Comments on: Implications of Iceland's putative international debt arrangements?

Question: Implications of Iceland's putative international debt arrangements?

laumry — Thu, 18 Jun 2009 17:07:42 -0800

Can anyone comment on the sovereignty implications of the putative debt agreements that the Icelandic government is seeking to enter into with Britain and the Netherlands?

Hello all. I am writing on behalf of a friend of mine, who is a very concerned Icelandic citizen.

At the moment, the Icelandic government is apparently negotiating a debt agreement with the governments of Britain and the Netherlands. Earlier today, these putative debt agreements were leaked onto the internet. Here's a link to a newspaper article in one of Iceland's newspapers of record, that in turn gives links to the loan documents at the bottom.

The loan documents seem pretty short versus what I'd expect – 20 pages each. Our question is: what are the implications of these loan agreements for Iceland's sovereignty?

I would be delighted to get views from not just any financiers and international lawyers, but also anyone else who can spare some time and critical faculty to take a look at this.

My friend believes that since Iceland's population is so small, there aren't many home-grown experts qualified to talk about this – and what few there may not be credible commenters given their role in Iceland's recent financial history. Hence this shout out to Metafilter – international, intelligent, and independent!

By: randomstriker

randomstriker — Thu, 18 Jun 2009 17:40:54 -0800

This isn't much different from any other IMF bailout.

What "sovereignty" concerns do you have? The UK and NL haven't colonized Iceland as a result of this loan. Iceland must keep up with loan repayments or "face the consequences".

In practical terms, the "consequences" are that the UK and NL, via the IMF, will gain a bit of influence over Iceland's fiscal and monetary policy. But it's not like they're going to dictate and micromanage how Iceland governs itself -- more like they are going to excercise their due diligence to ensure that there is not corruption in the disbursement of the loan and that Iceland is taking the right steps to be in a position to be able to repay the loan, which means stimulating their economy sustainably so that domestic tax revenues will grow in the long term.

If Iceland defaults on its loans, the UK and NL aren't going to blockade Iceland with their battleships. It wouldn't be in their interest to do anything to sabotage the Icelandic economy, which in term would prevent Iceland from repaying the loans. Iceland wouldn't want to default anyway, because its currency would then become worthless.

Really, what other choice does Iceland have besides bankruptcy?

By: allen.spaulding

allen.spaulding — Thu, 18 Jun 2009 17:43:48 -0800

Nothing seems that surprising. The MFN clause may hamper future attempts to raise capital, but that's not really all that shocking. The waiver of soverign immunity at the end allows the counterparties to pursue remedies in their own courts, which is necessary for various reasons. These terms seem a lot more pro-debtor than some of the bilateral deals made in the past 15 years as well as relevant IMF bailouts. Should your friend and his/her co-citizens be worried? I'm not really sure if there's an answer to that. Iceland isn't it an enviable position by any means but it's still better off than similalrly sitauated countries have historically been. I don't see substantial requirements to privitize, mess with interest rates, or sell off national assets. Things could be a lot worse.

By: Kattullus

Kattullus — Thu, 18 Jun 2009 21:54:23 -0800

Yeah, the deal as it stands is quite good considering how badly the Icelandic state had been left on the hook by the collapsed banks. I was expecting the worst.

Let me provide a bit more context. There's been a lot of crazy talk in the Icelandic media about this deal, a very good chunk of it coming from the right-wing politicians who enabled the banking sector insanity in the first place* (they are now out of power). They have stoked and mongered fear about the deal in an effort to score cheap political points against the current left-wing government. The poster's Icelandic friend is right to say that it's hard to get any sense of what's going on. Icelandic media's default reporting style is reporting opposing viewpoints and not providing anything in the way of facts to help people figure out what the truth is. It's a lot worse even than American media in this regard. One widely disseminated opinion was that the Icelandic government could simply refuse all negotiations and send the matter to the courts (presumably EU ones) and somehow** not have to assume any debt from the collapsed banks beyond the very minimum required by pan-European banking regulations. This was presented as a consequence free option. Presumably once we'd dragged this through the courts for a number of years Britain and Holland would be more than happy to present us with the same deal we'd walked away from.

