Early attempts (October – December 2008) The first attempts at resolving the Icesave dispute came the very weekend after the collapse of
Landsbanki, when British and Dutch officials travelled to
Reykjavík to meet separately with their Icelandic counterparts, in talks which all sides described as "constructive" and "in a friendly atmosphere". An agreement with the Netherlands was announced on 11 October, while the negotiations for an agreement with UK was described as being in "significant progress". The Icelandic prime minister
Geir Haarde however a few days later announced, that the agreement with the Netherlands would first need the approval of the
Althing, before being declared to be a final and settled agreement. In addition to the offered bailout loans for the Icelandic state, there was also at that point of time three special loans from Germany + UK + Netherlands, being offered to Iceland and earmarked for the repayment of minimum deposit guarantees to those account-holders having lost their private savings because of the systemic bankruptcy of Icelands three leading banks. It was rumoured that Iceland would refuse the loan offered by the UK and Netherlands, as those two loans were only earmarked for the repayment of minimum deposit guarantees to the Icesave bank, which was a foreign branch of the now bankrupt
Landsbanki, and thus Iceland felt it was not the Icelandic states responsibility to guarantee/pay for the payment of such minimum deposit guarantees to the British and Dutch savers, and apparently instead preferred to leave them unpaid while referring them to legal proceedings over the alleged failure of British and Dutch watchdogs for the financial services sector. In regards of the responsible authority for the monitoring and control of financial activities performed by the Icesave bank, it was however later established this had always been the sole responsibility of the
Icelandic Financial Supervisory Authority (FME) with the minimum deposit guarantees also to be covered by the Icelandic Depositors' and Investors' Guarantee Fund, because the Icesave bank had been established as a foreign branch by the Icelandic
Landsbanki. The foreign authorities would only have had the responsibility to monitor and control the Icesave bank, if it had been established as an independent UK/Dutch subsidiary being fully owned by
Landsbanki. Thus it was only the Icelandic authorities having a legal responsibility in the case, and this fact alone emphasized the need for a solution about the payment of minimum deposit guarantees to the Dutch and British Icesave account holders, either to be reached with the Icelandic state or the Icelandic Depositors' and Investors' Guarantee Fund. Talks began almost immediately in
Brussels with the mediation of
France, which held the rotating
Presidency of the European Council. An outline agreement was reached on 16 November, with the Icelandic government accepting to guarantee the liabilities of the
Tryggingarsjóður. In the event of bankruptcy of any Icelandic bank, the Icelandic guarantee scheme was responsible to repay the first €20,887 of savings held by private foreign individuals, with the foreign guarantee scheme's in other nations responsible to pay the remaining guarantee according to their rules; meaning that the Dutch and British state would pay for the remaining amount up to its guarantee of respectively a maximum of €100,000 in Netherlands and £50,000 (approx. €60,000) in UK. The settlement of the €5bn earmarked minimum deposit guarantee loans, at the same time paved the way not only for the US$2.1bn
IMF bailout loan, but also for a transfer of some bilateral bailout loans for the Icelandic state, with $2.5bn being transferred by Denmark + Sweden + Norway + Finland, $0.2bn from Poland, $0.05bn from Faroes Island. On 10 December,
De Nederlandse Bank (DNB, the Dutch central bank) started to refund the deposited amounts to depositors up to a maximum amount of €100,000 per person. For this operation, DNB hired sixty temporary employees who were housed on the second floor of the Bank's headquarters. With around 120,000 paper files being handled on this floor, lying around in crates, DNB realised the floor was not capable of holding this amount of weight and the entire department had to be moved. The repayment liability for the Dutch state according to the Dutch minimum deposit guarantee scheme equalled €1.6bn out of a total of €1.67bn being lost by Dutch retail customers (of which €1.33bn equalled the Icelandic minimum deposit guarantee liabilities, ultimately to be covered by either
Tryggingarsjóður or the Icelandic state). The repayment liability for the British state according to the British minimum deposit guarantee scheme equalled £3.5bn out of a total of £4.53bn being lost by British retail customers (of which £2.2bn equalled the Icelandic minimum deposit guarantee liabilities, ultimately to be covered by either
Tryggingarsjóður or the Icelandic state).
