Iceland and the financial crisis

The population of Iceland has refused – for the second time – to pay the minimum guaranteed deposits of UK and Dutch depositors in its failed Icesave high-interest accounts. This would have reimbursed the governments of the UK and Netherlands for unilaterally compensating savers in Icesave, the failed Icelandic bank operating accounts in these two countries. ….

The refusal does not seem to be based on cold and rational economic calculations. After all, the amounts of money are small, even for a country the size of Iceland.

The reasons for the refusal were essentially emotive. The population, by 60% to 40% with a high turnout, rejected the agreement because they refused to have ordinary people meet the obligations created by a failed private bank. ….

Icesave … arose from an Icelandic bank (Landsbanki) taking advantage of weaknesses in European financial regulations to provide high-interest deposits in the UK and Netherlands under the name of Icesave. By the time Landsbanki collapsed in the fall of 2008 it had been one of the riskiest banks in the world for quite some time, resorting to high-interest savings accounts since other avenues for raising funds were closed.

Jon Danielsson and Gylfi Zoega, “The lessons from the Icesave rejection“, VoxEU, 27 April 2011

European financial regulations are ambiguous by design. One lesson of the Icesave rejection, the authors cautiously conclude, is “Europe might be better served if European policymakers were more explicit about how the financial system is supposed to operate”.

Economists Jon Danielsson and Gylfi Zoega teach at LSE and Birkbeck College, respectively.

To view an earlier post on Iceland, click here.


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