April 11th, 2011
12:01 PM GMT
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The Icelandic people are known for their independent nature, isolated at the northern tip of Europe, but their second “no” vote on bailing out investors from Britain and The Netherlands will keep them entangled in European courts for a long while.

There are only 320,000 citizens of Iceland, but they continue to punch well above their weight in their desire to reject a bailout of nearly $6 billion “foreigners” who invested in the on-line division Icesave of Landsbanki.

During the go-go days of the Icelandic real estate boom, the country’s banks were offering well above the going rate for savers, 6% at the time. This lured in not only the so-called average investors of the U.K. and The Netherlands, but local city council investment managers as well.

After the crash, and facing political heat from a Northern European deep freeze in relations, the British and Dutch governments stepped in and bailed out their citizens and went to Iceland to collect their funds. What was an original plan agreed to behind closed doors was put to a referendum twice in Iceland.  Both times the terms were rejected by voters.

Not surprisingly, local politics have a role to play as well. Iceland’s President Olafur Ragnar Grimsson used one tool of his largely ceremonial position to intervene and block the center-left government from paying out these sums – even though repayments terms were stretched out over many years.

While President Grimsson and the nearly two-thirds of people who voted "no" may be pleased, it could eventually scupper or at least complicate plans to join the European Union. Iceland now belongs to a limited membership club, the European Free Trade Association or EFTA. Lichtenstein, Norway and Switzerland are Iceland’s three other partners of EFTA.

One may read between the lines here – they all share a similar trait of being ardently independent minded. Some have benefited from that trait, such as Switzerland, with a flood of funds coming into the banking sector while the EU sinks in a sea of debt. Iceland, after its banking and real estate boom and bust, probably has not.

There remains a deep divide on the path ahead after the "no" vote. British and Dutch officials have pledged legal action. This case will likely be heard in Luxembourg in the EFTA court – a venue most did not think existed.

But this vote reveals something bigger about the shortcomings of Europe – whether it is the EU or EFTA. The banking sector has long been protected by national governments and the single market directive within the EU has left a lot to be desired. As a result, instead of treating investors as Europeans, the laws may have kept national boundaries in tact and the British and Dutch governments in this case out in the cold.

soundoff (7 Responses)
  1. Leifur

    He is partly right, at least about not willing to be pushed around, or controlled fram afar through the EU also. But he is wrong, the EFTA court has no jurisdiction and the british have no legal basis, we did did maintain a deposit-insurance system, The Depositors’ Guarantee Fund was founded according to the letter and spirit of European Union directive 94/19/EC, which specifically prohibits sovereign guarantee of the fund. That fund was depleted when Iceland suffered the collapse of every major bank, a systemic collapse, within a few days, partly because of the anti-terrorist laws enacted against all Icelandic companies. It is also important to note that the directive was never intended to cover systemic failure.

    April 11, 2011 at 5:35 pm |
  2. PJL

    Hooray for Iceland! We should stop "privatizing profits while socializing risk".

    April 11, 2011 at 5:44 pm |
  3. Jóhann Haukur Gunnarsson

    It is important to add to this discussion the fact that the UK and the Netherlands will get more or less the principal of their claims without dispute from the bankrupt estate of Landsbankinn which is in the process of being liquidated. Due to the emergency laws set in Iceland on the eve of the banking collapse, depositors have priority claims to the estate over anyone else.
    The Icesave referendum was about a much more technical issue, the issue of paying the UK and the Netherlands back the principal PLUS interests above and beoynd the EU's directive of minimum depositors guarantee.

    Bottom line, Iceland did not vote not to pay anything back.

    April 12, 2011 at 12:39 am |
  4. Xplod

    PJL, Excellent synopsis on bank/government collaboration

    April 14, 2011 at 2:12 pm |
  5. Gus

    Did Icesave of Landsbanki give their investors/depositors some kind of return guarantee, some version of our $100,000 guarantee? If not, then why did the governments of the UK and the Netherlands feel obligated to cover their citizen's losses? There seems to be a mindset these days in several areas that one should never have to lose money on an investment but, of course, any gains are all theirs - underwater mortgages, for instance.

    April 14, 2011 at 7:37 pm |
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