Iceland didn’t break the law by refusing to compensate U.K. and Dutch customers of Landsbanki Islands hf after the lender collapsed, a European court ruled.
The ruling means the nation won’t have to pay damages claims of as much as 335 billion kronur ($2.6 billion) for customers who had money in the bank’s Icesave high-yield savings accounts.
The court for the European Free Trade Association, or EFTA, today rejected arguments against Iceland, saying the country “has not failed to comply with the obligations” under European Economic Area law by not paying the minimum amount of compensation to Icesave depositors in the Netherlands and Britain.
“In a systemic crisis of the magnitude experienced in Iceland,” the bloc’s law “does not envisage that the defendant itself must ensure payments to depositors in the Icesave branches” in the U.K. and Netherlands, the court said in its ruling, which is binding and can’t be appealed.
Iceland in 2008 refused to cover $5.4 billion in guarantees to 350,000 U.K. and Dutch citizens who opened savings accounts at Landsbanki, one of three major banks to fail during the country’s financial meltdown. The EFTA surveillance authority, the agency in charge of supervising Iceland’s compliance with European rules, sued the island nation in 2011 over its failings after the British and Dutch governments covered the guarantees.
Landsbanki, which had sought to attract foreign depositors through high-yielding Internet banking accounts that saved it the trouble of opening subsidiaries abroad, collapsed in October 2008 with the rest of Iceland’s debt-laden banking industry.
The International Monetary Fund last week estimated a defeat for Iceland may lead to damage claims by the Netherlands and U.K. as high as 20 percent of Iceland’s economic output.
The EFTA surveillance authority argued Iceland was obliged under European rules to guarantee minimum compensation of 20,000 euros ($26,900) to Dutch and British citizens with Icesave accounts. Even though Iceland rejected the argument, the administrators of Landsbanki last year began repaying priority U.K. and Dutch claims. They have now covered half of all such obligations, or 650 billion kronur, Pall Benediktsson, a spokesman for the lender, said by e-mail last week.
“It is a considerable satisfaction that Iceland’s defense has won the day,” Iceland’s Foreign Ministry said in an e-mailed statement. The “ruling brings to a close an important stage in a long saga.”
The EFTA agency ensures Iceland, Norway and Liechtenstein comply with European rules governing the European Economic Area, which consists of the three countries plus the 27-nation European Union.
“The court case was necessary to bring clarity to an important issue under EEA law and to settle the matter,” Oda Helen Sletnes, president of the EFTA Surveillance Authority, said in an e-mailed statement.
“Member states in the EU are obliged to ensure full and effective protection of depositors, even in times of severe crisis,” said Stefaan De Rynck, a spokesman for EU finance commissioner Michel Barnier.
While it is expected the Icesave claims will be paid in full by the Landsbanki estate, De Rynck said the European Commission needs more time to review the full implications of the ruling.
Ben Feiertag, a The Hague-based spokesman of the Dutch Finance Ministry, wasn’t immediately available to comment when contacted over the phone today.
The case is: E-16/11, EFTA Surveillance Authority v. Iceland.