October 18, 2019

DealBook: Iceland Wins Major Case Over Failed Bank

A branch of Landsbanki, Icesave's corporate parent, in Rejkjavik.Olivier Morin/Agence France-Presse — Getty ImagesA branch of Landsbanki, Icesave’s corporate parent, in Rejkjavik.

BRUSSELS — Iceland won a landmark case at a European court, ending an acrimonious legacy from the collapse of its banking system more than four years ago.

On Monday, the court upheld the country’s refusal to promptly cover the losses of British and Dutch depositors who put more than $10 billion in Icesave, the bankrupt online offshoot of a failed Icelandic bank.

In a judgment issued in Luxembourg, the court of the European Free Trade Association, or EFTA, cleared Iceland of complaints that it violated rules governing the protection of depositors drawn up by the European Union. While Iceland is not a member of the Union, it is bound by most of its rules, as a member of EFTA.

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The case has attracted widespread attention because it touches on issues of cross-border banking that have been at the center of the European Union’s efforts to ensure the future stability of the region’s financial system. The Iceland banking collapse in 2008 — and the mayhem it caused far beyond the country’s borders — raised issues directly relevant to the 27-nation Union.

Monday’s court ruling in Luxembourg marks a significant victory for Iceland. Unlike Ireland, Iceland declined to use taxpayer money to bail out foreign bondholders and depositors. This triggered a bitter dispute with Britain, which used anti-terrorism rules to take control of assets held in Britain by Icesave’s parent, Landsbanki.

In a recent interview with British television, Iceland’s president Olafur Ragnar Grimsson denounced Britain for its legal approach — using anti-terrorist rules — to seize Icelandic assets. “We were there together with al Qaeda and the Taliban on that list,” he said. “We have not forgotten that in Iceland.” He referred to the maneuver as Britain’s “eternal shame.”

After the 2008 crash, the Icelandic government tried twice to settle the Icesave debts. But the country’s voters, asked to approve settlement plans in two separate referenda, rejected the proposals. Foreign holders of bonds issued by Icesave’s corporate parent, Landsbanki, and two other failed Icelandic banks lost some $85 billion. Those losses were not at issue in the Luxembourg case, which involved only customers with bank deposits.

The Iceland government, in a statement by its foreign ministry after Monday’s verdict, said that Landisbanki had already paid out some $4.5 billion to Icesave depositors, covering nearly half of all initial claims by individuals, chartities and others in Britain and the Netherlands. The ministry said the bank would eventually reimburse the rest.

“It is a considerable satisfaction that Iceland’s defense has won the day in the Icesave case,” the Icelandic government said in its statement. The Luxembourg ruling, it added, “brings to a close an important stage in a long saga” and “Icesave is now no longer a stumbling block to Iceland economic recovery.”

Iceland’s economy, which went into a nosedive after the banking crash, is now growing again. The credit-rating agency Fitch recently raised its rating of the country’s debt, noting that its ‘‘unorthodox crisis policy response has succeeded in preserving sovereign creditworthiness.’’

But the Icesave saga has clouded the recovery.

Icesave collapsed in October 2008 along with its parent, Landsbanki, and the rest of Iceland’s banking sector in a spectacular blowout. Caught in the wreckage were some 350,000 people in Britain and the Netherlands who, lured by unusually high-interest rates, had put their money in Icesave accounts.

The Icelandic government protected the deposits of Icelanders who had money in failed banks by moving them into new, solvent versions of the banks. But the government declined to cover the losses of foreigners with on-line accounts operated by Icesave, a move that prompted complaints of illegal discrimination to the court in Luxembourg.

The case against Iceland was bought by the Surveillance Authority of the European Free Trade Association and revolved around interpretation of a European Union directive requiring that deposits in European banks be covered equally by deposit guarantee systems. Britain and the Netherlands supported the case.

But the court, according to a statement summarizing the verdict, ruled that the directive on guaranteeing bank deposits did not oblige Icelandic authorities to ensure immediate payment to depositors in Britain and the Netherlands “in a systemic crisis of the magnitude experienced in Iceland.”

Iceland argued that all Icesave depositors will eventually get their money back but that the government, confronted in 2008 with a total breakdown of the financial system, did not have the means to offer immediate payment of all claims. The court also cleared Iceland of complaints that it violated non-discrimination rules when it protected domestic depositors by moving their accounts to solvent new banks but reneged on protecting foreign depositors in Icesave.

Article source: http://dealbook.nytimes.com/2013/01/28/iceland-wins-major-case-over-failed-bank/?partner=rss&emc=rss

For Britain, Another Step Away From Europe

Many bankers and economists are pondering that question after Mr. Cameron’s surprising decision last week to leave Britain out of a historic accord aimed at moving Europe closer to political as well as monetary union.

Mr. Cameron said the pact lacked safeguards to protect the City of London, Britain’s version of Wall Street, against future regulations that might not be in its best interests. And because France and Germany would not bend on his proposed protections, he would not sign on to their plan for more tightly coordinated oversight of European Union governments’ revenue and spending.

