If a bank goes bust is it obliged to pay everyone off?

The Dutch want answers and the Brits – well they just want their money back. But it looks like they’re both just going to have to wait if Iceland has anything to do with it.

The President of Iceland has refused to sign a bill to repay  more than $5 billion dollars worth of lost bank deposits to Britain and the Netherlands until the Icelandic people vote on it in a referendum.

Should a struggling economy be made to pay back what it’s borrowed? Or is a deal a deal?

Icelanders feel hard done by and believe that the UK is part responsible for driving their banks into the ground. Around a quarter of the population have signed a petition against repaying the money.  Should Icelanders have to foot the bill alone?

Icelandic journalist Iris Erlingsdottir thinks not.
“It would indeed feel satisfying to tell the Brits to cram it. The invocation of anti-terror legislation against a NATO ally in a matter that obviously did not involve any physical danger to the British public was insulting and irresponsible. The bullying tactics employed against a much smaller country that was in obvious distress demonstrated a complete lack of tact or compassion.Nevertheless, Ólafur Ragnar should sign the bill …It’s the right thing to do because the foreign depositors relied on the integrity of the Icelandic banking regime when they placed their funds in Landsbanki’s hands.So, we’re damned if we sign the IceSave agreement, and damned if we don’t. We need every krona we can get to rebuild our damaged economy, and it hurts to see these funds shipped off-shore.”

Here’s another frustrated blogger.

“I think it sucks bigtime that we, the Icelandic taxpayers who had nothing to do with launching or operating Icesave, are stuck with the debt. Yet I can also put myself in the position of those depositors who put their money into Icesave in good faith. ”

Likewise there are depositors putting themselves in the shoes of the Icelanders. Take this dutch blogger – he’s been doing his maths and feels that the foreign investors should support the people of Iceland instead of robbing them.

Should Iceland live up to its obligations? Or is this the risk foreigners take when they decide to invest abroad?

34 Responses to “If a bank goes bust is it obliged to pay everyone off?”

  1. 1 Henry
    January 5, 2010 at 22:18

    We Icelanders or the Government have never said we are not going to pay !!! You have to realise that the country has been in a huge downspiral which is being pull upwards, but the Icesave thing was not the invention of taxpayers and working people in Iceland, which have to pay the bill now for these adventures which Godknows who are ??? I have to pay taxes and more money on food becouse of some bank adventure I had nothin to do with !!! Please at least show a little sympathy, the money we have to pay is to the UK Government, they have already taken over the loans. That is at least as accurate as I know. But you have to check this out for your self. Not everything that comes out from the media is factual !!! I am just a normal Icelander and I have to pay these bills and mine too ???

    • 2 Henry
      January 5, 2010 at 22:23

      And For Your Information – There are People taking their own lives here in Iceland, because of this Global Economic meltdown and also because of the pressure of this Icesave deal. We are being bullied and I am a Voter and I have gotten the message from Britain that if I dont vote “correctly” then …..???? Is this fair treatment ??? And we went on the terrorist list ?? That is strange !!!

      • 3 Henry
        January 5, 2010 at 22:28

        I have to correct myself I said in the first comment “which have to pay the bill now for these adventures which Godknows who are” I meant Adventurers or The Bank and Money guys which have mostly fled the country acording to MY information and are living now in Britain or on some exotic islands and have gotten huge money-piles in some off shore bank accounts !! Thank you.

  2. 4 Bert
    January 5, 2010 at 22:20

    Foreign investors were lured into investing with Icelandic banks by high yields? Well, guess what? That’s why it’s called risk.

    In the US, similarly, people were lured into buying properties that were way above their means. And subprime mortgages were given triple A ratings by fraudulent bankers.

    Looks to me like the greedy, and that would include both the bankers and individuals grabbing at those too-good-to-be-true deals, have gotten what was coming to them. No, the average Icelander owes them nothing, with the possible exception of any guarantee the government had signed up to.

  3. 5 fmog
    January 5, 2010 at 23:06

    Iceland couldn’t pay this money back even if they wanted to. How could 140k/150k population pay back $5m. Iceland was a victim just as Britain, Holland etc were. So they won’t be allowed into the EU. Well aren’t they the lucky ones.

