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At website of HM Treasury

When the Icelanders Were Talibans

Chancellor Alistair Darling and Prime Minister Gordon Brown both had an interest in demonstrating to their Scottish voters that independence could be perilous. Photo: Ken Jack.

Strange as it may seem, the Icelanders and the Talibans have one thing in common...

For an Icelander, watching the sad spectacle of the Talibans taking over Afghanistan and triumphantly marching into Kabul brings back memories of Wednesday 8 October 2008, in the midst of the collapse of the Icelandic banking sector. This was the day when the British Labour government, led by Prime Minister Gordon Brown and Chancellor Alistair Darling, invoked the 2001 Anti-Terrorism Law against Iceland, freezing all accessible assets of Landsbanki (one of Iceland’s just-fallen commercial banks), as well as assets of the Central Bank of Iceland and the Icelandic Financial Supervisory Authority. At the website of H.M. Treasury, the astonished Icelanders could see their tiny, windswept country in the North Atlantic on a list with the Talibans, Al-Qaida, and the governments of North Korea and Sudan as countries and organisations subject to sanctions under the Anti-Terrorism Law.

Iceland Under Siege

A few days later, after vehement protests from the Icelandic government, H.M. Treasury relented a bit, removing Iceland from the main list, alongside the Taliban, and putting her on a special list below it. But great harm had been done. For a few fateful days, the markets were under the impression that all Icelandic assets abroad had been frozen, not only those of the organisations named. Consequently, most foreign businesses companies immediately cut ties with their Icelandic counterparts. Suddenly import firms could not obtain credit abroad, even from old customers, and a lot of Icelanders travelling abroad found themselves unable to use their bank cards. Iceland was under siege. The Central Bank of Iceland (where I was at the time on the Board of Overseers) could only transfer money between Iceland and other countries with the assistance of the financial firm J.P. Morgan, and even the firm’s staff briefly considered leaving Iceland and stopping all dealings with her in order to comply with the Anti-Terrorism Law. The Central Bank swiftly issued a comprehensive guarantee of all Icelandic credit cards abroad, and thus averted great difficulties.

The Icelanders only ceased to be semi-Talibans in June 2009 when British government repealed its Freezing Order under the Anti-Terrorism Law. Then Iceland had after lengthy negotiations reluctantly issued a full guarantee of all British deposits in Landsbanki. This was in effect a promise by the Icelandic Treasury to reimburse the British Treasury for its outlays in October 2008 when immediately after Landsbanki’s fall it had compensated all British depositors in the bank. Of course it was the estate of the fallen Landsbanki itself which was in the first place liable for the deposits as well as for other debts of the bank, but for a while it was believed that the estate’s assets would not suffice to compensate the depositors and that the Icelandic Treasury would therefore have to contribrute a huge sum, by Icelandic standards.

Unnecessary Conflict

I was one of those who opposed the 2009 deal between the United Kingdom and Iceland because I found it preposterous to expect Icelandic taxpayers to bear the risk, and possible cost, of business transactions between a privately-owned bank and its customers. I was not the only one of this opinion: the President of Iceland refused to sign the deal, even after some amendments, and in a referendum in 2010 98 per cent of the voters sided with us while 2 per cent wanted to ratify the deal. I also opposed a revised deal (with somewhat better terms for Iceland) which was also rejected in a referendum in 2011, this time with 60 per cent against and 40 per cent for the deal. The British government then referred the case to the EFTA Court which found in 2013 that there was no government liability for the Landsbanki deposits. Thus the dispute ended with the full victory of the cause which I had supported all along: that the participants in a private transaction should bear any risk from it, not the taxpayers.

What the British government had seemingly not fully comprehended, however, was that by a special Emergency Act passed by the Icelandic Parliament on 6 October 2008, at the beginning of the collapse, the claims of depositors had been given priority over the claims of all other creditors. This applied to foreign as well as domestic depositors. Thus the interests of British depositors had been as well protected as was possible in the circumstances. It then turned out that the estate of the fallen Landsbanki was worth much more than initially estimated, so that all foreign depositors received full compensation. (The accounts of Icelandic depositors in the fallen banks had been transferred into new banks established by the Icelandic government and kept open.) The whole conflict was in a sense unnecessary. It was the familiar struggle between two bald men over a comb.

