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Icesave dispute

Logo: Icesave Bank, Public domain, via Wikimedia Commons³

Dispute between Iceland and foreign depositors

The Icesave dispute was a diplomatic dispute among Iceland, the Netherlands and the United Kingdom. It began after the privately owned Icelandic bank Landsbanki was placed in receivership on 7 October 2008. As Landsbanki was one of three systemically important financial institutions in Iceland to go bankrupt within a few days, the Icelandic Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) had no remaining funds to make good on deposit guarantees to foreign Landsbanki depositors, who held savings in the Icesave branch of the bank.² Wikipedia text CC BY-SA 4.0

Last updated Oct 21, 2026.

Overview

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The story

When Landsbanki was placed into receivership by the Icelandic Financial Supervisory Authority (FME), 343,306 retail depositors in the UK and Netherlands that held accounts in the "Icesave" branch of Landsbanki lost a total of €6.7 bn of savings. Because no immediate repayment was expected by any Icelandic institutions, the Dutch and British national deposit guarantee schemes covered repayment up to the maximum limit for the national deposit guarantees – and the Dutch and British states covered the rest.

The dispute centred on the demand by the British and Dutch states that the Icelandic state should repay the Icelandic minimum deposit guarantees (up to €20,887 per account holder), equal to £2.35 bn (€2.7 bn) repaid to the UK and €1.3 bn repaid to the Netherlands. The Icelandic state refused to take on this liability on behalf of the guarantee fund. Originally this was because the state lost funding access at credit markets due to the 2008–2011 Icelandic financial crisis, but later proposed bilateral loan guarantees for repayment were rejected by Icelandic voters in two separate referendums. The Icesave disputes and associated referendums sparked a nationalist backlash in Iceland, which some scholars have attributed as a factor in reducing support in Iceland for EU accession.

The Icesave bill 1 was the first negotiated loan agreement, attempting to define the repayment terms for these two loans. It was enacted on 2 September 2009 but was not accepted by the governments of the UK and Netherlands, due to a unilaterally attached term added by the Icelandic parliament which limited Iceland's repayment guarantee only to 2024, with automatic cancellation of any potential owing still existing beyond this year. Instead, UK and Netherlands then counter proposed a new version of the loan agreement, referred to as Icesave bill 2, where no time limit was included for the Icelandic state's repayment guarantee. This was at first accepted by the Icelandic parliament, but the Icelandic president refused to enact the law and referred approval to a referendum being held on 6 March 2010, where voters subsequently rejected the law.

After the rejection of Icesave bill 2, renewed negotiations started on the terms for the repayment agreement. The negotiations resulted, in December 2010, in an adjusted agreement named Icesave bill 3, with better terms for Iceland. This included the removal of a previous creditor priority issue, a lower 3% interest rate, an interest moratorium until 1 October 2009, and a possible extension of the "repayment window" up to 30 years. When the Icesave bill 3 was put to a referendum in April 2011, it was again rejected, by 59% of Icelandic voters. After analysing the election result, stakeholders decided not to attempt negotiation of a further improved Icesave bill 4, but instead to refer the case to the EFTA Court as a legal dispute.

On 28 January 2013, the EFTA Court cleared Iceland of all charges, meaning that Iceland was freed from the disputed obligation for deposit guarantees worth €4.0 bn (ISK 674 bn) plus accrued interest to UK and the Netherlands. This caused shock, as some legal experts had suggested the EFTA Surveillance Authority would win. The repayment claim still existed as a claim on the Landsbanki receivership, who one year earlier had been ordered by the Supreme Court of Iceland to repay confiscated deposits (including minimum deposit guarantees) as priority claims, totaling ISK 852 bn (£4.46 bn, €5.03 bn) to the UK Financial Services Compensation Scheme and ISK 282 bn (€1.67 bn) to De Nederlandsche Bank. By January 2016, the Landsbanki receivership had, through liquidation of assets, repaid all the priority claims.

From Wikipedia’s article on Icesave dispute, shared under CC BY-SA 4.0.⁴

Controversies and legal

Legal arguments

The arguments of the British and Dutch governments are based on their interpretation of the law of the European Economic Area (EEA), and around two positions in particular:

that the Icelandic government is obliged to guarantee at least the first €20,000 in Icesave accounts;

that Iceland's actions surrounding the collapse of Landsbanki are discriminatory against non-Icelandic creditors.

The Icelandic government disputes these positions.

