93% of Icelandic voters refuse to pay back loan
by Benjamin on March 7, 2010
This morning, Icelands voters said no thank you to the compromise between their government and the Anglo-Dutch claim for recompensation after the collapse of Landsbanki and the ICEsave scheme they ran, where British and Dutch people had saved a hefty $5.3bn. Reading that back, it seems unfair that the people of Britain and the Netherlands should not be compensated, but there is a rather important detail which is missed by the usual commentary on this. This money was not saved. It was invested. The people who chose to send their money to Iceland, did so as a calculated investment decision. In the UK that happened via a savings account with Landsbanki or putting your money into bonds or ISA’s. The return was high while the perceived risk of an ISA – promoted by tax incentives from the UK government – was low.
5%+ return and no risk... Some things are too good to be true
But then Landsbanki went bankrupt and their English and Dutch branches shut down, unable to repay deposits, the host governments went for the Icelandic government’s jugular - demanding the repayment of all UK/Dutch money held in the banks. Two things strike me: 1. If you put your money into an ISA or bond with a foreign bank, you are an investor. If the investment doesn’t pay off, you lose. Why should the Icelandic population bear the cost of your bad investment choice? (They’re already paying for their own bad choices). If anyone is wondering why the Icelandic people voted NO to a $16,400 debt per capita yesterday, I think it was not just the amount of money. It was about not re-compensating bad investment choices by relatively richer foreigners. By the way, in the UK, the minimum deposits/investments ranged from $10,000-$50,000, which investors could deposit tax free – this is not a domestic savings account for the low income person. 2: If a bank goes bankrupt, it is the host governments responsibility to insure against deposits being forfeited, even when that bank is foreign – although one would expect some guarantees to have been lodged with the central bank prior to the banking license being issued. That leaves the buck with the UK and Dutch governments, not the Icelandic one. Not a pleasant prospect in this day of growing government deficits.
That last part is where the argument is now centered. But the fact remains that a large proportion of the money lost in the Landsbanki collapse were investments into bonds and ISA’s. Investments always have some risk, and I’m sure there isn’t the same outcry of government support for those people who lost money on the Icelandic bond or stock market. Why not? Because I think we’ve confused an investment for saving. Which is an easy mistake to make, they are supposed to equal after all.
