Iceland Girds for Fight as Suit Targets Half $14 Billion GDP

Iceland’s guarantee fund is bracing itself for a battle it says may last years after the U.K. and the Netherlands brought new lawsuits over depositor claims equivalent to almost half the island’s gross domestic product.

“It may take one or two years to resolve this matter,” Gudrun Thorleifsdottir, chairman of the depositor guarantee fund in Reykjavik said today by phone. “It’s absolutely clear that this case will go to the Supreme Court, which means that in a best-case scenario there may be an outcome next year.”

The Depositors and Guarantee Fund, or TIF, revealed yesterday it was being sued by the Dutch Central Bank and the British Financial Services Compensation Scheme for as much as 1 trillion kronur ($6.7 billion) to cover claims and costs for backing the 350,000 depositors in failed Landsbanki Islands hf’s Icesave accounts.

The suits come after Iceland’s government last year won a case in the European Free Trade Association Court, which ruled the island was right to reject claims from British and Dutch depositors. Iceland in 2008 decided to let its three largest banks fail under an $85 billion debt mountain. It also declined to cover foreign depositors, as the magnitude of the banking failure dwarfed the nation’s $14 billion economy.

Total Repayment

The U.K. and Dutch central banks are seeking repayment of about 556 billion kronur in principal and additional payments for costs and interest of about 400 billion kronur, according to TIF. The estate of Landsbanki said in December it had already paid priority creditors, mostly the British and Dutch, a total of 715 billion kronur, which represented about 54 percent of the priority claims. The bank also estimated it had assets valued at 1.56 trillion kronur.

“Everything points to them getting the principal amount paid in full from the estate” of Landsbanki said Thorleifsdottir. “This case in fact revolves around their claims for interest payments and costs, which are approximately 400 billion kronur in total.”

Dutch Finance Minister Jeroen Dijsselbloem said in an interview on RLTZ television that the country is “justified” in seeking compensation.

“Though the largest share of the amount we expect to get from the inventory, which is cleaned up now, there’s a conflict about the interest rates and the costs,” he said. “That’s where this legal procedure is about. ”

The State

The U.K. compensation plan today stressed that the lawsuit isn’t a “claim against the Icelandic state,” according to an e-mail from Mark Oakes, its head of communications.

“Although FSCS expects to recover much of the compensation paid out to depositors from its claim in the winding up of the bank, this claim is for recognition of the obligation to meet depositors’ claims and for money and costs incurred in funding and administering the payout on its behalf in the Icesave failure,” he said. “The Icelandic fund has yet to pay out the funds it has at its disposal from 2008.”

Remko Vellenga, spokesman for the Dutch central bank, confirmed the claim and said it would have no further comment.

The Defense

The decision not to back the Icesave accounts frayed the nation’s ties with investors and the European Union. At the height of the dispute, the U.K. even resorted to anti-terror legislation to freeze Icelandic assets. Icelanders twice rejected backing the Icesave accounts in referendums.

“We’re working on our defense now, but one of our demands will be for an acquittal on the basis of the lawsuit being filed too late and therefore the claims having lapsed,” said Thorleifsdottir. “We don’t believe” that any claim can be made against Icelandic taxpayers because of this, she said.

The EFTA court said in January last year that the Icesave claims were dismissed, in part, because the laws governing Iceland’s membership didn’t envisage a “systemic crisis of the magnitude experienced in Iceland. How to proceed in a case where the guarantee scheme was unable to cope with its payment obligations remained largely unanswered by the directive.”

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