  4. 6 Roberto
    January 5, 2010 at 23:12

    RE “” he risk foreigners take when they decide to invest abroad? “”

    ———- There should be a minimum of 10,000-20,000 politicians, bankers, lawyers, accountants, Wall Street traders and investment fund managers worldwide stripped of every asset serving full life sentences to go with hundreds of businesses stripped of assets and shut down.

    I’ll let the people of Iceland decide what their responsibility is in this global financial meltdown.

    US Big Banks and Wall Street continue to pay bonuses for this $26 trillion fraud that is wrecking lives worldwide and will probably lead to a massive global war in the near future as if bungling Iraq and Afghanistan wasn’t enough for these people.

  5. 7 Jenni from NW
    January 6, 2010 at 00:06

    In Britain, before the banking crisis the rule was 100% compensation for the first £2000 of deposits. So, the fine print DID suggest there is always a risk.

    Of course it would be a great shame for anyone who lost their life savings because of the incompetent actions of those in charge, but realistically those individuals can not repair the damage so there should be some other recourse.

    However, I agree with the blogger that it is very unfair on the Icelandic people. Their country having to pay back the debt caused by a few individuals. No doubt affecting their own quality of life, as public expenditure falls.

    I also have less sympathy for the savers (esp. in Britain) who chose to put their money in IceSAVE, because they were simply motivated by greed (due to the very high interest returns offered by this bank). No-one forced them to do this.

  6. 8 claudine
    January 6, 2010 at 01:08

    Everyone is theoretically obliged to pay back what they owe.
    Still, if a bank goes bust it doesnt have any more funds to pay back the money, how to give it back?
    I think the bankers in this case should be taken to task and should give everything back they ever earned. They anyway get ridiculously high salaries….and for what? To be so incompetent to let their bank go bust.

  7. 9 Tan Boon Tee
    January 6, 2010 at 03:58

    In the 1950s, 60s and 70s, I used to think that a bank was like a giant safe, a caretaker for customers’ money.

    In the 1980s and 90s, I had the impression that banks were doing a good job for the public, lending out money with less stringent conditions and giving good interest to depositors.

    In the 2000s, I gradually lost confidence in banks. And the subprime crisis that triggered the economic downturn shattered my faith in banks completely.

    Yes, by right (or should I say legally), banks are obliged to pay back whatever they received. But, nowadays, anything goes. Who really has the say?


  8. 10 Dennis Junior
    January 6, 2010 at 04:06

    Krupa—Yes, all due respect the Icelandic banks should be REQUIRED to be reimbursed the customers who lost $ in the collapse of the Banking systems….

    ~Dennis Junior

  9. 11 William
    January 6, 2010 at 04:38

    If a bank goes under then I think the bank is obligated to its customers who kept the bank running by depositing funds from the banks first day of trading. I do not think the Icelandic government should be bailing out this particular bank as it will impact the Icelandic people so much. Interest rates on all loans defaulted on during the crunch should be wiped clean so the actual debt is easier to pay. Interest rates are just legal theft anyway in my opinion.

  10. 12 t
    January 6, 2010 at 04:58

    If I have a company and run it into the ground, I’m responsible. What’s next? Everything from bankruptcy to possible jail time.

    Assume that Iceland doesn’t pass this repayment bill. What’s the U.K. govt. going to do? Sue Iceland’s govt.? Get IMF sanctions placed against them? That will only lead to a chain reaction worldwide.

    Meanwhile, U.K. banks are saying, we’ll pay our staff bonuses. And then WE’LL pay the 50% tax. Which is totally pointless.

    Darling and Brown can talk tough all they want. But at the end of the day (with an election looming), there’s NO chance the bankers will ever be prosecuted.

  11. 13 scmehta
    January 6, 2010 at 08:10

    The Banks go bust mostly because of their own mismanagement and misdeeds; sometimes, of course, they are bound by the governments to abide by their requirements and/or orders; they just cannot afford to confront the govts., even if they feel or know that the orders are fraught with financial risks/crises. The Banks are recognized and authorized by their respective govts. for the public-money dealings/investments, so it is also incumbent upon them to ensure proper functioning of the Banks and ensuring that their citizens’/public money is handled/transacted honestly and securely. Hence the Icelanders are absolutely right and just to ask for the pay-back of their deposits/investments in the Banks; The government and/or the Banks just cannot absolve themselves of their responsibilities/commitments.

