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STOP PRESS - Did Mr. Darling play it straight? The IceSave-Battle Timeline

24 Oct 2008

FIRST TO APPEAR ON THIS WEBSITE - A longer UPDATED VERSION of Gudni Elísson article  “Iceland – The Darling Tapes”, posted on Financial Times blog this morning, including a complete list of references.  Gudni Elísson, is a well-respected Icelandic public intellectual and columnist for Morgunbladid, an Icelandic newspaper.

Gudni Elísson’s original article posted on the Financial Times blog is found at:
http://ftalphaville.ft.com/blog/2008/10/24/17401/iceland-the-darling-tapes/

 

 

Did Mr. Darling play it straight?

The IceSave–Battle Timeline

 

By Guðni Elísson

 

On October 8 Mr. Alistair Darling, the UK Chancellor, declared that the Icelandic government had no intention of honouring its obligations in Britain regarding the Icesave deposit insurance scheme. The British government responded by invoking anti-terrorism powers to freeze Icelandic assets. The same day the British Supervisory Authority seized Kaupthing Edge from the bank’s UK subsidiary, Kaupthing Singer & Friedlander, which Kaupthing’s creditors considered tantamount to defaulting, thus bringing about a collapse of the bank in Iceland. In the following days the British Prime Minister, Mr. Gordon Brown, declared that the Icelandic banking crisis was “totally unacceptable” and that he expected the Icelandic government to honour its international obligations. According to Mr. Brown the Icelandic government effectively took “illegal action“ and he promised that the British government would “take further action against the Icelandic authorities wherever that is necessary to recover money.”

            These accusations against the Icelandic government came as a surprise to most Icelanders whose understanding had always been that their government would honour its agreements in Britain. Where they wrong in assuming so? Did Mr. Brown and Mr. Darling have grounds for assuming that the Icelandic government would not honour its agreements? The following timeline brings out the facts.

 

Saturday, October 4

Tryggvi Herbertsson, economic adviser to the Icelandic prime minister, tells BBC Radio 4's programme, Money Box, that the Icelandic government will honour its part of the compensation limit (£50,000) if Landsbanki (which trades as Icesave in the UK) runs into difficulties. As is pointed out in the programme the first 20,000 euros come “from the Icelandic compensation scheme, with the balance coming from the scheme in the UK.“ Herbertsson emphasizes the Icelandic government’s obligations: “We are part of the European directive on deposit insurance and we are bound by international law.”[i]

 

Sunday, October 5

The “Act providing for special powers in exceptional financial Market circumstances“ is passed in the Alþingi, the Icelandic Parliament. One of the primary amendments to the Act on Depositors' and Investors' Guarantee Fund is to the effect that deposits will „be given priority in the event of insolvency proceedings.“[ii]

 

Monday, October 6

The Icelandic Prime Minister’s Office announces the “Deposit Guarantee“ early in the morning before the banks open. It states: „The Government of Iceland underlines 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.“[iii]

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. Foreign deposits with subsidiaries of Icelandic banks are guaranteed by the guarantee funds in the countries concerned.“[iv]

The “Deposit Guarantee“ announcement is also sent to Britain, concerning deposits at Landsbanki and Kaupþing Edge (the latter being protected through the UK scheme).[v]

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 Arni Mathiesen, the finance minister in Iceland. This conversation has been the focus of much debate, for it is after this talk that Darling declares 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.[vi] According to a transcript of that conversation, Darling asks Mathiesen what the Icelandic government intends to do about the depositors who have deposits in the 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. [Mathiesen is referring to the letter sent to the British Government the day before.]

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.

