An International Battle Over One Of The Most Boring Things In Finance
Originally published on Mon February 4, 2013 10:36 am
This week saw the end of a years-long, international, multi-billion-dollar battle over one of the most boring things in finance: savings accounts.
At the center of the battle was Iceland, a tiny country where the banks grew into international behemoths during the credit bubble.
The banks got so big partly by convincing foreigners to open up online savings accounts. In particular, lots of people in England and Netherlands opened up "ICESAVE accounts" with a bank called Landsbanki. During the financial crisis, the bank collapsed.
The government of Iceland stepped in to make sure everyone in Iceland got their money out of their ICESAVE accounts. But the government didn't do the same thing for the British and Dutch people who had put their money in the bank.
The British and Dutch governments stepped in and made whole their own citizens who had lost money in the accounts — but they also promised to try to get the government of Iceland to pay them back.
Eventually, Iceland held a national referendum to decide whether to pay back the British and Dutch governments. The people voted that, no, Iceland should not repay the foreign governments. (Here's our story on the referendum.)
After that, the British and the Dutch took Iceland to court, to try to make the government pay. The ruling came down this week — and, basically, Iceland won. (This Reuters story has more details.)
I talked this week with Baldur Hedinson, a former Planet Money intern who grew up in Iceland and lives there now.
In the referendum, he voted in the minority: He thought Iceland should immediately repay the British and Dutch governments.
But, when I talked to Baldur this week, he told me his thinking had changed since then. At the time of the referendum, he worried that if Iceland refused to repay the British and Dutch, the country would be shut out of the world economy and would suffer as a result.
But that hasn't happened.
"Our economy is doing OK," Baldur told me. Things there aren't perfect, but Iceland hasn't been shunned. And the court's verdict this week validates the country's decision not to repay the foreign governments.
'"When I look back," Baldur said, "I think I voted the wrong way."
STEVE INSKEEP, HOST:
One of the stranger stories of the financial crisis may finally have come to an end. It was an international battle over bank accounts on a scenic island nation that touches the Arctic Circle. More precisely, it was a battle over who would pay when those bank accounts came up empty. Here's David Kestenbaum with NPR's Planet Money team.
DAVID KESTENBAUM, BYLINE: The first remarkable thing about this story is where the bank accounts were located. The bank was on a small, often frozen island in the middle of the ocean. In fact, it's named for being frozen: Iceland. As it happens at the time all this was unfolding, our Planet Money intern, he was from Iceland. Hey, Baldur.
BALDUR HEDINSON, BYLINE: Hello, David.
KESTENBAUM: I got to say your last name right. Let me try: Hedinson?
HEDINSON: Very good.
KESTENBAUM: Nice to have you back. Get us started: How big were the banks?
HEDINSON: The banks were huge. Before the financial crisis, they were 10 times the size of the economy. And they were even running TV ads abroad.
KESTENBAUM: Here, let's play my favorite ad. It starts John Cleese of Monty Python fame. It was for a bank called Kaupthing.
(SOUNDBITE OF ADVERTISEMENT)
JOHN CLEESE: Kaupthing is the biggest company is Iceland. It's a company where you get all the benefits of a huge, global, multimillion - I mean, how many millions live in Iceland?
UNIDENTIFIED MAN #1: Three hundred thousand.
CLEESE: Three hundred thousand million?
UNIDENTIFIED MAN #1: No, just 300,000.
CLEESE: Huh. So, Kaupthing is the biggest company in this tiny, little country. Tell me, how many companies do you have in Iceland? What, half a dozen?
KESTENBAUM: Ads like this worked in part because the savings accounts paid surprisingly high interest rates. And lots of people in England and the Netherlands opened up savings accounts with one bank in particular, Landsbanki. They were called ICESAVE accounts. During the financial crisis, the bank collapsed, and everybody tried to get their money out, but there was not enough money to go around.
HEDINSON: My government stepped in and made sure that everybody here in Iceland got their money back. But they didn't do the same for people abroad.
KESTENBAUM: And the British and Dutch governments, they were pretty unhappy about that, since a lot of their citizens had money in ICESAVE accounts. So what did they do? They stepped in and bailed out their own citizens. Here's British Finance Minister Alistair Darling on the BBC that day in 2008.
(SOUNDBITE OF BBC BROADCAST)
ALISTAIR DARLING: I'm going to make it clear in the House of Commons later today that we will stand behind the depositors, the savers in ICESAVE to make sure that they get their money back. I wouldn't normally do this, because this is a branch of a foreign bank, but these are exceptional times. And, you know, it really is quite extraordinary when you get a country like Iceland, which is basically defaulting on its obligations. Now, we're going to pursue them, you know, with, you know, vigor.
KESTENBAUM: This pursuing with vigor, it went on for quite a while, the British and Dutch governments saying: You owe us money, and Iceland saying, no, we don't.
HEDINSON: Eventually in Iceland, we had a national referendum on this question. Should we pay the British and the Dutch back or not?
KESTENBAUM: It was a big decision. Some people felt, no, you know, these are private banks. Why should we pay for their mistakes? Why should we pay what could be a few thousand dollars per person? Iceland, after all, is a tiny country. England is 166 times larger. Baldur, though, you did not feel that way.
HEDINSON: I was really worried what would happen if we didn't pay the back. I mean, would people want to trade with us? Would people want to invest in Iceland? Would people trust Icelanders ever again? So I voted yes. I said we should pay the money back. I just thought it was the right thing to do.
KESTENBAUM: You were outnumbered, though, Baldur. There were more no's than yeses.
HEDINSON: Yeah. I definitely lost. But it still wasn't over. After that, it went to international court.
KESTENBAUM: And this week, this week finally, the court issued its ruling. There was a press conference on TV.
(SOUNDBITE OF PRESS CONFERENCE)
UNIDENTIFIED MAN #2: Thank you very much. I'll just...
HEDINSON: Basically, Iceland won. We didn't have to pay any money back.
(SOUNDBITE OF PRESS CONFERENCE)
UNIDENTIFIED MAN #2: And that - in very, very short summary - is what the court said over about 240 paragraphs.
KESTENBAUM: In England, this ruling barely made a ripple in the newspapers.
HEDINSON: Here in Iceland, people were really relieved. The TV cameras even caught our prime minister doing a little dance.
KESTENBAUM: What did the dance look like?
HEDINSON: It was very awkward.
KESTENBAUM: OK. So, the court answered this one question. Iceland does not owe any extra money. But there was this bigger fear you had, Baldur, which is that if you didn't pay up, you were worried Iceland's economy might suffer, that Iceland might be thrown out of the international community, seen as a deadbeat. Did that happen?
HEDINSON: No, it didn't. And, actually, our economy is doing OK at the moment. It's not great, but it's doing OK.
KESTENBAUM: The world still needs Iceland.
HEDINSON: The world still needs Iceland, and Iceland definitely still needs the world.
KESTENBAUM: And how do you feel about your vote?
HEDINSON: When I look back, I think I voted the wrong way. Yeah. I voted the wrong way.
KESTENBAUM: Baldur, you know, no one ever admits they're wrong on radio.
KESTENBAUM: All right. We've just got to do the end. I'm David Kestenbaum in New York.
HEDINSON: And I'm Baldur Hedinson in Reykjavik, for NPR News. Transcript provided by NPR, Copyright NPR.