  12. 14 Hallgrimur
    January 6, 2010 at 09:37

    There seems that foreign media have a will to misinterpret and disinform. The Icelandic president refused to sign the bill but we have not now and not ever refused to pay the debt that is owed.
    The bill that he refused to sign into law is wastly different than the one that was put to the people in august of 2009. By not signing this bill the president was in fact putting the matter up for a vote for the nation.

    And besides, the profit from Icesave was privatized but the debt is nationalized, that is just not right. Give us a little time and everything will be sorted out.

  13. 15 Ronald Almeida
    January 6, 2010 at 10:22

    Of course! the banks took the money to profit from it by using the money and only paying the minimum interest. They should be responsible to pay all the money back. Otherwise the whole law and order system makes no sense whatsoever. Promises made must be kept.

  14. 16 Mohammed Ali
    January 6, 2010 at 11:29

    How on God’s earth can a country repay debt when it is undergoung some sort of economic crises? Don’t the Brits and the Dutch understand that countries with smaller economies suffered the worst from the economic crises? Let them give some breathing space to the Icelanders, when they have the money, they will pay back. Meanwhile, during this period there should be no interest whatsoever add on the current amount.

  15. 17 JanB
    January 6, 2010 at 11:55

    Savers were guaranteed a certain amount if the bank went bust. Iceland decided to let Icesave go ahead with its trickery and profited from the taxes it got from icesave. So, yeah, ultimately the Icelandic government is responsible. I’m pretty sure Icelandic people who invested in Dutch and British banks did get their money back so it’s a matter of responsibility. Iceland should have thought about this and implemented regulations, but they didn’t, they were too busy reeling in taxes from Icesave’s profits.

  16. 18 JanB
    January 6, 2010 at 11:59

    “And besides, the profit from Icesave was privatized but the debt is nationalized, that is just not right. Give us a little time and everything will be sorted out.”

    Privatized? No, it paid taxes over its profits, so the Icelandic public did profit from icesave’s success. Maybe that’s why tiny Iceland didn’t have a law requiring banks to keep reserves.

  17. 19 Henry
    January 6, 2010 at 12:14

    Thanks for good responses !!! I hope My bills wont skyrocket upwards. I have to read your comments better, but of what I have read I see that you understand that Iceland is going to pay, but in a way that wont ruin the country entierly !!! But all this bank-fiasko sadly puts its hands in my pocket. And I have to pay for other peoples “mistakes” thanks for the understanding !!!!! Love U all !!!

  18. 20 Robert
    January 6, 2010 at 12:23

    Iceland faces a big decision over this. The loan is a big amount to pay back now, and is painful. But this is the same pain the rest of the world face.

    Defaulting on the debt will substainly harm Iceland’s future business potential. Which company or country will seriously consider significant investment in Iceland in the next 20years if they refuse to pay. To stave of a deep pain they will expose themselves to a much longer one instead.

    • 21 Bert
      January 7, 2010 at 02:28

      Very true.

      Hopefully, the banks will recover in due course and will be able then to pay back the debt. What would be unacceptable would be for their govt to drive every Icelandic household into poverty, by levying the onerous taxes they would need to pay off the debt now. If even that would be possible, which I believe is mathematically not possible. They owe far more than their GDP, if I remember the numbers correctly.

      But you are right, I think. People will think twice before investing in Icelandic banks in the future. That is the self-regulating mechanism at work. That mechanism has to be allowed to work, not circumvented, driving all Icelanders into the poorhouse for years and years to come, in order to artifically prop up the credibility of their banking system.

  19. January 6, 2010 at 16:30

    This is a question of honour.A referendum would be a waste of time/money,I think we could all forecast the result? A promise to pay,along with a good will gesture of some monies would go along way.In return for that,UK and Holland should cancel any interest accumalated.Also give a generous time lapse.I think it will be a long time before anyone invests in Iceland,if they decide to do a runner.

