost certainly the case), then the Icelandic government was not legally bound to step in with additional resources.
Thus the British and the Dutch governments had no authority to create new obligations on the part of the Icelandic government by paying their nations' depositors.
This legal position is indeed also that of the Norwegians, who are, with Iceland and Liechtenstein, the only non-EU members of the EEA. Arne Hyttnes, chairman of the Norwegian Depositors' and Investors' Guarantee Fund, is adamant that there is neither by law nor international agreements a government guarantee of deposits in Norwegian banks; there is only the guarantee of the fund itself.
Moreover, Jean-Claude Trichet, president of the European Central Bank, and Wouter Bos, the Dutch minister of finance, have both publicly admitted that European regulations on depositors' guarantees were not designed for the collapse of a whole banking sector"such as occurred in Iceland in 2008.
Posted by Angus on 03/09/10 10:36 AM
In response to your posed questions: the Icelandic banks' behaviour may have been effervescently "Viking" - but it was indeed little different from that of many others worldwide; most of whom clearly think that "ethics" is an archaic concept.
Very little is reported - perhaps understandably - about organized criminals' money-flow. Their hundreds of billions annually of illicit profits must have a significant effect on the banking system somewhere, as they can't keep it all under the bed.
As the "Mafias" realized, decades ago, that there were better profits in international finance than in shaking-down corner shopkeepers; their tentacles must stretch by now into almost every country's banks - not just Iceland's.
It now may be impossible to differentiate between the actions of "Godfathers" and "God's Workers."
On the matter of Gordon Brown's seizure of Icelandic, particularly the still-functioning Kaupthing's, assets; I have failed to find any definitive reference to those assets being illegally dispersed. Once seized, their disposition becomes, or should become, a matter for the High Court after due process of law.
Although high-handed actions are almost his trademark, they certainly weren't given to the many UK municipalities who lost millions, some tens of millions, of invested local tax receipts - as did all the private depositors of Icelandic banks in the Isle of Man.
And yes; it will be nothing short of a miracle if the truth ever emerges about what information his decisions back then were based upon. As those of us who are subjects of what has become nothing short of a police-state can readily testify; the only thing that Gordon Brown runs efficiently is the state-security surveillance apparatus.
Reply from The Daily Bell
"Very little is reported - perhaps understandably - about organized criminals' money-flow."
We agree. But in fact, we believe the entire central-banking private/public mercantilist regime is a kind of criminal Ponzi scheme. No one will ever get to the bottom of it. The best that can be hoped for is that it be shut down, worldwide. The Internet is contributing to this possibility.
As to the freezing and dispersal of assets, both the Dutch and the British made unilateral decisions to reimburse shareholders for amounts far higher than what they were likely legally due. That process is in fact underway.
Posted by Dave on 03/08/10 11:19 PM
I just wanted to correct that only 2 voted no. The rest were blanks and invalids. But not 7, this makes a huge difference so it matters.
Posted by Puck Smith on 03/08/10 09:02 PM
I salute courage.
Posted by Angus on 03/08/10 09:00 PM
The story as reported is very heartwarming and in the genre of "David and Goliath" - sadly, the facts may prove to be a little different once the inquiry has reported.
The involvement of Russian Mafia families in the management of those - and other - banks for instance. However; one thing must be deeply regretted. The inept clumsiness of Gordon "Sold the Gold" Brown in allowing the impression to linger that the UK views the good, honest, people of Iceland as "terrorists."
This was not, and is not, the case and could - and should - have been quickly refuted.
In the panic of that morning, at the height of the '08 financial collapse, the Terrorism and Proceeds of Crime Act was used, rightly or wrongly, to freeze the failed banks' assets once it was discovered that the crooks running them were apparently trying to empty all their London assets and disappear.
It's easy to criticize now; but in the febrile atmosphere of those dark days; allowing retail depositors of IceSave to lose their savings [commercial and municipal depositors did] could easily have sparked a worldwide run on the banks that could have brought down their whole fractional-reserve Ponzi scheme.
The one thing that bankers fear most is a chequebook-waving mob outside their doors.The other concern should be precedent.
One can do nothing but admire the oft-stated wish of the Icelandic people to stand behind the losses of their wayward banks - the negotiations are really only about the repayment and interest rates - but if the principle of repudiation is seriously to be suggested, does it also hold true for the people of the UK?
