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Banking: Iceland

Volume 716: debated on Wednesday 13 January 2010

Questions

Asked by

To ask Her Majesty's Government what are the terms of the original proposed agreement between the United Kingdom and Iceland for the reimbursement of Icesave losses. [HL1083]

To ask Her Majesty's Government with which proposals in the agreement for reimbursement of Icesave losses approved by the parliament of Iceland in August 2009 they disagree. [HL1084]

To ask Her Majesty's Government what is the annual cost to Iceland of the original proposed agreement between the United Kingdom and Iceland for the reimbursement of Icesave losses; in what currency that amount is calculated; what interest rate is applied; and over what duration the amount is spread. [HL1085]

To ask Her Majesty's Government what would be the cost to Iceland of the agreement as approved by the parliament of Iceland for the reimbursement of Icesave losses; in what currency that amount is calculated; what interest rate is applied; and over what duration the amount is spread. [HL1086]

The EC Deposit Guarantee Scheme Directive (94/19/EC) sets the minimum terms on which depositors are protected throughout the European Union and European Economic Area (EEA). All EEA member states are required to ensure that the deposit guarantee scheme directive is adequately implemented in their territories.

Under the directive, depositors at branches in a host state are covered by the guarantee scheme of the home state. Depositors with the UK branch of Landsbanki were therefore eligible for compensation (for deposits up to €20,887) from Iceland's Depositor and Investors' Guarantee Fund (DIGF).

On 8 October 2008, the FSA announced that the UK branch of Landsbanki was in default for the purposes of the FSCS. To maintain financial stability and protect retail depositors, the UK Government committed that all Icesave retail depositors with the UK branch of Landsbanki would receive their money in full. In total, around £4.5 billion has been paid. This includes £2.35 billion compensation that the UK Government paid out to depositors on behalf of the DIGF.

On 5 June 2009, the UK Government reached agreement with the Icelandic authorities on a process to ensure the UK is refunded for the compensation that had been provided on behalf of the DIGF. This will be achieved by recognising the assistance provided by the UK Government as a £2.35 billion loan from HM Treasury to the DIGF.

The loan agreement was made with the DIGF, and the original terms included an interest rate of 5.55 per cent payable over 15 years. The loan agreement provided for an initial seven-year period during which interest will be capitalised and the DIGF will have no principal repayment obligations other than to pass on to the FSCS all recoveries made by the DIGF in the winding up of Landsbanki. After the expiration of the seven-year period, interest and principal amounts are payable quarterly over a period of eight years during which period the loan will be guaranteed by Iceland.

Under Icelandic law, the Icelandic Parliament is required to authorise the guarantee. A Bill was passed in August to this effect but with a number of conditions introduced by the Icelandic Parliament.

Following further negotiations, the loan agreement was amended to take account of these conditions. The amendments include a cap on repayments from years eight to 15 of the loan period to 4 per cent of Iceland's GDP growth relative to 2008, an extension of the maturity from 2024 to 2030; and confirmation that the guarantee will continue until the loan has been repaid in full.

Throughout this process, the UK Government have sought to ensure that repayment would not damage economic recovery in Iceland. The recoveries that the DIGF will make from the Landsbanki estate, and which will be used to repay the loan, are expected to be significant. This should substantially reduce the repayments required from the DIGF and, as a result, substantially reduce the value of the state guarantee for the DIGF repayment obligations. Any outstanding principal and interest will then be repaid in the following years, subject to those payments not exceeding the economic parameters that have been determined by the Iceland Parliament. The Parliament in Iceland has endorsed the loan arrangement and agreed a state guarantee.