  20. 23 patti in cape coral
    January 6, 2010 at 16:44

    I don’t know the answer to this at all, it’s easy to see both sides. I still fantasize about the bankers in It’s a Wonderful Life, similar to the way Tan Boon Tee in his comment above saw banks in the 50s, 60s, and 70s. “I used to think that a bank was like a giant safe, a caretaker for customers’ money.”

  21. 25 chip johns
    January 6, 2010 at 16:54

    Do casinos have to give back the stake.
    Are we talking capitalism or socialism here.
    Time to live and learn and stand up and take responsibility for our own greed.

  22. 26 Armchair rebel, UK
    January 6, 2010 at 18:09

    It is not very nice or even fair to expect the Icelanders to repay the debt which was not their fault. My government put up a couple of billion pounds to repay the UK savers and that money came from MY taxes which in effect means that I have now lost out because some people including local councils decided to invest in Iceland instead of at home.

    As far as I’m concerned the UK savers have had their money back compliments of me and every other British taxpayer thanks to Gordon Brown. Iceland is a small country with a population much smaller than many of our towns and cities and I think we should be doing what we can to help them rather than doing everything to make matters worse for them.

    Wake up Britain, the fishing war is long over and it’s time to help these people and embrace them as friends. Just write the debt off and start the new year building up some sort of special relationship with them.

  23. 27 Sam
    January 6, 2010 at 18:15

    Iceland has every right to not repay the money, afterall when you invest in a bank you do exactly that, invest.

    A bank failing is the risk you take when you choose to deposite money and reap interest on it.

    However from the people of icelands point of view it would be economic suicide to not repay the money because by not repaying it you are effectively declaring iceland bankrupt. IT may be 5 billion better off for now but in terms of economic recovery its chances are slim.

    When a country goes bankrupt its just like when a individiual does it, not somthing to be taken lightly.

  24. 28 Tom K in Mpls
    January 6, 2010 at 19:58

    Some things are missing here to me. Was the original issue supported by the Icelandic government? If not, it would be moronic for the government to even consider backing it. If the government was part of the original issue, then they should repay to the best of their ability. Then the people of Iceland need to do two things, hold the individuals involved highly accountable and limit governmental powers to prevent it from happening again.

    As for other governments and private investors, caveat emptor.

  25. 29 T
    January 7, 2010 at 05:02

    Since bankers in many Western countries are taking the same hardball tactics against their govts. and the public, what’s the answer?:

    Nationalize all banks.
    If the govt. won’t investigate and prosecute these bankers, then the customers should take their money out. Would the bank actually deny people the right to get their funds out?
    Iceland refuses to pay the U.K. back. Then other countries refuse to pay their debt as well. If one does it, the whole chain falls apart.
    Everyone who’s angry at their high credit card interest rates: tell the bank, lower the rates and stop the stupid fees. Or I don’t pay. Sue me, Send me to jail.

    Now, reality. Which one of these has any chance of happening?

  26. 30 A R Shams
    January 7, 2010 at 17:04

    Come what may a bank is cent percent obliged to pay back its clinents’ deposits as and when just claimed.

  27. 31 venebles
    January 8, 2010 at 18:26

    I laud the Icelandic President. Enough is enough and no one has lifted a finger to help Iceland since the collapse. Stuff the banks and the investors.

  28. 32 M
    January 10, 2010 at 05:29

    At the end of the day, the rich are looked after, and the working class suffers. The greed in the world today dictates this way of life. Not a thing we can do about it.

  29. January 10, 2010 at 16:08

    Banking is based on trust. You give your money to strangers for safe-keeping. When that trust is breached, the strangers are obliged to pay.

  30. January 11, 2010 at 00:26

    Many should watch ‘Its A Wonderful Life’ movie; money is NOT in the banks safe, it is lent to those who cannot afford to buy their home for-cash…

    High interest-rates reflect RISK; pitiful-returns available from National Savings [in the UK]

    With 0.5% on-offer at the Post Office why would anybody RISK 5% with ANY-bank?

    May I interest-you in the Brooklyn Bridge; I accept cash 🙂

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