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Update On Iceland Bank Foreign Deposits

by Jim ONeil on April 29, 2011

in uk banks

Banks in Iceland were kind enough to offer residents of other countries, namely the Netherlands and UK, the ability to hold high-yield savings accounts in the country. However, no explicit guarantee was provided by the government. When the global financial crisis hit in 2008, banks in Iceland failed and these depositors fell victim.

Unlike Ireland, Iceland did not guarantee the liabilities of its banks. It elected to bail out domestic but not foreign depositors. The Netherlands and UK stepped up to bail out their own citizens who made deposits in Iceland banks.

These two governments then requested repayment from the Icelandic government. A settlement was negotiated but then rejected by popular referendum within Iceland. Another settlement was negotiated and that too was rejected.

There is currently a legal question regarding whether or not Iceland is obligated to bail out the foreign depositors in its banks. The issue surrounds whether bailing out only domestic depositors is considered illegal discrimination under international law. From an economic perspective, the question is whether repaying the Dutch and UK governments will help attract future foreign investment.

Foreign lenders to Icelandic banks have learned a difficult lesson and that is to ensure that there is a government guarantee before depositing money. These are private institutions and how Iceland behaves regarding the repayment will indicate its future behavior. Will it recognize an obligation to bail out private institutions whenever these default?

Some feel that those who make loans to someone who walks away must bear the blame in the situation. There was no obligation for Icelandic banks to pay debts when they defaulted. These people say that the foundation of capitalism is allocating capital to places where it can be used most efficiently.

This situation is sending another message: that capital is allocated to place where government provides strong implicit guarantees.

crische

No body or parties could do worse than bushy and them reps!!!

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