More than four years after its banking system collapsed, Iceland won a landmark court case Monday over its refusal to cover the losses of British and Dutch depositors who lost money in Icesave, a failed Icelandic bank.
In a judgment issued in Luxembourg, the court of the European Free Trade Association, or EFTA, 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 EFTA.
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 its financial system.
The court ruling Monday represents a significant victory fr Iceland. Unlike Ireland, which also suffered a catastrophic bank failure, Iceland declined to use taxpayer money to bail out foreign bondholders and depositors. This set off a bitter dispute with Britain, which used anti-terrorism rules to take control of assets held in Britain by Icesave’s parent, Landsbanki.
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.
“It is a considerable satisfaction that Iceland’s defense has won the day in the Icesave case,†the Icelandic government said in a statement issued by the Foreign Ministry in Reykjavik. The ruling in Luxembourg, it added, “brings to a close an important stage in a long saga†and “Icesave is now no longer a stumbling block to Iceland economic recovery.â€
Iceland’s economy! is improving. Fitch recently raised its rating on the nation’s bonds, noting that its ‘‘unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness.’’
Still, the Icesave saga has left an acrimonious legacy.
In a recent interview with British television, Iceland’s president, Olafur Ragnar Grimsson, denounced Britain’s “eternal shame’†for invoking the terrorism laws. ‘â€We were there together with Al Qaeda and the Taliban on that list,†he said. “We have not forgotten that in Iceland.â€
Icesave collapsed in October 2008 along with its parent bank and the rest of the banking sector. Caughtin the wreckage were some 350,000 people in Britain and the Netherlands who, lured by unusually high interest rates, had put their money into Icesave accounts.
The Icelandic government guaranteed the deposits of Icelanders who had money in failed banks. But it declined to cover the losses of foreigners with on-line accounts operated by Icesave, a move that prompted complaints of illegal discrimination to the court in Luxembourg.
The case against Iceland, which was bought by the Surveillance Authority of the European Free Trade Association, revolved around interpretation of a European Union directive requiring that deposits in the region’s banks be covered equally by deposit guarantee schemes. Britain and the Netherlands supported the case.
But the court ruled that the directive on guaranteeing bank deposits did not oblige the Icelandic authorities to ensure payment to depositors in Britain and the Netherlands ‘‘in a systemic crisis of the magnitude experienced in Iceland.! ’’ Ic! eland argued that all Icesave depositors will 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 to all claims.
The court also cleared Iceland of complaints that it violated non-discrimination rules when it protected domestic depositors by moving their accounts to solvent new banks but reneged on protecting foreign depositors. The government statement issued Monday assured depositors that ‘‘Icesave claims will be paid out in full’’ by the estate of Landsbanki.