It's probably impossible to discern the total liability of UK-domiciled financial entities; but RBS has around $3 trillion in book liabilities alone. If the principle of sovereign guarantee was ever abrogated, then the total and permanent collapse of the world's financial system would be only hours away.
Reply from The Daily Bell
Thanks for writing such a provocative and interesting feedback.
We must respectfully disagree, however.
We ask the following questions: Were the three Icelandic banks more poorly run than British, Scottish or French banks, etc? Was the Russian mafia therefore involved only in Icelandic banks? Was there no criminality elsewhere - in say Italy, Poland, Spain, Portugal or Greece?
And as far as Prime Minister Brown is concerned, why did he not confine himself to freezing assets? Those assets were apparently summarily denied to Iceland and elsewhere dispersed. One can make the argument that Iceland's banks were peculiarly inept (moreso than Citicorp, RBS, Credit Suisse, etc.?) We don't believe it.
In fact we're not sure anyone will ever get to the bottom of the Iceland banking mess because in our opinion whatever was going on Iceland was taking place elsewhere and likely in a much magnified form. The problem is the central-banking/fiat-money system itself, which regularly encourages ruin and rapine -- not the incompetence or potential criminality of certain of Iceland's bank managers.
How many times are systemic failures going to be blamed on specific individuals and rogue "Enron-like" corporations and banks? We would argue that the Internet is making this particular dominant social theme increasingly hard to pursue.
Posted by Bruce on 03/08/10 06:21 PM
If Iceland repudiates its debt, get ready for vilification of Icelandic leaders in the U.S. press, and a push to invade Iceland to secure US and British interests. Isn't that how it's done?
War, short for warrant. An order to seize property in which you claim title but do not possession. A party who has adverse possession, but does not honor your claim of title and court order to relinquish possession is deemed the enemy.
When it comes to government, its all about title interests in property.
Reply from The Daily Bell
Posted by Art Solvason on 03/08/10 02:42 PM
No Ichabod, the Icelanders do not need to get ideas from the Chinese. It is a well educated society, even though a very small one. Its simply a matter of ANGER. The US citizens should be so vocal in protest (its coming?). This country has always been independent. That is more important to them than being sheeple! If you risk it; you lose it (when wrong decisions are made). But do not pass that onto the people as "too big to fail". Maybe they will embrace a gold standard. Hey, with all that cod they still will have something to eat, at least!
Posted by Jones on 03/08/10 02:01 PM
The new article that I read was prefaced with a statement from an Icelandic official who said that the vote was largely "symbolic" and that the European banks would be repayed. Can you explain what he meant by that?
Reply from The Daily Bell
It means the socialist Icelandic leadership is determined to keep negotiating in order to force through some sort of repayment plan. The alternative is an Icelandic bankruptcy - or repudiation.
But it is certainly not a symbolic vote. See:
Click to view link
Iceland's Finance Minister Steingrimur Sigfusson stressed the importance of quickly securing a new deal, preferably before British and Dutch elections due in May and June.
"If we were not successful in solving this before (those elections), it might take some time to form new governments so that could mean further delays," he told reporters Sunday.
More delays in the drawn-out Icesave debacle could prove fatal to Iceland's leftwing government, which negotiated the agreement considered by many here as little more than a foreign diktat.
"The government stands weak after this result," said Eirikur Bergmann Einarsson, a political science professor at the Bifrost University.
The referendum result sent a clear message that: "Iceland will not be bullied into an unjust agreement."
Posted by Ichabod on 03/08/10 01:09 PM
It seems the Chinese have already fired the first shot. A report surfaced that the Chinese athorities advised their regional banks that they would be allowed to renege on derivative debts if it threatened their currency.
Maybe that's what gave Iceland the idea. I can't imagine any reporter getting the Chinese to admit this publicly but their actions speak loudly. In their dealings with their US counterparts the Chinese are definitely in the drivers seat. Their citizens are now encouraged to buy gold and silver.
Chinese companies may now buy stakes in miners outside of China. If China eventually wants a strong currency, and it does, it will hold the cards close to the vest while remaining inscrutable to the world.
Our financial leaders remain firmly committed to Keynes monetary theory. They continue to shout Hail Keynes despite the obvious worldwide failure of fiat money. For them gold is the barbaric metal. Iceland just could be the one country to tip the scales. Meantime, who knows what gold the US holds and whether it is all genuine. The same with the Brits. I don't hear any in the mainstream media asking the question.
