In many countries, taxpayers are rightly cranky over the idea that their governments are bailing out banks and others -- including their own regulators and central bankers -- who helped create the 2008 global financial meltdown. Iceland appears to be setting a new standard of taxpayer response that politicians everywhere might want to note.
Under pressure from voters and taxpayers, Iceland's President, Olafur Ragnar Grimsson, this week refused to sign a bill to reimburse almost $6-billion to Britain and Holland for money paid to depositors who put money into two high-flying Icelandic banks that failed in 2008. The president was responding to taxpayers who are essentially rebelling against being forced to pick up the tab for a financial bailout of depositors, regulators, foreign governments and even their own government and politicians.
It is only a bit of an exaggeration to say that the people of Iceland are refusing to pay for all the schemes of private bankers and public officials who, over the course of the last decade, drove the whole of Iceland into bankruptcy.
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The Iceland rebellion has been characterized as foolish. Fitch, the credit rating agency, warned of "a renewed wave of domestic political, economic and financial uncertainty" for Iceland and downgraded the country's main sovereign rating to junk status. Paul Rawkins, senior director in Fitch's Sovereign ratings team, told a news agency that the standoff "represents a significant setback to Iceland's efforts to restore normal financial relations with the rest of the world."
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The immediate focus of the current Icelandic revolt tells much of the story. Icelanders are being asked to repay money that was deposited in Icelandic banks by mostly British and Dutch residents during a frenzy of fund-raising by Landesbanki, one of Iceland's hot-shot banks. In 2006, Iceland's financial condition began to deteriorate, risking a drain on bank funds and a currency run. Rogers Boyes, in his book, Meltdown Iceland, describes how "the Icelandic government ... needed the banks to appear more stable.
So a scheme was hatched to set up competitive online banking services that would lure cash from Britain, from the Dutch, and from Germans." The scheme, a brilliant marketing move, was called Icesave.
Icesave became a cash machine for Landesbanki. "The only thing I have to do is look each day and see how much money came in. Fifty million pounds came in, just last Friday," said Landesbanki CEO Sigurjon Arnason in 2006. Offering rates of up to 6%, within five months Icesave accounts attracted $10-billion in British deposits from 300,000 people -- equal to the entire population of Iceland. These deposits were marketed as if they carried deposit insurance from Iceland. Another Iceland bank also raised money using the same technique.
When the banks collapsed, however, there was no deposit insurance available. Deposit insurance is normally structured to cover the failure of some institutions by taking pooled money from the surviving institutions. But in a systemic failure, when all banks our essentially out of business, who pays the depositors?
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