Needless Brutality

The alleged purpose of the Freezing Order under the Anti-Terrorism Law was to hinder any illegal transfers of Landsbanki’s assets in the United Kingdom to Iceland. But as I pointed out in a report I wrote for the Icelandic Ministry of Finance in 2018, this was unnecessary, because on 3 October 2008 the British Financial Authority, FSA, had issued a so-called Supervisory Notice to Landsbanki’s London branch in which the branch was barred from transferring money out of the United Kingdom without written permission by the FSA. At the same time, Barclays, which actually did such transfers was informed of the confidential Supervisory Notice. It was in other words impossible to transfer any of Landsbanki’s assets illegally out of the United Kingdom. There was no need for the Freezing Order under the Anti-Terrorism Law. The Icelanders never belonged on the same list as the Talibans at H.M. Treasury website.

The sheer brutality of needlessly invoking the Anti-Terrorism Law against Iceland and of putting a peaceful, civilised nation which has no military, on a list alongside terrorist organisations like the Taliban and Al-Qaida is astonishing. When the Icelandic banks fell in October 2008, similar problems arose with deposits in other countries where the banks had branches. There the authorities simply lent the estates of the fallen banks money to compensate the depositors and got their money back as the bank assets were sold. It probably did not occur to any official or politician in any other country to try and use a law on terrorist activities against Iceland. It should also be recalled that Iceland is a member of the Western defence alliance, NATO, as is the United Kingdom.

The Scottish Angle

There had to be a reason for this behaviour. In my 2018 report I identified one possible reason. Prime Minister Brown and Chancellor Darling were both from Scotland, long a Labour stronghold. But their party had recently been seriously challenged by the Scottish nationalists who were able to form a government in 2007. This was when both Ireland and Iceland were doing quite well. Alex Salmond, the leader of the Scottish National Party, often referred to what he called the ‘Arc of Prosperity’ leading from Ireland through Iceland to Norway of which Scotland could be a part. If Iceland, Ireland and Norway could thrive as independent countries, why could Scotland not do the same? Thus, it was politically opportune for Brown and Darling to demonstrate to their Scottish voters that independence could be risky. It was in their political interest to dismiss the Icelanders as semi-Talibans, unarmed to be sure, but definitely untrustworthy.

It should be recalled that a month after the government imposed the Anti-Terrorism Law on Iceland, Labour faced a by-election in a Scottish constituency, Glenrothes. The example of Iceland was much discussed in the election campaign. As a Guardian journalist wrote: ‘Alex Salmond, the first minister, has cited the so-called northern ‘arc of prosperity’ — from Ireland to Finland via Iceland and Norway as all small countries doing well: we can too, he says. Now things look different. Iceland has gone bust, Ireland has cut spending and raised taxes to pay for its unilateral bank bail-out. Even Norway’s famous oil fund has shrunk as stocks, as well as oil prices, tumble. After a Scots columnist coined the phrase ‘arc of insolvency’ Jim Murphy, the new and keen Scottish secretary, adopted it.’ To everybody’s surprise, Labour retained the seat. A commentator in Spectator remarked: ´Salmond’s unfortunate past praise for Iceland came back to make  him seem foolish in the extreme, while the government bailouts of HBOS and, in  particular, the national champion, RBS dented the idea of Scotland and Scottish  success—the kind of tartan brio that was supposed to float all boats upon a nationalist  tide.’ Moreover, Darling directed the ‘No’ campaign in the 2012 Scottish referendum on independence where the example of Iceland was also often brought up.

A Sound Economy

The brief online identification of the Icelanders as some kind of Talibans was a story with a happy end, though. After the bank collapse, Iceland made a rapid recovery, not least because the economy is sound after extensive liberalisation in the 1990s. Iceland enjoys a sustainable and profitable system in the fisheries, ample supply of renewable energy, considerable human capital, and a new-found popularity as a tourist destination. Quietly, the European Union, including the United Kingdom, has followed the example set by Iceland and given priority to depositors’ claims on the estates of failed banks. I am afraid that the story of the real Talibans who have now entered Kabul will not have such a happy end.  

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