Icesave bill 1 (June – September 2009) A final repayment agreement was reached between UK, Netherlands and Icelandic negotiators, and a bill formally entitled
Act 96/2009 was presented to the Icelandic parliament in June 2009. However, the Althing debate revealed wide opposition -even within the government- about the repayment conditions, and thus the parliament unilaterally added an amendment to the bill which set a maximum ceiling on the yearly repayments based on the country's
Gross Domestic Product. On 28 August 2009, Iceland's parliament voted 34–15 (with 14 abstentions) to approve this amended bill (commonly referred to as the
Icesave bill 1), which covered the conditions for the repayment to
Great Britain and
Netherlands of the €3.8bn minimum deposit guarantees stemming from the losses on the foreign Icesave deposit accounts. The repayment basically functioned as a states guaranteed repayment of the €3.8bn to UK and Netherlands, previously being owed to them by the at that point of time money drained Icelandic
Depositors' and Investors' Guarantee Fund (Tryggingarsjóður). At the parliamentary vote, the 15 opponents of the bill had argued that no clear legal obligation existed for the Icelandic state to pay/guarantee for those lost deposits that
Tryggingarsjóður potentially could not afford to cover by itself. The government however argued, that if the parliament failed to pass the bill, then Britain and the Netherlands might retaliate by blocking a planned aid package for Iceland from the
International Monetary Fund (IMF). After unilaterally having amended the bill with a special ceiling for the state's guaranteed repayment, which greatly reduced the risk and liabilities for the Icelandic state, the two government parties voted through the bill in the parliament. President
Ólafur Ragnar Grímsson signed and enacted the bill on 2 September 2009. The introduced repayment ceiling under the amended bill was rather complicated. It was supposed to work in this way, that starting from 2008 the yearly increase of Icelandic
GDP growth measured in
pound sterling and
euro (according to
Eurostats method) should be calculated, with these figures being accumulated from year to year. Then the yearly repayments should be conducted in 2017–23 to the degree of what an IMF evaluation had found was within sustainable limits, but in all circumstances still also within a maximum amount for UK equal to 4% of the accumulated basis increase of the Icelandic GDP since 2008. For UK the same repayment rules would apply for 2016–24, but with the maximum rate being lowered to 2%. An identical repayment ceiling was introduced for the repayments to Netherlands, with the only exception that the maximum rate in this case was 2% in 2017–23 and 1% in 2016–24. Remaining debts after 2024 would be cancelled. During the parliamentary debates, an assessment note for the amended bill had been delivered by the
Icelandic Central Bank, concluding that when the
Landsbanki receivership had finished its liquidation of all positive financial assets from the bankrupted
Old Landsbanki by the end of 2015, then it was very likely
Tryggingarsjóður through this liquidation would have received an amount big enough to repay the Dutch and British state 75% (+/- 15%) of the owed €3.8bn minimum deposit guarantees; meaning the size of the repayment liabilities for the Icelandic State was likely in all circumstances to be limited, as it would only takeover the remaining part of this unpaid liability (incl. accrued interest) in 2016–24. As the altered bill, no longer guaranteed a 100% repayment of the €3.8bn owed for the minimum deposit guarantees, the Dutch and UK governments however opted not to accept the enacted
Icesave bill 1, and continued to block the payment of the second
tranche of the IMF loans, and argued they would continue to do so until the Icelandic state were willing to pass a repayment agreement that would guarantee a full repayment of the entire amount of their owings (although they were ready to renegotiate the terms).
