5 Jan 2010

Extraordinary news from another northern rock

Extraordinary news from that northern rock in the mid-Atlantic.

Iceland’s president has provoked a constitutional crisis by refusing to sign the bill that is supposed to compensate UK taxpayers for £2.3bn used to bail out British savers in the ill-fated Icesave.

Keen viewers will be aware that two years ago, Channel 4 News flew to Reykjavik to ask some tough questions to its central bank governor, David Oddsson, about billions of pounds of ordinary UK savers’ money that had been sucked up to Iceland by internet savings accounts.

The report is here It has won four major broadcast news awards.

My instincts were pretty simple. Icelandic banks had been a no-go area for international investors for some time. Yet they raised huge sums, more cheaply, from unsophisticated investors in Britain.

So the hedge funds had said “Nei”, ordinary British pensioners and workers were lured by table-topping interest rates, slick marketing and a supine personal finance media across our broadsheet newspapers and major broadcasters, that evangelically recommended Icesave and Kaupthing Edge.

Oddsson’s interview then was fascinating. Here was a man who clearly had to say, as he did, “Your money is safe with us”. Yet Mr Oddsson was also a former prime minister of Iceland, and remarkably, as local mayor, he was the other man in the photo at the famous summit between Reagan and Gorbachev.

And I could tell he was uncomfortable with striking the balance between reassuring the British savers who were funding Iceland’s banks, and defending some of the excesses of Iceland’s banking sector. (By the way he is now, rather bizarrely, editor of a major Icelandic newspaper).

One Oddsson response that we aired in our original investigation is highly pertinent today. I challenged him that there was no way that Iceland could afford to support the deposit protection obligations amounting to half of its GDP. He said: “The Icelandic state being debtless, we could do this… if we chose to.”

Well, the people of Iceland are understandably sceptical of the need for them to stomach debts worth £11,000 per Icelander that were incurred by reckless bankers. Nonetheless, an IMF bailout and prospective membership of the European Union depend on this deal. This is the mess created when a banking system outgrows the capacity of a state to support its liabilities.