Martin Wolf on Iceland

Martin Wolf has an article on Iceland in today’s FT. The concluding paragraph is worth quoting in full:

they – and everybody else – must learn the really big lesson here. The combination of cross-border banking with generous guarantees to creditors is unsustainable. Taxpayers cannot be expected to write open-ended insurance on the foreign activities of their banks. It is bad enough to have to do so at home.

19 replies on “Martin Wolf on Iceland”

It certainly does not make sense that EU/EEA law
– allowed Icelandic (and other) banks to accept deposits from abroad and
– required them to set up a deposit insurance scheme governed by national icelandic law
where such deposit insurance scheme could not be adequately funded out of bank contributions
and where Iceland, as a nation, is to be held liable (by the UK interpretation of EU/EEA laws) in a situation where a bank has not complied with its obligations to notify the deposit insurance scheme of all deposit accounts.

@zhou_enlai – “in a situation where a bank has not complied with its obligations to notify the deposit insurance scheme of all deposit accounts.”.

Is that not a criminal act under European/UK law? I’m not a lawyer but I think it is? In which case, it becomes a police action?

I’m not an expert/lawyer but I used to work in banking in Europe and one of the programmes I managed was nicknamed “Keep the directors out of jail”…. which was very difficult sometimes because they always had their annual bonus at the forefront of their minds, rather than whether their actions were in line with the compliance of the day. I recall some American bankers I met over in Paris had a lovely phrase for it – “Keep your eye on the donut, not on the hole”. A charming bunch of men.

I should also point out that it may be arguable that the Icelandic state should not have a legal liability in this instance.

I suggest that the subjugation of legal rights to the market (in relation to Iceland having to bail out the UK and the Netherlands and in relation to Ireland making bank bondholders whole) is a key factor in propogating domestic and international political discord and instability. It is, in some ways, similar to the way that international public opinion has turned against the USA and its cronies for their contempt for international law and the UN as highlighted by Chomsky and others.

One can argue that the law is not being subjugated but I think that this ignores the key fact that the rules (i.e. creditors lose in a bankruptcy) by which ordinary citizens understood businesses operated have proved to be false, to be incompletely implemented (e.g. by not allowing bank resolution) so as to create an implicit guarantee which the ordinary citizen were not advise of and which they must pay for. The fact that citizens can see their own governments being bullied by creditors does not help.

One might suggest that ordinary citizens are entitled to suspect that state of affairs which creates implicit guarantees and systemic risk is no accident and that the economic system is a fraud perpetrated against them which they are entitled to repudiate. It does not matter whether one is correct or not. Being able to suggest it is enough to cause serious international and domestic political instability.

In these circumstances, surely it is up to the EU, which is dedicated to peace and prosperity in Europe and which has the market strength to back up its decisions, to step in to prevent these perceived injustices against common citizens in Iceland, Ireland and elsewhere.


A link to the UK legal opinion was published on another Iceland thread. Cvil and criminal remedies are not mutually exclusive. The fact of an offence having been perpetrated usually suggests that the perpetrator should be liable at civil law as well. Some Icelandic bank officers have already been convicted as far as I am aware. I have not heard of any civil cases against them by aggrieved borrowers, creditors, shareholders though. Presumably they enjoyed indemnities from their employer save in the case of fraud.

“a bank has not complied with its obligations to notify the deposit insurance scheme of all deposit accounts.”

I wasn’t aware of that aspect of the case and it makes me somewhat more sympathetic to the Icelandic case. However, leaving aside the criminal culpability or otherwise of such a bank, who is more blameworthy – the depositors or the Icelandic government. I would say the latter – there was surely a greater obligation on the Icelandic government to monitor its deposit insurance scheme than there was on British and Dutch depositors to do the same.

Because the British and Dutch governments decided to expedite matters by themselves protecting the depositors doesn’t, as far as I can see, change the fact that this is really (in principle) a dispute between the rights of depositors and a government which claimed to guarantee their deposits.

There is no two ways about it – there is no moral case for the Icelandic government bailing out UK and Dutch depositors. Unfortunately (or perhaps fortunately), international politics has no time for things like morality, and Iceland will have to strike some sort of a punitive deal to maintain its failing credibility.

Was this interstate Banking not just a case of the the bigger countries Banks using the Banks in the smaller countries as an extension of their own investment arm and basically involving themselves in the type of risky lending practice they would never have got away with within their own borders.

Personally, I’d say the critical question is who was supposed to regulate the bank? If the answer is the Icelandic Regulator then – if the Regulator failed to do its job – the Icelandic government should be on the hook for ths mess. If you have a situation where a Regulator, its Government and its taxpayers have no responsibilty for failing to regulate their banks and bear responsibility for the resulting debts, then you cross-border banking just can’t work.

@ Zhou

I’m not sure if “the subjugation of legal rights to the market” is really at stake, nor is the principle of governments being bullied by creditors. The creditors here are depositors. Creditors are supposed to get burnt in a bankruptcy, but for sound historical reasons this is not usually applied to ordinary depositors (even if they’ve been getting high interest rates).

What’s at stake is whether the UK/Dutch taxpayer or the Icelandic taxpayer should pick up the tab. It is true that Iceland is a smaller country than the other two and we all like an underdog. But Iceland was supposed to be insuring these deposits.