 

 

Wednesday, October 8

Referring to his telephone conversation with Arni Mathiesen from the day before, the UK Chancellor, 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 […] Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it. […] The British scheme would top that up to £50,000, but people over and above that would lose out […] But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back.”[vii]

 

Geir Haarde, the Icelandic Prime Minister, responds to Darling’s accusations by refusing to use the press as an “intermediary in the discussions between the two countries”. At the same time he releases the following statement:

 

“The Icelandic government appreciates that the British authorities are willing to step in and respond to the immediate concerns of depositors of Landsbankinn Icesave accounts. 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. The government of Iceland is determined not to let the current financial crisis overshadow the long standing friendship between Iceland and the United Kingdom.”[viii]

 

That same afternoon Gordon Brown tells the members of the press at a conference in Downing Street 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“. Mr. Brown adds: “We are showing by our actions that we stand by people who save in Britain.”[ix]

 

That same day the British Government uses anti-terrorism powers to freeze Icelandic assets in Britain. As a result part of Kaupthing’s UK operations, Singer & Friedlander, is put into administration by the Financial Services Authority in the UK, leading to the fall of the parent bank in Iceland that same night. Kaupthing had only two days earlier been offered a €500 million (£390.7 million) loan by the Icelandic government, led by Prime Minister Geir Haarde.

 

Thursday, October 9

In an interview with BBC political editor Nick Robinson, Mr. Brown says: “What happened in Iceland is completely unacceptable. I've been in touch with the Icelandic prime minister. I said this is effectively illegal action that they have taken. We are freezing the assets of Icelandic companies in the United Kingdom where we can. We will take further action against the Icelandic authorities wherever that is necessary to recover the money. […] But this is fundamentally a problem of an Icelandic-registered company, Icelandic-registered financial services authority – they have failed not only the people of Iceland, they have failed people in Britain.”[x]

 

Later the British Prime Minister stresses a similar point when interviewed on Sky News:

 

“The issue is basically this. The Icelandic banks have collapsed, the Icelandic authorities have to take some responsibility for it. They cannot just default and say that they’re going to take on none of the responsibility for what has happened. And we have therefore taken action to seize the assets of the Icelandic banks. We are determined to do what we can to help the local authorities, but also individual depositors who have been carrying accounts with these Icelandic banks. But the responsibility for this lies fairly and squarely with the Icelandic authorities, and they have a duty in my view to meet the obligations that they owe to citizens who have invested from Britain in Icelandic banks.“ The reporter on Sky News then asks Mr. Brown whether a country has ever before claimed to be bankrupt, “as the Icelandic government is doing at the moment“? Brown accepts the premise of the question (which is untrue) but stresses that the “responsibility does lie with the Icelandic authorities“.[xi]

 

Icelandic Prime Minister, Geir Haarde, is asked the same day if he feels there is a crisis in relations between Britain and Iceland. He says: “I thought so for a few minutes this morning when I realized that a terrorist law was being applied against us. That was not very pleasant. I'm afraid that not many governments would have taken that very kindly, to be put in that category and I told the chancellor that we were not pleased with that.”[xii]

 

Friday, October 10

Geir Haarde holds his fourth press briefing in one week about the current financial crisis in Iceland. He says: “Let me say very clearly that the country as such is not in default, is not abrogating its obligations. There may be individual private companies that may not be able to meet their obligations but the government and the treasury will of course do so like always before. Iceland has never defaulted on a loan. The Sovereign Republic of Iceland has never defaulted on a loan and will never do.”[xiii]

 

Saturday, October 11

A joint declaration is made by the Icelandic and British delegation after less than two days talk:

 

“Delegations of Iceland and the United Kingdom have met in a friendly atmosphere in Reykjavík to discuss issues of mutual interest related to the current financial crisis, with the objective to reach a mutually satisfactory solution on the issues concerned. Significant progress was made on retail depositors of Icesave with arrangements agreed in principle for an accelerated payout to depositors. The delegations agreed to work closely on the other remaining issues over the coming days.“[xiv]

 

The friendly atmosphere came as no surprise to the Icelandic public.

 

“Believe it or not“

The catalyst in the IceSave conflict is without any doubt the conversation between Darling and Mathiesen on October 7. The morning after his talk with Arni Mathiesen Mr. Darling announced: “The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here“. Mr. Darling wanted us to settle for belief when we should have been given the facts. Only last August Mr. Darling insisted that it was his duty to be “straight” with people.[xv] Now Mr. Darling should play it straight and admit that Mathiesen at no point in his conversation stated that the Icelandic government had no intention of honouring its obligations.

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