Iceland and the politics of money

In the fall of 2008, Icesave Bank, a subsidiary of Landbanksi, went belly up, becoming another casualty of the global financial crisis. Icesave was an online bank that offered high interest rates on savings accounts, high enough to lure depositors from Britain and the Netherlands. When the bank went bankrupt, Iceland's government stepped in and paid depositors from Iceland back.

Foreign depositors? Not so lucky. Iceland's government tried more than once to pass legislation allowing them to send taxpayers' money overseas to repay depositors who were expecting the government to back their lost savings, but Iceland's voters repeatedly refused to pass that legislation. They held protests against using taxpayer money to reimburse lost accounts, and ultimately the depositors were not reimbursed by Iceland.

Since then, Britain and the Netherlands have been trying to sue Iceland for repayment through the EU courts. Britain even tried to use what they called "anti-terrorism legislation" to force Iceland to cover the lost accounts. This week those EU courts have set down their verdict: Iceland does not have to pay.

Wow. I'm torn between the joy of seeing taxpayers say no to bailing out big banks that fail because of financial recklessness and the thousands of people and organizations who lost money. More than $10 billion evaporated, though much of it was repaid by the British and Dutch governments to their citizens.

The argument and outcome are, of course, much more complicated than I've made them sound, but the idea of this as an EU and potentially a world banking precedent is, well, unprecedented. If we cannot have faith in foreign banks to repay losses in the event of a bankruptcy, will that affect the global financial market and lead to more big depositors keeping money at home? Or will it lead to a more populist direction, with depositors calling on banks to be more cautious in their dealings to ensure that deposits don't disappear?

What do you think?

Image courtesy of Li'l Wolf via flickr