Icesave bill 2 (December 2009 – March 2010) In December 2009, the
Althing, voting almost strictly by party lines (with two defections from the governing parties to the opposition), narrowly (33-30) passed a new version of the Icesave bill formally entitled
Act 1/2010 being an amendment of the former
Act 96/2009, to agree with British and Dutch demands in the Icesave dispute. The bill would make it possible for Britain and the Netherlands to recoup the €4bn of minimum deposit guarantees, which they had paid on behalf of the money drained Icelandic minimum deposit guarantee fund to the British and UK Icesave customers who had lost all their savings with the bankruptcy of Landsbanki in October 2008. The two governments would receive payments over the next 14 years after compensating the losses of more than 320,000 of the bank's customers. In the UK, deposits of up to £50,000 per account holder had been guaranteed by the British government under the
Financial Services Compensation Scheme. The British and Dutch governments had in fact at this point of time already repaid in full, all the lost €6.7bn of deposits belonging to UK and Dutch retail customers, which was beyond the liability stipulated by their minimum deposit guarantee schemes, and now with Icesave bill 2 only requested the Icelandic state to guarantee, that the British and Dutch government over a 15-year period at least would receive a repayment equal to the applying Icelandic minimum deposit guarantees, which totaled €4bn. A few days after
Icesave bill 2 had been passed by the Althing, a highly respected judge of the
Icelandic supreme court, Ragnar Hall, went public with a strong criticism on the repayment agreement, as it had been outlined with the same legal design flaw both in
Icesave bill 1 and
Icesave bill 2, and thus he recommended the president not to enact the passed bill and if a referendum subsequently was called on the issue he also recommended the Icelandic electorate to turn it down. The legal design flaw he had pointed out, was that the repayment agreement had a paragraph which had interfered and changed the usual creditor priority order, compared to how it normally worked according to the Icelandic law. He stated to have repeatedly pointed this important detail out to the Icelandic negotiatiers already in June 2009, then again in his article published 22 July 2009, and on several other occasions; but now he could see the issue unfortunately and somewhat surprisingly had not been fixed in either
Icesave bill 1 nor in
Icesave bill 2. According to Ragnar Hall, any enactment of the current version of
Icesave bill 2, would mean that the highest creditor priority would no longer be held solely by the Icelandic
Depositors' and Investors' Guarantee Fund, as would have been the case if only the standard Icelandic receivership/bankruptcy law had applied, but instead the Icesave bills had now relegated its priority order to be equal with all other "priority claims" towards the receivership. By side-ordering all creditor priority claims, which primarily was related to the extra claims from UK and Netherlands also to seek coverage for their extended repayment of deposits to UK and Dutch savers (from the receivership and not from the Icelandic state), in reality meant that after liquidation of all positive remaining
Landsbanki assets, then this recovery would no longer first be used 100% to repay all of the €4bn big minimum deposit guarantees to the Icelandic state, but due to the side-ordering of creditor priorities the Icelandic state would straight from the start only be repaid by the receivership by a 51% share of the money being recovered. If the receivership managed to recover enough money to cover all priority claims, the Icelandic State's loss of first priority status within the priority claims would not cause any difference. In the event the receivership only managed to recover 50% of all priority claims, there would however be a huge difference, as a first priority status then would ensure 100% coverage of the €4bn liabilities, while enactment of the Icesave bill agreements on the contrary would mean that the Icelandic state instead only would receive half of its €4bn claims towards the receivership, leaving the Icelandic state and tax payers responsible to pay for the remaining claims not being met. The news about the included design flaw in the Icesave bills related to the unfavourable side-ordering of all the creditors "priority claims", and hence if this bill was enacted a significant increase of liabilities for the Icelandic state compared to status quo, ignited a wide dissatisfaction in the Icelandic electorate, and the president was petitioned by some 56,000 people, or approximately 23% of Iceland's voters, not to enact the bill and instead put the issue before a
referendum. On 5 January 2010, Icelandic President
Ólafur Ragnar Grímsson declared that he would not sign the bill and called for a referendum. Opinion polls predicted that a sizable majority of Icelanders would vote against the bill in a referendum. On the day that President Grímsson announced that he would not sign the new Icesave law, the UK
Financial Services Secretary Lord Myners responded saying that "The Icelandic people, if they took that decision [not to accept the bill], would effectively be saying that Iceland doesn't want to be part of the international financial system," while Dutch
finance minister Wouter Bos called such a decision "unacceptable" and stated that whatever the outcome of the Icelandic referendum, Iceland would still be "compelled to pay back the money". Iceland's prime minister,
Jóhanna Sigurðardóttir, ensured towards the international community that her government was still committed to campaign for electoral approval of the Dutch and UK loan guarantee agreements, because these agreements were considered to pave the way for enactment of a comprehensive IMF bailout package to Iceland, and thus viewed as being integral to the country's economic revival. On 5 January 2010, the credit rating agency
