Iceland Wins Case on 2008 Refusal to Cover Foreign Deposits

Iceland was found to have acted within its rights in its 2008 refusal to cover U.K. and Dutch depositors in a failed Icelandic bank, escaping damages as high as 20 percent of its economic output.

The European Free Trade Association Court in Luxembourg today dismissed a case brought the EFTA Surveillance Authority, which claimed the island had breached European Economic Area law. A loss would have allowed the Netherlands and the U.K. to seek damages of much as 335 billion kronur ($2.6 billion), according to International Monetary Fund estimates.

All three “pleas” were dismissed, in part because the laws governing Iceland’s membership didn’t “envisage” a “systemic crisis of the magnitude experienced in Iceland,” the court said in a statement. “How to proceed in a case where the guarantee scheme was unable to cope with its payment obligations remained largely unanswered by the directive.”

Iceland in 2008 declined to cover $5.4 billion in guarantees to 350,000 U.K. and Dutch citizens who had opened Icesave accounts at Landsbanki Islands hf, one of three major banks to fail during the island’s financial meltdown. The British and Dutch governments covered the guarantees and Iceland was then taken to court by the EFTA Surveillance Authority.

The krona was little changed at 172.93 per euro as 3:09 p.m. in Reykjavik.

‘Completely Vindicated’

“Iceland is completely vindicated,” Foreign Minister Ossur Skarphedinsson told reporters in Reykjavik. “All of Iceland’s costs will be paid by ESA. That, by itself, underlines how great our victory is.”

Iceland had maintained it wasn’t obligated to guarantee the foreign deposits. The caretakers of Landsbanki last year began repaying priority claims, using the proceeds of the bank’s estate. They have now covered 50 percent of all such obligations, or 650 billion kronur, Pall Benediktsson, a spokesman for the lender, said by e-mail last week.

Iceland reiterated today that it expects to repay the Icesave claims in full and that it has already covered 90 percent of the money advanced by the U.K. and the Netherlands to cover the minimum deposit guarantees.

“Within a few years we will have finished paying all our obligations and probably 15 percent more than that,” said Skarphedinsson. “I don’t remember any bank in the world that has failed and still delivered results of this kind. So Icelanders will honor their obligations and that’s what matters most.”

Fast Recovery

The north Atlantic nation, which completed a 33-month $4.6 billion IMF-led economic program in August 2011, has been praised for its handling of the crisis. The $85 billion default of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki in 2008 plunged the $13 billion economy into its worst recession in six decades. Iceland escaped sovereign default by refusing to back the banks.

Since then, Iceland has recovered faster than much of the European Union, of which it isn’t a member. Gross domestic product will expand 2.9 percent in 2013, the central bank estimates. The 17-nation euro area will shrink 0.2 percent this year, the IMF estimates.

Iceland carries the lowest investment grade at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Fitch in February last year raised the island from junk, praising its “unorthodox crisis policy.”

Sustainable Debt

Iceland would have been able to withstand a worst-case outcome in the Icesave ruling, Franek Rozwadowski, the IMF’s representative for Iceland, said in a phone interview last week from Reykjavik.

“Debt sustainability analysis suggests that an increase in debt of this size” would still mean that the government debt levels were “sustainable,” he said.

Landsbanki had sought to attract foreign depositors through high-yielding Internet accounts that saved it the trouble of establishing subsidiaries abroad. The lender collapsed in October 2008 with the rest of Iceland’s debt-laden banking industry. At their peak, Landsbanki, Kaupthing and Glitnir had combined debts that swelled to 10 times Iceland’s economy.

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