Deposit insurance

Within the EEA, the requirement for deposit insurance is regulated by European Union directive 94/19/EC, which was incorporated into EEA law by decision 18/94 of the EEA Joint Committee. Iceland transposed the directive into national law in 1999, setting up the Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) funded by 1 per cent of insured deposits. At the time of Landsbanki's collapse, the Tryggingarsjóður had equity of only ISK 10.8 billion, about €68 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.

As pointed out by the European Court of Justice in the Peter Paul and Others case, "Directive 94/19 seeks to introduce cover for depositors, wherever deposits are located in the Community, in the event of the unavailability of deposits made with a credit institution which is a member of a deposit guarantee-scheme". The directive does not specify how the Member States have to provide the cover, although most operate some sort of fund to which credit institutions contribute, as in Iceland. In principle, if the fund cannot meet depositors' claims in the event of a default by a member of the scheme, it is for the remaining credit institutions to make up the difference. Such a move was impossible in the case of the Tryggingarsjóður as the remaining Icelandic credit institutions were far too small in relation to the claims of Icesave depositors, and a fortiori because Icelandic law states that "Member Companies shall not be liable for any commitments entered into by the Fund beyond their statutory contributions to the Fund."

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The Icelandic government has stated that the directive was never intended to cover the case of a systemic failure, and does not impose a sovereign guarantee on deposit insurance schemes. In a speech on 3 March 2009, the Dutch Finance Minister Wouter Bos said: "First and foremost, European countries need to take a close look at how the deposit guarantee scheme is organised. It was not designed to deal with a systemic crisis but with the collapse of a single bank."

The Icelandic government has repeatedly asked that the matter be taken to the EFTA Court, and points to Recital 24 to the directive:

Whereas this Directive may not result in the Member States' or their competent authorities' being made liable in respect of depositors if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized;

The Member States of the European Union contest the interpretation of the Icelandic government, and consider that a sovereign "guarantee of last resort", similar to the role of central banks as lenders of last resort, is the only way of "ensuring the compensation or protection of depositors" as required by the Directive. The ruling of the European Court of Justice in Peter Paul and Others, the only case to have considered Directive 94/19/EC, begins: "If the compensation of depositors […] is ensured, …". The ECJ then went on to uphold the immunity of the German authorities from civil liability for alleged failings in banking supervision (as per Recital 24) given that the depositors had been compensated up to the minimum set by the Directive.

The Directive imposes a minimum guarantee of €20,000 per depositor; moves to increase this minimum to €50,000 or even higher had been agreed politically before the Icelandic crisis, but had not been incorporated into EU law, much less into EEA law. The Tryggingarsjóður guarantees ISK 1.7 million on the basis of a fixed euro–ISK exchange rate, equivalent to €20,887. The Netherlands and the UK have higher guarantee levels, €100,000 and £50,000 (approx. €60,000) respectively; Landsbanki was a member of the Dutch and British compensation schemes for the purposes of guaranteeing this difference in cover, an arrangement known in Britain as the "passport system", and commonly used by banks throughout the EEA (see MIFID). In addition, the UK Treasury has exceptionally guaranteed retail deposits in excess of £50,000 which were held in Icelandic-owned banks in the UK at the time of the crisis, at a cost of some £1.4 billion (€1.7bn).

Finally, the emergency powers, passed by the Althing on the night of 6 October, contain a measure (Art. 8(a)) stating in regard of the Tryggingarsjóður: "It shall always be permissible to reimburse the value of deposits, securities, or cash in Icelandic currency (ISK), even though the original transactions may have been in another currency." Fortunately for the value of the ISK, it has never been seriously suggested that the Tryggingarsjóður pay out more than ISK 600 billion to British and Dutch depositors, simply to see them try to sell those ISK on the open market.

A resolution of the Joint Parliamentary Committee of the EEA adopted unanimously on 28 October 2009, notes the "lack of clarity" of EU Directive 94/19/EC over the legal obligations of governments if national guarantee funds do not suffice to cover deposit guarantees; moreover, the resolution expresses regret that "significant pressure seems to have been employed" by the IMF on Iceland to reach an agreement with the United Kingdom and the Netherlands.

Non-discrimination

The second, if not primary claim of the British and Dutch governments is that Iceland is in breach of its obligations under Article 4 of the EEA Agreement which prohibits "any discrimination on grounds of nationality", echoing Article 7 of the Treaty of Rome. The contention is that, by guaranteeing deposits at Icelandic branches but not at overseas branches, the Icelandic government is unfairly (or "illegally") favouring Icelanders, be they individuals or corporations. Iceland roundly denies the charge of discrimination.

