Tea Party-inclined U.S. commentators have applauded Icelanders for their referendum decision this week to reject the latest plan to repay the UK and Netherlands some 4 billion euros that were lost by British and Dutch customers of Iceland’s banks when the country’s banking system collapsed in 2008.
Iceland’s Parliament backed the deal, but the country’s populist President, Olafur Ragnar Grimsson, refused to sign off on it – hence the referendum.
As far as some conservative commentators here see it, this all comes down to a rejection of the plutocrats and fat-cat bankers. Hurrah for the people!
But this isn’t about a bailout of Iceland’s bankers. It is about the rule of law, contractual obligations and treaty agreements voluntarily entered into by Iceland.
Sure the British Labour government back in 2008 behaved badly and foolishly. Then UK Chancellor Darling and his boss Gordon Brown were particularly bumptious in their invoking of anti-terrorism legislation to seize the remaining assets in the UK of the Icelandic banks.
They thought they could intimidate Iceland. Quite the reverse happened.
Darling and Brown were, of course, covering up their own incompetence and the failings of the UK Financial Savings Authority to act much more quickly. It had been known for months that Iceland’s banks were over-extended and ripe for a crash. The interest rates they were offering depositers in Icelandic banks in the UK and the Netherlands and elsewhere in Europe increasingly looked suspicious.
The plain fact is that Brown and Darling should have acted sooner – as the Germans did – in seizing assets. They had other legislation on the books to do this without using anti-terrorism legislation.
By the time they acted it was too late. Money was shifted bank to Iceland — admittedly not enough to cover the losses of British customers.
Even so, Iceland would seem to be in clear breach of their treaty obligations under the EEA deposit insurance rules they signed on to that require signatories to guarantee at least the first €20,000 of a deposit.
The deposit insurance guarantee is regulated by European Union Directive 94/19/EC and was incorporated into EEA law.
Iceland even adopted the directive as part of national law in 1999.
The British and Dutch are right in their reading of the EEA law.
Iceland claims the directive was never meant to be used to cover systemic failure. But there is no mention in the EEA legislation — or Iceland’s for that matter — concerning systemic failure.
Using a referendum to decide on whether to observe legal and treaty obligations is absurd and demagogic. And it is an awful precedent that civilized nations would do better to avoid.
Dislike of bankers and the whole sub-prime mess shouldn’t lead people to be cavalier about the rule of law.