But the main issue here is that Icelanders (I am including myself) are touchy about issues of sovereignty. That is part and parcel of having been a colony for hundreds of years. Anything that is perceived to threaten Icelandic self-determination is taken very, very seriously. Since the deal affects some issues that are the prerogative of the Icelandic government it feels like a lessening of independence. Having read the damn thing (which was boring) I don't really understand where people are coming from. Now, I'm no expert in international (or any other kind of) law but it seems to me that it's pretty mild. But then I was expecting something a lot worse.

To give you an idea of the rhetoric that is being used about this deal here is most of the text*** from an internet petition that is making the rounds of the Icelandic blogosphere that people are supposed to copy and send to their members of parliament (my translation with further explanations within square brackets):

Nú er loks að skýrast hvað IceSave samningurinn raunverulega geymir.

Now it is finally becoming clear what the IceSave contract really contains. [IceSave was the British netbanking arm of one of the collapsed Icelandic banks, Landsbanki]

Fullkominn rétt Hollendinga (Breta líka?) til að hirða allar eignir Íslenska ríkisins ef við getum ekki borgað. Þar með talið orkuna, fiskinn, landnæði og hugsanlega olíu. Og sökum næsta liðs verður engin raunhæf leið fyrir okkur að véfengja neinar kröfur þeirra.

The full right of the Dutch (the British also?) to take all assets of the Icelandic state if we can't pay. That includes energy, fish, land and possibly oil. And because of the next point there will be no realistic way for us to challenge any of their demands. [There is some oil exploration going on in Icelandic territorial waters]

Fullkomið afsal Íslendinga á því að sækja ágreining eða skort á greiðslugetu á alþjóðagrundvelli. Hugsanleg mál væru rekin sem einkamál fyrir breskum dómstólum. Þar sem breskir lögfræðingar myndu takast á um samning sem skrifaður er af breskum lögfræðingum á ensku.

Full relinquishment by Icelander of the right to resolve conflict or inability to pay before international bodies. Potential cases would be tried as private cases before British courts. Where British lawyers would argue about a contract which is written by British lawyers in English.

Enginn spunaleikur getur breytt því sem stendur í samningnum.

No spinning can change what it says in the contract.

Þau efnisatriði samningsins sem þegar eru komin í ljós sýna það skýrt að þeir sem samþykkja þennan samning eru að samþykkja landráð.

The details of the contract that have already been revealed show it clearly that they who accept this contract are accepting treason. [This text was written before the full text of the contract had been leaked. It's still making the rounds of the Icelandic blogosphere and I haven't seen another petition replace it. That Icelanders are accusing other Icelanders of treason demonstrates how far beyond the realm of reason this particular debate has gone. Accusing someone of treason is the Icelandic equivalent of Godwin's Law (the longer an argument goes on the probability that an Icelander accuses another Icelander of treason approaces 1)]

Að láta sér detta í hug að taka þann séns að eignir Landsbankans verði einhvers virði eftir 7 ár og þann séns að krónan verði einhvers virði eftir 7 ár er ótrúleg heimska (bjartsýni ef kurteisi væri viðeigandi á þessari ögurstundu) og fullkomin vanvirðing á því trausti sem þér er sýnt með því að vera kosinn sem þingmaður á Alþingi Íslendinga.

To even think about taking the chance that Landsbanki's assets will be worth anything after 7 years and the chance that the króna will be worth anything after 7 years is an incredibly idiocy (optimism if politeness were appropriate in this fateful hour) and complete disrespect of the trust which you are shown by being elected a member of Iceland's parliament. [The króna is Iceland's currency]

Ég bið þig innilega, sem Íslendingur að samþykkja ekki þennan Afsalasamning heldur neita honum alfarið. Og krefjast þess í leiðinni að IceSave verði útkljáð fyrir alþjóðlegum dómstól eða á annan sambærilegan hátt sem er eðlilegur í samskiptum tveggja sjálfstæðra ríkja.

