Iceland Wins Major Case Over Failed Bank

 
Icesave, an online subsidiary of the Icelandic bank Landsbanki, attracted British and Dutch depositors before it failed in 2008.
Olivier Morin/Agence France-Presse — Getty ImagesIcesave, an online subsidiary of the Icelandic bank Landsbanki, attracted British and Dutch depositors before it failed in 2008.

BRUSSELS — Iceland won a landmark case at a European court, ending an acrimonious legacy from the collapse of its banking system more than four years ago.

On Monday, the court upheld the country’s refusal to promptly cover the losses of British and Dutch depositors who put more than $10 billion in Icesave, the bankrupt online offshoot of a failed Icelandic bank.

In a judgment issued in Luxembourg, the court of the European Free Trade Association, orE.F.T.A., cleared Iceland of complaints that it violated rules governing the protection of depositors drawn up by the European Union. While Iceland is not a member of the union, it is bound by most of its rules as a member of E.F.T.A.

The case has attracted widespread attention because it touches on issues of cross-border banking that have been at the center of the European Union’s efforts to ensure the future stability of the region’s financial system. The Iceland banking collapse in 2008 — and the mayhem it caused far beyond the country’s borders — raised issues directly relevant to the 27-nation European Union.

Monday’s court ruling in Luxembourg is a significant victory for Iceland. Unlike Ireland, Iceland declined to use taxpayer money to bail out foreign bondholders and depositors. This set off a bitter dispute with Britain, which used antiterrorism rules to take control of assets held in Britain by Icesave’s parent, Landsbanki.

In an interview this month with British television, Iceland’s president, Olafur Ragnar Grimsson, denounced the British government’s approach of using antiterrorist rules to seize Icelandic assets. “We were there together with Al Qaeda and the Taliban on that list,” he said. “We have not forgotten that in Iceland.”

After the 2008 crash, the Icelandic government tried twice to settle the Icesave debts. But the country’s voters, asked to approve settlement plans in two separate referendums, rejected the proposals. Foreign holders of bonds issued by Landsbanki and two other failed Icelandic banks lost some $85 billion.

Those losses were not at issue in the Luxembourg case, which involved only customers with bank deposits.

The Icelandic government, in a statement by its foreign ministry after Monday’s verdict, said that Landsbanki had already paid out some $4.5 billion to Icesave depositors, covering nearly half of all initial claims by individuals, charities and others in Britain and the Netherlands. The ministry said the bank would eventually reimburse the rest.

“It is a considerable satisfaction that Iceland’s defense has won the day in the Icesave case,” the Icelandic government said in its statement. The Luxembourg ruling, it added, “brings to a close an important stage in a long saga.”

“Icesave is now no longer a stumbling block to Iceland economic recovery,” it said.

Iceland’s economy, which went into a nose dive after the banking crash, is now growing again. The credit ratings agency Fitch last year raised its rating of the country’s debt, noting that its “unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness.”

But the Icesave episode has clouded the recovery.

Icesave collapsed in October 2008 along with Landsbanki and the rest of Iceland’s banking sector in a spectacular blowout by the North Atlantic island nation’s entire financial system.

Caught in the wreckage were some 350,000 people in Britain and the Netherlands who, lured by unusually high interest rates, had put their money in Icesave accounts.

The Icelandic government protected the deposits of Icelanders who had money in failed banks by moving the deposits into new, solvent versions of the banks. But the government declined to cover the losses of foreigners with online accounts operated by Icesave, a move that prompted complaints of illegal discrimination to the court in Luxembourg.

The case against Iceland was bought by the Surveillance Authority of the European Free Trade Association and revolved around interpretation of a European Union directive requiring that deposits in European banks be covered equally by deposit guarantee systems. Britain and the Netherlands supported the case.

But the court, according to a statement summarizing the verdict, ruled that the directive on guaranteeing bank deposits did not oblige Icelandic authorities to ensure immediate payment to depositors in Britain and the Netherlands “in a systemic crisis of the magnitude experienced in Iceland.”

Iceland argued that all Icesave depositors would eventually get their money back but that the government, confronted in 2008 with a total breakdown of the financial system, did not have the means to offer immediate payment of all claims.

The court also cleared Iceland of complaints that it violated nondiscrimination rules when it protected domestic depositors but not foreign depositors in Icesave.

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