Here’s a link to a defence of the British/UK side:

@James Conran

It is Ireland who is being forced to rescue creditors when they should lose their money. Iceland is being forced to rescue depositors by countries who wield influence in the IMF.

The reality of the situation is that the UK and Netherlands are imposing their terms on Iceland through economic duress, by witholding IMF assistance, rather than through the courts. The citizens of Icland perceive it that way – hence the petition to the President.

Here is a link to the UK submissions previously posted by Maz on another discussion.
The arguments made to make the Icelandic State liable for the deposit insurance scheme are tortuaous. However, as I have mentioned, the legalities are somewhat beside the point when the reality is that financial muscle is the final arbiter.

The initial post suggests that we cannot have trans-frontier deposits while implicit national guarantees remain. Old fashioned principle of risk allocation come into play.

The country where the depositor is resident should have the capacity to bear the risk because its GDP should be linked to its citizen’s wealth. Furthermore, it is the country with the greatest motivation to make sure the deposits of its citizens are protected and that its citizens are made whole.

However, the bank regulator in the nation where the bank resides is best placed to mitigate the risk through regulation of its banks. That leaves aside the question fo who is best placed to implement a proper regulatory structure.

The most logical solution is to implement regulation on an EU/EEA wid basis. I wonder which country in the EU would be the first to object to that…

Another element of a solution might be to make any protection, beyond the wherewithal of deposit insurance (i.e. the bit which must be subsidised by the State), to be on a per depositor rather than a per bank basis.

Does anyone know if any major UK or Dutch institution (bank, insurance company, government arm, quango, etc.) or senior politician/business person (i.e. someone with an undue amount of influence) ‘lost’ money on deposit with Icelandic banks? Is there a list anywhere I can look at? I’m aware that some local authorities in the UK did.


Financial muscle certainly is the main driver in all this, but the UK and Netherlands aren’t the only European countries implicated. Iceland’s IMF financing was held up because agreement between Iceland and those two countries on the Icesave issue was a precondition established by Nordic countries for providing their share of the overall financing package – and under IMF rules the IMF component of such packages can only go ahead when all the agreed contributions are confirmed. It would be interesting to know whether there was prior consultation between the Nordics and UK/Netherlands on this precondition.

It is certainly arguable whether the Icelandic people can legally be forced to pay the debt incurred as a result of the collapse of Landsbanki/Icesave. There is is certainly no moral obligation – but morality and laws are diferent animals. But the morality issue is also interesting to consider in the case of sovereign debt. It is widely known that much of the debt owed by third world countries, and indeed first world countries was incurred through immoral borrowing practices – arms suppliers lending to countries so that they can purchase their munitions and so on – often including the bribing of politicians

There is surely a case for some kind of international arbitration in deciding whether the repudiation of sovereign debt could be allowable in some cases, in particular where political corruption was proven.

Update on the FT article above. Despite other articles being accessible, I have been unable to access the one on the future of the UK:

“Our server was unable to complete your request due to high volume. Please try again by clicking your browser’s reload button. If you receive this message again, wait a few minutes before attempting to access the page again.

We apologise for any inconvenience.

* Visit our site map for more information on
* Go to homepage”

This is the third time in over 16 hours, that I have been unable to access it. Maybe google and others have it in cache form? Why would the UK be so sensitive about an idle speculation, unless it is not? No proof of anything, but intriguing nonetheless?

contains the FT article I refer to above:

I have just checked again and it is still unable to be downloaded! What is in that article? Here is an extract from nakedcapitalism:-

“Which country experienced the biggest jump in debt, relative to gross domestic product, over the past decade?…if McKinsey consultants are to be believed, the real leverage giant – at least among the big western economies – is actually the UK. After crunching the data, McKinsey estimates that the gross level of British private and public debt is now 449 per cent of GDP – up from 350 per cent at the start of the decade.

And even excluding the liabilities of foreign banks based in the UK, the ratio still runs at 380 per cent – higher than any country except Japan (closely followed by Spain where debt has also spiralled dramatically, according to a McKinsey report issued today.*)

That is sobering stuff, particularly for UK voters. However, it also raises a much bigger point. In the middle of the last decade, it was often frustratingly difficult to get any data on leverage levels, since it was an issue on which precious few policymakers focused…

Now, of course, the world is radically different. But, as McKinsey points out, there is still surprisingly little known about the actual mechanics of “deleveraging”, compared with, say, all that research that has been conducted on financial crises. And so it has tried to plug this gap by both plotting the recent pattern of global leverage levels – and then setting it in a wider historical context, to show how deleveraging has (or has not) occurred before…

Nevertheless, some of the patterns in the report are fascinating – and valuable –precisely because they have often been ignored. Contrary to popular perception, for example, McKinsey points out that, by historical standards, most of the financial world was not crazily leveraged in the past decade. Instead, the crazy debt increase was focused on a small group of brokers, and global banks.

Moreover, alongside the (limited) rise in broker borrowing in the past decade, there was also a far more startling increase in “real economy” debt, particularly in the household and real estate sector. “

Still unable to access and nakedcapitalism has a glitch. Loading older pages goes to 4th Jan and prior. Unless you know the exact ref of this article it cannot be read on her pages!

Comments are closed.