Posted by Mel on 03/08/10 12:24 PM
"No state may use anything but gold or silver coin" in tender or payment of debt. This is the US if this no longer applies in the constitution (non existent no one cares) because it competes with the Private bankers why would a state bank or any payment -gold or silver work - who has gold to make a payment in the store. wont work in US.
Posted by Scottleier on 03/08/10 11:56 AM
The Brownians are a coming.....stay tuned.
Reply from The Daily Bell
We do not - and never have been - antagonistic to Brownian input, though we disagree ultimately with the idea of nationalized money. But we do agree with some of Ms. Brown's analysis. If you know something we don't, let us know!
Posted by Lance E. Schultz on 03/08/10 11:38 AM
"Those in Iceland would soon discover that they really didn't need the government for much if anything."
Eventually, someday all fiat ravaged societies will covertly discover in the quiet that the very state which they created and entrusted with the sole responsibility for safeguarding and protecting their private property has been the same band of ruffians branded exclusive license to plunder the masses and dare exact them due usury on the privilege.
On that day, the whole world will soon discover that they really don't need and they really would never miss much of anything any government band of ruffians offer in exchange for their monopolized plunder. I mean ask yourself...just what is it that you would miss? One day man will awaken to the realization that he has been the principal treasurer of his own destruction and his conscience will be very troubled indeed.
Posted by Gilbert Morales on 03/08/10 11:34 AM
The citizenry of Iceland are heros in my eyes. Why should they pay for others' mistakes? The EU has failed to fulfill its promises to countries such as Iceland.
Posted by Ryan on 03/08/10 11:14 AM
What country in the world doesn't already have a nationalized fiat money? If the question is whether a national fiat currency will be issued by state-owned banks backed openly by the taxpayers, or privately-owned banks backed implicitly by the taxpayers, then it's a question of semantics only.
Reply from The Daily Bell
So who controls the fiat paper is not important? In America it is a handful of individuals operating under the color of the government. To us that is not semantical.
Posted by Adrian W on 03/08/10 09:51 AM
If Iceland decides to offload Fiat Currrency and go with "honest money", I'll be very tempted to buy a one-way ticket outta the United States of Fascism!
Posted by Adam E on 03/08/10 09:46 AM
The move by Iceland's citizenry to not pay off banking debt incurred without its consent is akin to that other "shot heard 'round the world." In the end, the details surrounding the refusal won't matter. The refusal itself is the perfect soundbite for the times we're now entering.
Posted by Khl on 03/08/10 08:43 AM
Your analysis of the Icelandic situation is basically correct. However, the people running the Icelandic banks did not have a clue as how to run a successful investment banking empire. As a result, the American and mostly British investment banks had a field day, off-loading on the poor Icelandics deals that no sane or informed bank would ever acquire or finance.
The Icies paid top dollar for questionable assets and then those deals went south, or maybe north. In any event, Iceland's efforts to become a banking center were a dismal failure. They were used and abused and then discarded like a squeezed grapefruit.
All we need is one country with the cajones to stand up and make gold their currency. This would bring down the fiat madness that is taking our world to the brink.
At one time that country would be Switzerland, but now who could it be? If gold became the official currency of a country, it would immediately force all other currencies to be valued in gold, much the same function the US Dollar played for much of the last century.
But taking on every country in the world is a risky endeavor. Perhaps North Korea could take the first step. Or maybe Haiti. The problem is that there is so little credibility that very few would actually trust a government to have the gold reserves it claimed.
Rather, the cure to this situation is as Mises and Rothbard suggested, let the market decide what will be money. By abolishing legal tender laws, thus the central bank's monopoly on money, the people would decide what would be money. Rep. Ron Paul has introduced such a bill in Congress. However, its chances of passage are probably worse than an Icelandic herring washed up on a hot summer sidewalk in New York City.
Posted by BILL WOLF on 03/08/10 08:14 AM
"Follow the yellow brick road" the gold standard and a private Icelandic government, might well scare the rest of the world powers to clean up theirs, and the USA governments, that has been running amuck for years.
Spending, and taxing willy nilly, as if the people don't matter. This is why Clinton jr. is out signing agreements banning hand guns, they are afraid that the people around the world are going to step up and demand better from them NOW!
Posted by Eric Parks on 03/08/10 08:06 AM
"The gold and silver is currently hoarded by the money power, it needs to be seized and taken by force from them."Couldn't this be achieved simply by asking for gold and silver as payment for goods and services rendered?