The Government of Iceland submitted its reply to the statement in intervention of the European Commission (EC) in the Icesave case to the EFTA Court this week. This marks the end of the written part of the proceedings in this case.
An oral hearing is scheduled to be held in Luxembourg on Tuesday 18 September 2012, as reported in a statement from the Icelandic Ministry for Foreign Affairs released yesterday.
In its statement the EC largely supported the arguments of the EFTA Surveillance Authority (ESA) concerning the Deposit Guarantee Directive (obligation of result) and alleged discrimination. The EC also rejected that force majeure was applicable in the case.
In its reply, the government strongly objects to the commission’s arguments. The main elements of the government’s response are the following:
1. The extent of the obligation on the state
The ESA’s original case was that “should all else fail” the state itself would be responsible for compensating depositors.
Iceland contends that in its reply, however, the ESA sought to distance itself from this position, arguing that there is no obligation upon the state to use its own funds where a bank failure occurs on such a scale that a deposit-guarantee scheme is unable to compensate depositors.
The EC also claims that there is no obligation on the state to finance the deposit guarantee scheme, there is only an obligation of result to ensure that the guarantee scheme is capable of ensuring minimum compensation for depositors and that it is a matter of discretion of the state how to ensure that result.
Iceland claims that this reasoning shows a lack of understanding of the limits of a deposit-guarantee scheme. There is no possibility to ensure commercial financing of a deposit guarantee scheme in the case of large scale banking crisis.
If the state is obliged to ensure that deposit-guarantee scheme will be able to pay compensation, it will ultimately be required to use its own resources.
2. Rules on state aid
The EC seems to remain of the view that financial support for deposit guarantee schemes should be notified under EU’s state aid rules. Such assistance would therefore not be allowed without prior approval of the EC, or the ESA with regard to the EFTA states.
Iceland points out that this position is inconsistent with an obligation to ensure compensation is paid in all cases, as such assistance would fall outside the scope of state aid rules if there was an obligation to finance the deposit guarantee scheme under the Deposit Guarantee Directive.
3. Should the new banks carry the costs?
The EC proposed that the Icelandic government could have let the new restructured banks bear the costs of financing the deposit guarantee scheme. Iceland considers that this proposal is completely unrealistic.
The liabilities of the Icelandic deposit guarantee scheme represented around 30 percent of the new banks total assets at the end of 2008.
Had they been required to finance the guarantee schemes’ obligations, they would have had negative equity of around ISK 419 billion (USD 3.3 billion, EUR 2.6 billion) as of year end 2008, and would not have satisfied the conditions for a banking license or the regulatory requirements of the Financial Supervisory Authority (FME).
The reality is that without the injection of further funds, the banks would have no choice but to turn to the regulator and become subject once again to the Emergency Act, with the attendant damage to the Icelandic economy and financial markets.
Thus, overall, the reality is that the new banks could not possibly have met those liabilities without a large injection of further resources from the state, which was the owner of the new banks until end of the year 2009, if the state had been in a position to do so.
The EC supports the ESA’s claims on discrimination but in Iceland’s submission, does not succeed in answering the essential objection to the claim: the directive governs deposit-guarantee schemes, but does not require the equal treatment of depositors in all other respects.
The EC also argues that the discrimination by the Icelandic state between depositors in the Icelandic and overseas branches cannot be justified, in part because it was not necessary: the new banks could have made contributions to the guarantee fund to enable it to fulfill its obligations. Iceland has explained why it considers this proposal to be wholly unworkable.
Accordingly, the Government maintains that the case should be dismissed.
The bankruptcy estate of Landsbanki has now paid half of the Icesave debt.