Banks to Avoid as Iceland Goes Bankrupt with £10 billion of UK Deposits
Economics / Credit Crisis 2008 Oct 12, 2008 - 03:34 AMBy: Nadeem_Walayat
Relations between Britain and the small north atlantic government of Iceland hit a new deep freeze following Britain's implementation of Anti-terror laws to seize the assets of Icelandic financial institutions in Britain following the Icelandic Government's statements that they would not live up to their obligations in recompensing UK depositors.
Iceland is Bankrupt
I was one of the first to break the implications of the ongoing meltdown of Iceland's banking sector in the analysis Iceland Going Bankrupt? , which was a good 18 hours before the mainstream media awoke to the fast deteriorating situation with regards Icelandic banks. In an earlier article of 2nd October 2008, I voiced concerns that countries could also go bankrupt which would follow a similar path and outcome to the 1920's German Weimar Republic :
"Whilst we ponder the deepening financial crisis where individuals are going bankrupt, corporations are going bankrupt, and lately the biggest banks in the world are going bankrupt. Savers should not forget that countries can also go bankrupt as the Germany of the 1920's clearly illustrated that was saddled with huge debt burden following the end of World War 1 resulted in hyper-inflation and the systematic destruction of the value of savings as the German government printed money in response to Allied government demands for payment of War reparations, similarly governments now declaring ever larger bailouts and more importantly unlimited savings guarantees that if push comes to shuv would effectively bankrupt the said countries should their bluff ever be called. For the only way such guarantees could be financed would be by printing near unlimited amounts of money which would lead to hyper inflation and a collapse in the value of the currency and hence value of savings and the the whole economy. Therefore bailouts of the kinds that are being proposed are highly dangerous as they could lead to literally an out of control cascading currency collapse and loss of confidence in FIAT currencies which would result in a barter system economy, thus extreme economic deflation along the lines of the 1930's Great Depression." - Countries Can Go Bankrupt Too!
Iceland is bankrupt, the country's banks have a shortfall or losses of nearly £37 billion which is equivalent to £115,000 per each of the 320,000 citizens, as a comparison total British bank bailout losses to date as a consequences of the nationalisation of Northern Rock, Bradford and Bingley and including the anticipated losses on the £500 billion bank bailout announced (which includes the capital injection of £50 billion) are estimated to be in the region of £110 billion, which amounts to £1,833 per every UK citizen.
Therefore there is no way that Iceland can repay or service such a loss which is many times the countries annual GDP of £14 billion. The consequences of which has been witnessed in the foreign exchange markets where the Icelandic Krona has crashed by more than 50% against the US Dollar before it too froze on the forex markets. The only avenue open to Iceland to function economically on a day to day basis i.e. so as to enable Iceland to import resources such as food and fuel is by long-term loans and guarantees from the IMF and other countries such as Russia which has loaned Iceland euros 4 billion. The net effect is that Iceland is likely to experience a severe and prolonged economic recession and will be forced to develop cash generating commercial industries such as fishing to finance the increased debt burden. The expectation is that over time governments will cancel the Icelandic bad debts in exchange for geopolitical influence.
Icesave Deposits At Risk
UK depositors awoke to the shocking news on Tuesday the 7th of October as Icesave froze out all 300,000 UK depositors from accessing their funds.
Whilst the UK Government through its actions has ensured that bankrupt UK banks would be nationalised and therefore the risks to individual savers is negligible IF they stick to the £50,000 savings limit per banking group. This is clearly not the case with foreign banks with retail operations within the UK.
An Estimate of UK Deposits with Icelandic banks
| Individuals | £4,000 million |
| Local Authorities | £1,000 million |
| Charities | £500 million |
| Corporate & Pension Funds | £4,500 million |
| Total | £10,000 million |
Protected Savers
The UK Treasury has stepped in to state that all individual depositors will be fully compensated for the depositors in Icelandic banks regardless of the size of their deposits i.e. above the £50,000 limit,
However business and to a degree local authorities will not receive any compensation. Businesses already facing an economic slump could be now be tipped into a new phase of a chain reaction of defaults and bankruptcies which looks set to accelerate Britain's trend towards a deep recession
Small businesses
The FSA has finally clarified small business depositor protection which preceding conflicting statements on the FSA website implied that small limited companies were not covered whereas unincorporated small business were covered.
Who is protected?
FSCS was set up mainly to assist private individuals, although some smaller businesses are also covered. Larger businesses are generally excluded, although there are some exceptions to this (for example for claims in respect of certain compulsory insurances). Our rules tell us which claims are eligible and form part of the FSA's Handbook of rules and guidance, under Redress, Compensation.
As an indicative guide only, for the purposes of deposit and investment claims, smaller companies are protected. A smaller company must meet two of the following criteria (as set out in section 247 of the Companies Act 1985 or section 382 of the Companies Act 2006 as applicable):
- Turnover: not more than £6.5 million
- Balance sheet total: not more than £3.26 million
- Total number of employees: not more than 50
For claims made under an insurance contract, small businesses are protected. A small business under the COMP rules is one that has an annual turnover of less than £1m. The same levels of compensation apply whether the claimant is a private individual, small business, or a small company.
What Does this mean for Corporations
It means that British corporations both large and small with activity above the FSCS limits should avoid deposits in any non nationalised UK bank as there exists a risk of default and therefore should seek to keep the bulk of their funds in government bonds that are only likely to default in the face of the bankruptcy of State, in the likelihood of which we would have far bigger problems to worry about than money in the bank.
Conclusion
It is a totally unacceptable level of risk that ANY depositors are facing that banks going bust could not only result in loss of temporary access but also that any of the funds on deposit could also be lost.
As I suggested before Iceland froze UK depositor access to their funds, all UK depositors should seek to repatriate their funds back to wholly UK owned banks due to the unacceptable risk of default. Therefore ALL UK depositors should avoid non UK retail banks that operate within the UK that could present depositors with huge problems should they follow Iceland's route and go bust, and if their respective governments as in Iceland's case renege on their responsibilities to depositors, the most notable foreign banks with retail operations within the UK are -
- Firstsave - Nigeria
- ICICI - India
- ING - Dutch
- Tridos - Dutch
Those with fixed deposits had best keep their fingers crossed and hope that as with Iceland's case the government again steps in to underwrite deposits. However the business sector should seriously look at repatriating their deposits regardless of any loss of interest penalty clauses.
By Nadeem Walayat
http://www.marketoracle.co.uk
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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