Now, though, some in Britain worry that the nation’s ability to halt or shape what is expected to be a wave of future financial regulation from European Union headquarters will be severely constrained if Britain does not have a seat at the negotiating table. And so it remains to be seen whether the City financiers Mr. Cameron wanted to protect will eventually end up feeling grateful — or marginalized.

To be sure, few believe that his decision represents an immediate and mortal blow to London’s ambition to remain a center of international finance. Whatever banks and their overseers might eventually do on the Continent, much of the rest of the financial world — including the money centers of New York, Hong Kong and Tokyo — is likely to still see London as a primary node in the round-the-world, round-the-clock network.

Britain’s banks make more cross-border loans than those of any other country in the world, 18 percent of the global total. London is also home to the largest foreign exchange market in the world. And it remains the headquarters for the large banks that trade European sovereign debt, a business unlikely to go away any time soon.

Financial machinery aside, language, habits and history suggest that London will continue to be a magnet for the globally minded.

But some analysts nonetheless worry that Mr. Cameron’s desire to espouse the stubbornly independent British bulldog could harm the City over the long term.

“This is the worst possible news — the relative decline of the City of London relative to other financial centers in Europe is now a very real risk,” said Graham Bishop, a former London banker who is a consultant on European financial and regulatory matters. 

The decline will not happen at once, he argued. Europe is well aware that financial institutions in London have strong and deep links to the Continent.

But Britain, whose refusal to adopt the euro currency has long put it somewhat at odds with the European Union’s other biggest economies, appears to have estranged itself further from Europe’s policy inner circle.

With Britain now essentially having but one vote among 27 others in the European Union, the chipping away of London’s competitive position will be inevitable, Mr. Bishop contended.

Mr. Cameron has been cheered by the powerful faction of his Conservative Party that sees evil in all that Europe does. But it is unlikely that the constituency his veto was meant to protect — banks, hedge funds and insurance companies operating in the City of London — would welcome a further waning of Britain’s ability to influence regulations from Brussels.

Those executives, many of whom are French, German or Spanish, are a pragmatic, global lot. And they tend to shy away from public confrontation and wish only for an operating environment that continues to play to the City’s strength: providing competitive banking and financial services to an increasingly global economy.

“They will be very worried,” Mr. Bishop predicted.

For Britain, the stakes are huge.  

The fear is that the pact the other European Union members agreed to at the Brussels summit meeting will harden an emerging 17-member euro zone caucus within the 27-member European Union — a bloc that votes together on issues, particularly on financial regulations, that could work against the City of London.

Until now, Britain has been able to assemble blocking minorities on measures it opposes. That happened, for example, with a recent proposal to raise revenue for European governments by taxing financial transactions — a tax that would have put new fees on every trade of stocks, bonds and other financial instruments.

It is not hard to understand why Mr. Cameron and Britain vehemently opposed that particular measure. The new tax would have been imposed on activities that occur in the City more often and at greater volume than anywhere else in Europe.

Article source: http://feeds.nytimes.com/click.phdo?i=f0d325c22de74f274e8b6336b1a8b29b

Europe Girds for Breakout of New Bank Brush Fires

The comments came amid reports of customers withdrawing savings from the French-Belgian financial institution Dexia, which is about to receive its second bailout in three years. Shares of the bank, which is weighed down by its exposure to Greek debt, plunged following an acknowledgment Sunday from Athens that Greece would miss financial targets.

The frightening speed of that chain reaction has prompted European regulators to review the results of the bank stress tests to test for a possible Greek default. Dexia passed the test last time around. European policy makers also face discussions on a broader effort to pump money into the banking sector to reassure jittery investors.

“Germany is prepared to move to recapitalization,” Mrs. Merkel said during a visit to Brussels, adding that the criteria for such a move would need to be established by experts and that other European countries should do the same with their banks. “We are under pressure of time,” she said. “I think we need to take decisions quickly.”

Her comments, allied with a call for recapitalization from the International Monetary Fund, increased pressure on countries at the center of the euro zone to strengthen their vulnerable banks — something that might put national finances under strain.

“There is a general consensus that this is urgent, and should be done in the next few weeks,” said Antonio Borges, the I.M.F.’s European department head, adding that Europe would need to prime its banks with as much as €200 billion, or $267 billion, in fresh capital. “We would recommend that it move to a European approach. More should be done on a cross-border basis,” he added.

Mr. Borges initially appeared to suggest that the I.M.F could invest “alongside” the euro zone’s new bailout fund, if and when that fund assumed powers to buy euro zone government bonds, but he later issued a statement saying that was not being contemplated.

The French finance minister, François Baroin, endorsed calls for an examination of whether Greece’s private creditors should face higher write-downs on their investment as part of Greece’s second bailout.

“Given what’s happened over the last three months, we should perhaps look at the extent of the private-sector involvement,” Mr. Baroin said on the French radio station RTL.

Mrs. Merkel also appeared to support that position, which was the subject of debate by euro zone finance ministers at a meeting Monday in Luxembourg.

But the immediate concern appears to be what to do with big European banks deemed to have dangerously-high exposure to Greek debt.

