Iceland unexpectedly won its legal battle to avoid being forced to pay back the British and Dutch governments for not honouring deposit guarantees for savers in Icesave.
The EFTA (European Free Trade Association) court on Monday dismissed all claims against Iceland, ruling that it not breached the deposit guarantee directive due to the magnitude of the systemic crisis that Iceland experienced. It also held that Iceland had not discriminated between depositors in its own country and those in the UK or Netherlands.
Iceland reacted with relief after government officials had long been prepared for a defeat. "It is a considerable satisfaction that Iceland's defence has won the day in the Icesave case; the EFTA Court ruling brings to a close an important stage in a long saga," the government said in a statement.
The case arose after Landsbanki, the now collapsed Icelandic bank, attracted thousands of savers in the UK and Netherlands by offering high-interest accounts in Icesave. After Landsbanki's demise the British and Dutch governments paid the deposits of the savers themselves, and then demanded the money back from Iceland.
The Icelandic public twice rejected those demands in referendums, in part due to popular anger at how the UK in particular had behaved by using antiterrorist legislation in the dispute.
But Iceland has still been paying the governments back. Officials in Reykjavik said Iceland has paid IKr585bn ($4.55bn) of the IKr1,166bn claims from Icesave, equivalent to more than 90 per cent of the minimum deposit guarantee the two governments were obliged to pay.
"It is expected that the Icesave claims will be paid out in full by the actual debtor, the estate of the failed Landsbanki," the Icelandic government confirmed on Monday.
The case has been closely watched across the European Union because of concerns that a ruling for Iceland could undermine cross-border banking and leave many retail depositors unprotected in case of a major internal banking failure.
Indeed, the judges wrote that the deposit protection directive "aims expressly to preclude an excessive shifting to the State of the costs arising from a major banking failure". If that finding were to be applied across the EU, it would leave cross-border depositors vulnerable if their bank happens to be based in a smaller or less sturdy state.
However, the impact may be limited because the court found for Iceland based in part on differences between the wording of the deposit protection directive that was in place at the time of the crisis and the new one that was adopted in 2009. Nowadays, the court found, EU member states are required to insure that coverage is to protect deposits of up to €100,000 for each and every depositor. The old directive did not set a minimum requirement.
"It appears that under the new version of the provision EEA States are obliged to ensure a certain level of coverage. Whether this obligation is limited to a banking crisis of a certain size would require further assessment. However . . .[the new] directive is not applicable in the present case," the court wrote.