I ask you sincerely, as an Icelander not to accept this Relinquishment Contract but to refuse it totally. And demand it at the same time that IceSave will be resolved before an international court or in another comparable way which is normal in the interactions of two independent nations.

Ég þakka þér fyrir að hafa lesið þetta og treysti því að þú munir hafa framtíð Íslands sem sjálfstæðs ríkis í huga þegar atkvæðagreiðsla um IceSave samninginn fer fram.

I thank you for having read this and trust that you will keep the future of Iceland as an independent state in mind when voting on the IceSave contract takes place

* Am I bitter? Yes, yes I am.
** Through magic, perhaps.
*** I excised valedictions, footnotes and such.

By: Marisa Stole the Precious Thing

Marisa Stole the Precious Thing — Fri, 19 Jun 2009 10:42:04 -0800

Just to provide a little background:

Icesave was a branch of Landsbanki, in internet format, enabling people abroad to invest their money with the promise of higher returns than a regular bank as there was virtually no overhead. It was privately insured. How it collapsed is a whole other story, but what got Iceland embroiled in this is that when the banking system collapsed, the Icelandic government announced that it would cover all deposits in all Icelandic banks within Iceland - in other words, branches outside of Iceland would not be covered. This, you can't do. It violates the EEA treaty. Now, Britain had been badly burned the previous month when Lehmann Brothers pulled up their stakes and moved all their money out of the UK. They weren't going to let that happen again, and so they enacted anti-terrorist legislation to freeze all Landsbanki assets in the UK. Cue rising tensions and a lot of strong words. The IMF came into this because Iceland went to the IMF asking for a loan. The IMF told Iceland, "Not until you get the Icesave thing sorted". And so the government really had no choice but to make a deal.

Now, as to Iceland's sovereignty on this:

There are a lot of fears in the public that their taxmoney is going to pay for the bulk of the Icesave numeration. Others have estimated that no more than 25% of the money owed will have to come from the public; that the assets of Landsbanki should cover the rest of the debt. Everyone's estimating. The deal is basically that Iceland will pay back 2.3 billion pounds over the next 15 years with an interest rate of 5.5%, paying only the interest for the first seven years.

The interest rate is extraordinarily high, no doubt about it. But here's the thing:

Iceland didn't really have a choice but to agree to the terms. To say no, to just walk away, would have had worse consequences. Iceland would essentially be announcing to the world that their credit is no good. This would throw the EEA treaty in jeopardy, could prevent Iceland from getting any loans from anybody, possibly even isolating the country from the European market as a whole. It would be devastating. On the other hand, it is very, very doubtful that this will be the Final Deal. If the renumeration plan proves to painful for Iceland to handle, it would behoove the UK and Holland to go back to the negotiations table and work out a new deal. Why? Because the Brits and the Dutch want their money back. They cannot "take over" the country. That's just not even in the realm of possibilities. They will do what every other country in the world does with their indebted nations - renegotiate, as many times as possible, until the money's paid back.

I realize many Icelanders are upset with this deal and they should be. They should be pressuring their elected officials to go back to negotiations. But to not pay back Icesave would put Iceland in a worse position, and it is in the best interests of Holland and the UK to work out a plan that Iceland can actually pay back.

By: Marisa Stole the Precious Thing

Marisa Stole the Precious Thing — Fri, 19 Jun 2009 10:58:03 -0800

Should probably add that the agreements weren't "leaked" but were officially released by the Ministry of Finance yesterday*.

By: ROU_Xenophobe

ROU_Xenophobe — Fri, 19 Jun 2009 22:54:05 -0800

But the main issue here is that Icelanders (I am including myself) are touchy about issues of sovereignty. That is part and parcel of having been a colony for hundreds of years.

Not to mention having been invaded by the UK as recently as 1940/41, and arguably treated as something of a pawn by the UK and US during the cold war.

By: laumry

laumry — Sun, 21 Jun 2009 23:25:46 -0800

Thank you all for the thoughtful replies. I'll direct my friend to this thread.