It should not be a surprise that Americans are losing their faith in Capitalism as they mistakenly identify it with the recent highway robbery of tax payers practiced by so called Capitalist states. For the socialization of private loss and the bout of Fed money printing is nothing less. Unfortunately, the only place tax payers were in a position to prevent their government from such action is in Iceland and they said no. FT editors are right. Other countries should follow Iceland’s example.
When the Icelandic people faced a second referendum on the Icesave affair, they could have been forgiven for deciding that they had had a good fight but it was time to throw in the towel. Instead, three-fifths of voters faced down UK and Dutch bullying, denying that taxpayers must bail out failed private banks unless a court rules that they are legally obliged to do so.The Icelandic people’s admirable insistence on this principle may cost them dearly – or not, depending on what a court decides. But they prove that other governments are wrong to say there is no alternative to paying for banks’ losses.
Landsbanki’s bankruptcy in 2008 made it clear that Iceland’s deposit insurance scheme was unfit to deal with the collapse of one, let alone of all three of the country’s main banks. The Netherlands and the UK covered their citizens’ deposits in Landsbanki’s Icesave accounts, receiving claims on Landsbanki’s estate in return. Icelandic insolvency law, unlike most of Europe, ranks depositors above other creditors. So these are priority claims on assets worth an estimated 90 per cent of the lost deposits, which amount to some €4bn – more than a third of Iceland’s annual output.
The dispute centres on who is responsible for the shortfall, interest costs and the tail risk of assets fetching a lower price. London and The Hague insist these are Icelandic sovereign liabilities. Reykjavik disagrees but its politicians pragmatically agreed two settlements – both of which Icelanders rejected.
The dispute is now headed for the European Free Trade Association court. Iceland has a good case: European law tells states to introduce properly resourced deposit guarantee schemes but explicitly rules out sovereign liability. While the Icelandic scheme did not have resources for the kind of crisis that ensued, nor does any other country’s. Claiming that UK or Dutch taxpayers would pay a third of annual income for foreign deposits in equivalent bank insolvencies is either hypocritical or delusional.
The vote is unlikely to upset an International Monetary Fund programme or bilateral loans. But it may tempt the Dutch and British to stall Iceland’s European Union membership bid. It would be a tragic mistake to punish a country for claiming its right to resolve a legal dispute in a court of law – or demonstrating that it is possible to let overstretched banks fail.
At the time of the collapse, people said Iceland and Ireland differed only by one letter and a few weeks. Their views on picking up the bill for banks show the difference is more instructive than that.
By the way, Ayn Rand described just such a perversion of Capitalism in Atlas Shrugged. The movie could not have come out in a more opportune time.
For more, see my History News Network blog Deja vu
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