Fitch Group stated that the call for an Icesave election by the Icelandic president, had created "a new wave of political, economic and financial uncertainty", and characterized his decision as a "step back in the attempts to re-establish normal financial relations with the rest of the world", that now caused a further downgrade of Iceland's credit rating from BBB− to BB+. The downgrade of its rating to BB+, meant Iceland became categorized as a non-investment-grade country (also known as
junk status), which by effect made it impossible for Iceland to continue borrow money from the free capital markets, and thus became dependent on receiving external bailout loans to meet its short term financial needs. Mark Flanagan, head of an IMF mission to Reykjavik, made this comment 10 January 2010, about Iceland's immediate need to receive cash through an IMF bailout loan: "The fund [IMF] has never had a formal condition on Icesave completion. Never. How Icesave affected the timing of the review was indirect and related to the broader financing for the programme. Because other creditors of Iceland made it a condition, we had to wait until they were satisfied. The dispute between Iceland, Britain and the Netherlands concerning Icesave complicated efforts by Iceland to secure additional external financing for the programme from other participating countries. Would non-passage of "Icesave bill 2" affect financing assurances? I don't know how these things will play out. I'm not willing to speculate." The UK and the Netherlands, however, did not accept this new Icelandic proposal. After rejecting the Icelandic proposal, UK and the Netherlands, instead presented a counter proposal in which they offered variable interest rates, which were significantly lower than the previously agreed upon 5.5%, and moreover accepted to waive the accrued interests for 2009–10. This offer was estimated to save the Icelandic government €450 million compared to the previous agreements, an offer which according to the Dutch Minister of finance
Wouter Bos would be the Dutch final offer. Public statements were not available to reveal whether or not the counter proposal from UK and Netherlands, had managed to remove the unwanted effect of having side-ordered all the creditor claims towards the
Landsbanki receivership. Iceland rejected the offer by the UK and the Netherlands, but did present yet a new proposal to the UK and the Netherlands. Iceland's finance minister
Steingrímur J. Sigfússon described the new Icelandic offer as a "significant step towards them [UK and Netherlands]". The UK and Dutch government officials refused to discuss this new offer by Iceland. Talks continued until 5 March 2010. As no agreement was reached by the end of this day, the original
Icesave bill 2 agreement was put to a
referendum on 6 March 2010.
Referendum on "Icesave bill 2" After the Icelandic president had refused to sign and enact the
Icesave bill 2 on 5 January 2010, it was clear that a referendum on the bill was now needed. The referendum was the first to be held in Iceland since its independence referendum in 1944, and required special legislation. The
Althing (Iceland's parliament) approved a motion on 8 January 2010, which called for the referendum to be held by 6 March at the latest. The motion passed by 49–0 with 14 abstentions, and a few days later the referendum was scheduled to be held on 6 March 2010. The referendum was held to approve the terms of a state guarantee on the debts of the
Depositors' and Investors' Guarantee Fund (
Tryggingarsjóður innstæðueigenda og fjárfesta), in particular a
€4 billion loan from the governments of the
United Kingdom and the
Netherlands to cover
deposit insurance obligations in those countries. The referendum was held under article 26 of the
Constitution of Iceland after
President Ólafur Ragnar Grímsson refused to counter-sign the corresponding Act of Parliament (known as
Icesave bill 2) into law on 5 January 2010. On the election day basically all Icelandic politicians recommended the electorate to vote no to
Icesave bill 2, due to a design flaw in the bill, which accidentally had converted the by Icelandic law defined first priority creditor claim for repayment of the Icelandic minimum deposit guarantees from the
Landsbanki receivership, into a side-ordered lower priority together with the other priority claims. Ahead of the election, a calculation program had been published to display how the following five deciding parameters would influence the repayment conditions for the Icelandic state in the Icesave dispute (which showed how big an impact the newly introduced side-ordering of priority claims caused on the subsequent repayment liabilities for the Icelandic State): • Total value collected by the
Landsbanki receivership from liquidation of assets (depending on its success rate, and that valuation of assets can change in the years ahead). • All the creditor's "priority claims" can either be side-ordered (as in
Icesave bill 2), or obey to Icelandic law (with an exclusive first priority for repayment of the Icelandic minimum deposit guarantees). • A variable interest rate shall (in
Icesave bill 2) be paid on remaining debt repayments in 2009–24 (it was 5.55% in January 2010, but can change in the future). • Currency exchange rate between
Icelandic króna (ISK) and
Pound sterling (GBP), used for repayment to UK of the £2.35bn loan. • Currency exchange rate between Icelandic króna (ISK) and
euro (EUR), used for repayment to Netherlands of the €1.33bn loan. When the votes had been counted, the result of the referendum was a resoundingly defeat for the proposed
Icesave bill 2, with 93% voting against and less than 2% in favor.
