ICELAND’S government will not have to pay back the UK for bailing out depositors who lost money in the country’s banks in 2008, a top court ruled yesterday.
The move leaves the UK £2bn out of pocket, and the Treasury is likely to have to wait for years to get the money back as the failed banks’ estates are unwound.
Iceland can escape paying back the money because the European Free Trade Association (EFTA) court ruled that the financial crisis was so severe the country could disregard previous deposit guarantee plans.
The guarantees had been drawn up in case a single bank failed, rather than the whole industry, the court said, noting the very severe systemic nature of the crisis which hit the nation’s banks.
But MPs reacted with shock, warning that the ruling casts doubt on the reliability of the guarantee system as a whole, undermining confidence in the protection states give savers.
“While I am sure there will be rejoicing in the streets of Reykjavik, many in the City will be surprised and disappointed by this ruling,” said Mark Field, Conservative MP for the Cities of London and Westminster.
“This is a worrying precedent which throws into the air a lot of question marks around the future of government guarantees, with the notion of what an exceptional crisis is.”
And Labour’s John Mann MP, a member of the influential Treasury Select Committee, warned governments to reconsider the whole idea of guaranteeing deposits in all instances.
“This ruling has huge ramifications – this blasé attempt by all governments to guarantee all deposits is now in some jeopardy,” he told City A.M.
He argued consumers should bear more of the risk if they want to seek very high returns on savings, rather than leaving the government to pick up the whole tab if their bank fails.
Icelandic institution Landsbanki went under in 2008, including its online arm Icesave, which had 300,000 UK customers. The British government decided to bail out depositors entirely, rather than just up to the then limit of £50,000 through the Financial Services Compensation Scheme (FSCS).
The UK loaned Iceland’s Depositor and Investor Guarantee Fund £2.25bn and the FSCS £1.4bn, and another £780m to cover the amount over the usual limit. Half of that has been paid back in the years since as the bank’s remains are picked apart.
“We note the judgment of the EFTA Court and will study it in detail,” said a Treasury spokesperson.
Iceland’s government said: “It is a considerable satisfaction that Iceland’s defence has won the day; the EFTA Court ruling brings to a close an important stage in a long saga.”