France’s caution over recapitalization illustrates how each potential solution to the euro zone crisis tends to raise fresh problems to the surface.

If the French government pours large financial resources into its banking sector, it risks losing its triple-A credit rating because the large-scale spending that may be required could worsen its public finances. A lower rating would be economically undesirable because it would increase French borrowing costs; politically, it would be damaging to the current government ahead of presidential elections next year.

“The problem is that if you recapitalize the banks then you have a problem with sovereign debt,” said one European official not authorized to speak publicly. “That is Paris’s big issue.”

The issue of bank recapitalization also raises a question of strategy: whether governments should concentrate on shoring up European banks or spend resources instead on resolving the crisis in Greece, whose debt and financial troubles prompted the latest wave of anxiety about the banking sector.

The French president, Nicolas Sarkozy, is scheduled to meet with Mrs. Merkel for talks on Sunday.

Article source: http://www.nytimes.com/2011/10/06/business/global/europe-girds-for-breakout-of-new-bank-brush-fires.html?partner=rss&emc=rss

Geithner Says Strict Policy On Currency Hurts China

NANJING, China — Treasury Secretary Timothy F. Geithner urged China again on Thursday to adopt a more flexible exchange rate policy, saying failing to do so could worsen inflation in China and impede growth in other parts of the world.

In a speech here, Mr. Geithner never mentioned China’s currency, the renminbi. But he made clear that Beijing’s strict control over the value of its currency was at odds with flexible exchange rates in other major economies. He said the issue had become “the most important problem to solve in the international monetary system today.”

“It does not require a new treaty, or a new institution,” he said. “It can be achieved by national actions to follow through on the work we have already begun in the G-20 to promote more balanced growth and address excessive imbalances.”

Mr. Geithner’s remarks were delivered during a one-day seminar on the international monetary system organized by President Nicholas Sarkozy of France, who is serving this year as head of the Group of 20 industrial and developed nations. The conference was hosted in Nanjing by a group of Chinese academics.

President Sarkozy has promised to use France’s leadership of the G-20 to press for greater reform of the international monetary system.

The reforms he has begun to outline are largely aimed at addressing some of the most serious threats to global growth, including large trade imbalances, wildly fluctuating currency values and cross-border capital flows.

But those efforts will probably be hampered by fierce disagreement about how to proceed with reform and how to mediate continuing economic tensions between the United States and China.

While the United States wants China to overhaul its exchange rate policies and allow the renminbi to appreciate and move in line with market forces, China complains that the United States is damaging its interests by adopting loose fiscal and monetary policies.

The United States government, the Chinese argue, would like the Chinese to buy the country’s bonds, but seems determined to weaken the dollar’s long-term prospect by adopting loose monetary policies, thereby undermining the value of China’s huge holdings of Treasury bonds.

Other emerging-market countries are also worried about whether the dollar is facing a long-term decline, analysts say.

“The big issue is the dollar has to and should decline in value because the U.S. is running big deficits,” said Eswar S. Prasad, a professor of economics at Cornell University and a conference participant. “And that frustrates China and other emerging market countries. They know they have to buy lots more U.S. Treasuries if they continue accumulating foreign exchange reserves. And the value of those dollar reserves will eventually fall.”

Analysts say China also knows it has put itself in a difficult position by closely tying its currency to the dollar and by accumulating huge amounts of dollar-denominated foreign exchange reserves.

At Thursday’s seminar, however, Beijing seemed reluctant to discuss its own currency policies. Even before the seminar began, Beijing did its best to play down the importance of the meeting by insisting that discussion of the renminbi’s value was not even on the agenda.

Delegates to the meeting said Chinese leaders were worried that the gathering could revive a longstanding debate about the slow pace of China’s currency overhaul.

Some of China’s top economic and financial planners, including Vice Prime Minister Wang Qishan and the head of China’s Central Bank, Zhou Xiaochuan, attended the meetings Thursday. But participants said Chinese officials continued to insist on gradual changes rather than sharp moves that could shock the system.

President Sarkozy, however, seems to be looking for speedier efforts.

On Thursday, he said the international monetary system was already outdated and ineffective and said change was necessary to avoid “currency wars” or recurring financial crises.

In an impassioned address, President Sarkozy called for the International Monetary Fund to play a greater role in supervising the operations of the global monetary system. He also pressed for developing countries to have a greater role in the working of the international monetary system. He also said the I.M.F. should consider including the renminbi in its special drawing right, a kind of synthetic currency.

But like Mr. Geithner, Mr. Sarkozy also suggested that a crucial component in the reform would involve moving toward more flexible exchange rates, a proposal that seemed aimed at pressing China to speed up the pace of its overhaul.

“It is clear that we must evolve towards a more flexible exchange rate system that will allow us to withstand shocks,” Mr. Sarkozy said in his address.

“But this flexible exchange system,” he continued, “cannot evolve without rules, without coordination, without supervision, since instability would prevail. Without rules, the international monetary and financial system is incapable of forestalling crises, financial bubbles and the widening of imbalances.”

Article source: http://www.nytimes.com/2011/04/01/business/global/01geithner.html?partner=rss&emc=rss