Clash of the Pygmies: UK vs. Icelandic 'Terrorists'

The credit crisis has laid low two previously high-flying countries whose economies have been fueled by oodles of leverage: the UK may pony up $87B to protect its largest commercial banks, while Iceland is on the verge of seeking IMF help. Before getting to the current stories, a bit of history. Prior to the finalization of the UN Convention of the Law of the Sea (UNCLOS) in 1982, British fishing vessels regularly trawled what Iceland viewed as its waters. In particular, the UNCLOS provision for the creation of the Exclusive Economic Zone (EEZ) gave a country discretion over the natural and mineral resources for an area extending to 200 nautical miles from its coast. After UNCLOS, things cooled down between these two countries--but not forever. The International Herald Tribune discusses the so-called "Cod Wars" and brings the UK vs. Iceland story up to date:

Fishing has been the focus of many clashes between Iceland and its European neighbors - most heatedly with Britain, in what became known as the Cod Wars of the 1950s to the 70s. The two countries clashed repeatedly over Iceland's move to extend exclusive fishing rights into waters that had long been trawled by British vessels, too.

Tension with Britain has flared anew during the current crisis. It centers on hundreds of thousands of accounts that Britons hold in online branches of the Icelandic banks; now they fear they will lose their money, and the British government wants Iceland to pay up. The government of Prime Minister Gordon Brown of Britain has used powers granted under anti-terrorism laws to freeze British assets of Landsbanki until the standoff is resolved.

"We do not consider this to be a particularly friendly act," Haarde said, adding that he had tried to defuse the situation in a telephone call with Brown on Thursday.

In a previous post, I noted how interrelated the UK and Iceland have become through Icelandic purchases of British firms and the large presence of Icelandic financial concerns there. Now that all hell has broken loose, many Brits are vulnerable. This is especially so for those who have deposits in Icelandic banks. As noted above, the British government recently resorted to using anti-terror provisions to freeze funds in Icelandic banks operating in the UK. Although losing your savings is indeed a terrorizing event, I doubt whether these provisions were used for their intended purposes. It seems Icelandic authorities have taken umbrage to being labeled as "terrorists," saying the UK is to blame for creating a crisis by using such laws to seize these banks' assets:

A diplomatic row broke out between Iceland and Britain Thursday over how to deal with hundreds of millions of pounds of British deposits trapped in collapsed Icelandic banks.

Prime Minister Gordon Brown said Iceland's failure to guarantee the deposits was "completely unacceptable." "This is fundamentally a problem of an Icelandic registered company (and) Icelandic registered financial services authority -- they have failed not only the people of Iceland, they have failed the people of Britain," he told the BBC.

His Icelandic counterpart Geir Haarde had earlier expressed anger at Britain's use of anti-terror laws to freeze Icelandic assets in Britain, and said he had made his views clear to Chancellor Alistair Darling in a telephone call. "That was not very pleasant. I'm afraid that not many governments would have taken that very kindly, to be put in that category and I told the Chancellor that we were not pleased with that...I could not regard us in any way as the people that this act is supposed to apply to -- terrorists," Haarde told a news conference.

Brown remained unrepentant, saying he had been left with no other option. "I think the public ... will understand that when people's savings and deposits are at risk, we are entitled to take the action that is necessary to seize the assets if we are not going to get any other way of making it clear that people... will find that their savings and deposits are safe," he told Sky television. "Now we took that action -- I don't apologise for it. I think it is the right thing to do in the circumstances."

British officials have said repeatedly this week that they were having difficulty "getting complete clarity" from Icelandic authorities on how British savers were exposed and whether they would be able to recover their deposits. It emerged Thursday that 108 British local councils had a total of 799 million pounds on deposit with Icelandic banks [my emphasis].

Most of them will be able to continue to provide services, but the British government said it would help any councils with short-term cash flow problems on a case-by-case basis. The British government has pledged to protect the deposits of all British retail savers with those banks, but has not extended this guarantee to corporate investors.

The British government's actions chiefly concern two entities: First, an online bank, Icesave [is it just me or the name just dripping with irony?] a subsidiary of Landsbanki, Iceland's second largest bank. Going to their website tells us that Icesave has been iced--probably for good--and directs us to a notice by HM Treasury. The notice then cites the icing of another Landsbanki subsidiary, Heritable. Funds there have been transferred to Britain's Dutch buddies:

Heritable is regulated by the FSA. The FSA has determined that Heritable no longer meets its threshold conditions, and is likely to be unable to continue to meet its obligations to depositors. The FSA concluded that it is in default for the purposes of the Financial Services Compensation Scheme. The Treasury has used the Banking (Special Provisions) Act 2008 to ensure a resolution that preserves financial stability and provides protection and continuity of business for depositors.

Heritable’s retail deposit business has been transferred to ING Direct, a wholly-owned subsidiary of ING Group. ING Direct is working to rapidly ensure that it is business as normal for all customers.

This action by the Tripartite Authorities protects savers’ money and provides certainty for retail depositors. The transfer of the retail deposit book has been backed by cash from HM Treasury and the Financial Services Compensation Scheme.

The remainder of Heritable’s business has been put into administration. Any retail depositors eligible to claim under the Financial Services Compensation Scheme whose business has not been transferred to ING will be paid out in full through the Financial Services Compensation Scheme.

What the UK and Iceland are fighting over is who will now pay to reimburse the deposit holders at the Landsbanki subsidiaries. Reports mention that the first GBP 16,000 should be paid out by Icelandic regulators as part of their deposit insurance scheme, with the UK topping off the rest to the amount of GBP 50,000. Further complicating matters, the UK has more recently guaranteed savers not just GBP 50,000, but the entire deposit amount:

The savings provider is not covered by the financial regulator's compensation scheme. Instead, the first £16,000 of a customer's savings deposits is covered by the Icelandic regulator, with the UK service making up the rest, up to the current £50,000 deposit guarantee limit.

Following Landsbanki's nationalisation earlier this week, Iceland's government seems to have broken this commitment. "The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here," Mr Darling said.

"Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it," he added. "The British scheme would top that up to £50,000, but people over and above that would lose out...But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."

It will be interesting to see how this dispute plays out. to say the least. Ah, the joys of "Anglo-Saxon" economic governance. In the meantime, someone should tell John McCain about these enemies of freedom so he can issue a bellicose statement ASAP.