Referendum on "Icesave bill 3" (February – April 2011) After the referendum, a negotiating committee was formed under the chairmanship of Lee Buchheit, and new negotiations commenced. On 16 February 2011, the Icelandic parliament agreed to a repayment deal with the votes 44 for and 16 against, formally entitled
Act 13/2011 but more commonly referred to as the
Icesave bill 3. The third version of the Icesave bill entailed new terms and conditions for repayment of the full and remaining Icesave debt to UK and Netherlands, throughout a period stretching from one to 30 years starting from 2016 (with the length depending on how much time Iceland would need to repay its remaining obligations), to the sound of a fixed constant interest rate at 3.2% for 2009–15, which then ultimately would be substituted by a variable interest rate for the years beyond. Another improvement compared to the previous Icesave bills, was that it included an interest rate
moratorium (rate being fixed to 0%) for the first three quarters of 2009. The yearly repayment amount would also be capped at the lowest of these two ceilings: Maximum 1.3% of Icelands GDP (i.e. €0.13bn in 2011), or maximum 5% of the total Icelandic government revenue from the previous year (i.e. €0.23bn in 2011). A minimum repayment was however also guaranteed by the mutual agreement, as it could never be less compared to a situation with traditional amortisation over 30 years. Finally the new deal also in practise had removed the demand for equal footing for all "priority claims" towards the
Landsbanki receivership, meaning that it was now likely the receivership would repay 100% of the €4bn of owed minimum deposit guarantees during 2011–15, with the accrued interests being the only remaining responsibility for the Icelandic state subsequently to guarantee and cover. It was noted in the bill, that the expected remaining liabilities for the Icelandic state would now only amount to ISK 47bn (€0.24bn) in 2016, meaning it was now likely for the Icelandic state to repay all the remaining liabilities after only two years of amortisation in 2016 and 2017. A
referendum was held on 9 April 2011, asking the Icelandic electorate to vote yes/no for
Icesave bill 3. A group of 15 concerned citizens organised under the name of Advice.is and campaigned for a
No in Iceland and internationally. One month ahead of the vote, the
Landsbanki receivership (LBI) published a quarterly financial status, where its total recovery of assets was estimated to equal roughly 96% (ISK 1263bn/1319bn) of all priority claims towards the receivership, which implied a full repayment of all minimum deposit guarantees already by the end of 2013, due to their first priority status within the "priority claims". Assuming this estimate was correct, then the Icelandic state with
Icesave bill 3 would only be liable in 2016 to conduct repayments to the British and Dutch states, for the accrued 3.2% interests related to the delayed repayment of minimum deposit guarantees in 2009-13. After preliminary results suggested that the improved deal had been rejected by the referendum, with 58% of voters voting against it and 42% voting in favor, both the
Icelandic and the
British government expressed their disappointment at the preliminary result. Iceland's
prime minister Jóhanna Sigurðardóttir stated that "the worst option had been chosen";
Icelandic finance minister Steingrímur J. Sigfússon ruled out a third referendum, saying that "I think we're getting a very clear sign from this referendum, that further negotiations are ruled out. No use in trying that again". == EFTA Court clears Iceland of all charges ==