Be nicer to Iceland???

People are starting to write into the media castigating the UK Government's hard line toward Iceland, in the face of the collapse of that country's financial system (and maybe its economy too). Some of the objections centre on the Government's use of anti-Terrorism legislation to seize the UK assets of Landsbanki and Kaupthing -- objections on the lines of "see? Once you give Governments that kind of power for particular purposes, they'll use it when they're not supposed to". I guess there is some merit in this, but most of the opinions I've seen from lawyers suggest that the anti-Terrorism law was used because it was the quickest way to meet the Government's objectives. There were other ways the Government could have achieved the same ends, but they would have taken time, time which in the circumstances the Government maybe felt it didn't have.

Most of the objections, though, just criticise the Government for general heavy handedness. One letter-writer described Iceland as "the least threatening people on earth". This seems a bit rich, considering the past history of bad blood between the two countries, especially during the "cod wars" a generation or two ago. The Icelandic government was both duplicitous and belligerent at that time. It was not exactly scrupulous over the legal niceties when it unilaterally extended its territorial waters no fewer than three times, so it's a bit rich of Prime Minister Geir Haarde to act all offended at the UK's actions now. (How weird is it that the Icelandic PM is a virtual namesake of the founder of the UK Labour Party??)

Let's think about this in a slightly abstract way for a second. Ignore the individual companies involved and think in terms of Iceland plc and UK plc. Iceland plc has borrowed a lot of money from UK plc and has used the money to buy some of UK plc's assets. Now Iceland plc can't pay the money back. Is it so unreasonable for UK plc to seize back its assets? I've been involved in a number of what are euphemistically called "distressed situations" in banking, and the UK Government's actions are pretty much what any banker would do in a comparable situation.

It is, of course, a bit more complicated when you put back more of the detail: three privately-owned Icelandic banks buying private UK assets. However, the Icelandic banking system is very unusual. The banks have not been in the private sector for very long, and in the case of Kaupthing, founded only in 1982, don't have a very long track record. The links between the central bank and the private banks are exceptionally tight, or to put it another way, the regulatory system is inadequate. The banks have grown stupendously fast almost entirely on the basis of taking deposits outside Iceland and lending that money for the purchase of assets outside the country. So Iceland doesn't account for most of their business, doesn't regulate them adequately and admits it can't provide the deposit insurance it promised. In what sense are these Icelandic banks? It seems no more than a flag of convenience, the equivalent of registering oil tankers in Liberia or Panama.

I'm not privy to the UK Government's thinking on this, but it seems to me they must have focused on a nightmare scenario: Icelandic companies sell their UK assets and repatriate the proceeds to Iceland, where they're used to pay back some of the banks' domestic depositors, leaving the UK savers high and dry. You can imagine the media outcry if that had been allowed to happen. None of this changes my view that the UK Government should have thought twice before agreeing to pay back all those who chose to save with the Icelandic banks, but it's surely justified in doing everything it can to minimise the cost to the UK Treasury of those banks' failure.