The jurisprudence of the European Court of Justice is summarized in the García Avello case:

It is in this regard [Articles 12 EC and 17 EC] settled case-law that the principle of non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way. Such treatment may be justified only if it is based on objective considerations independent of the nationality of the persons concerned and is proportionate to the objective being legitimately pursued.

Iceland contends that its actions are "based on objective considerations independent of the nationality of the persons concerned" (the consideration being the location of the branches of the collapsed banks) and are "proportionate to the objective being legitimately pursued" (the legitimate objective being the survival of a banking system – and hence a non-barter economy – in Iceland).

The situation is complicated by the position of so-called "wholesale" depositors. In the United Kingdom, 123 local authorities and other public bodies had a total of £920 million (€1.1bn) deposited with Icelandic banks. Even the Audit Commission, the independent body responsible for overseeing local government finances, admitted having £10 million deposited with Landsbanki and its subsidiary Heritable Bank. In the Netherlands, 22 local authorities had a total of €220 million deposited in Icelandic banks, with the province of North Holland being the most exposed.

The complication is that both the UK and the Netherlands exclude local authorities and larger private corporations from their deposit insurance schemes, as is possible (but not obligatory) under Directive 94/19/EC, on the grounds that larger organizations should have more capacity to judge (and absorb) risk than the general public. Iceland makes a much more sparing use of this provision, so its definition of a guaranteed deposit is wider:

"Deposit" […] refers to any credit balance resulting from financial deposits or transfers in normal banking transactions, which a commercial bank or savings bank is under obligation to refund under existing legal or contractual terms. However, this guarantee does not extend to bonds, bills of exchange, or other claims issued by a commercial bank or savings bank in the form of securities.

Deposits, securities and cash owned by Member Companies, their parent and subsidiary companies for their own account, and deposits, securities and cash connected with convictions of money-laundering, are not covered by the guarantee […]

This means that Icelandic local authorities and corporations had their deposits (not including bonds) guaranteed at 100 per cent by the Icelandic government, while British and Dutch organisations in the same situation had no cover whatsoever. The Dutch government was forced to use a royal decree to prevent North Holland from attempting to seize Landsbanki assets through the courts outside the Netherlands: speaking on 7 November, Minister of the Interior and Kingdom Relations Guusje ter Horst said "Their behaviour is hindering the difficult and complex discussions with the Icelandic government."

EFTA evaluation

In their evaluation of the ongoing IceSave dispute, the EFTA Surveillance Authority (ESA) decided on 26 May 2010, that the Icelandic government was bound to pay the (minimum) deposit guarantee to all Icesave customers. As the UK and Dutch governments had already paid savers in their countries, Iceland was therefore liable to reimburse these governments. Additionally, EFTA criticised Iceland for the difference in treatment of international and domestic accounts. Iceland was given two months to respond. After initially ignoring the ESA letter, Iceland formally responded on 2 May 2011.

EFTA Court clears Iceland of all charges

After the results of the 2011 referendum became known, The EFTA Surveillance Authority released the following statement:

The Authority has taken note of the outcome of the Icelandic referendum concerning the Icesave issue. We now expect a swift answer from the Icelandic government to our Letter of Formal Notice of May last year. We will assess the government's reply before we take further steps in the case.

Unless the letter from the government contains arguments that alter our preliminary conclusions in the case, the next formal step would be to send Iceland a final warning, a Reasoned Opinion. This final warning will give Iceland two months to rectify their breach of the EEA Agreement. If Iceland continues to be in breach of the agreement, the case will be sent to the EFTA Court.

On 2 May 2011, the Icelandic Ministry of Economic Affairs published a response to the EFTA Surveillance Authority's letter of 20 May 2010, maintaining that Iceland "did not fail to comply with its obligations under Directive 94/19/EC." On 10 June 2011, the EFTA Surveillance Authority ruled that Iceland should take steps towards paying the full amount to the UK and the Netherlands within three months after the ruling. The Icelandic Minister of Economic Affairs Árni Páll Árnason made a statement to the Icelandic Parliament on the same day rejecting this ruling.

On 14 December 2011, the EFTA Surveillance Authority lodged a formal application with the EFTA Court. The EFTA Court opened the Case E-16/11 – EFTA Surveillance Authority v Iceland on 15 December 2011. Defence by the Government of Iceland was received by the Court on 8 March 2012 and a reply from the EFTA Surveillance Authority was received on 11 April 2012. The Governments of United Kingdom, Netherlands, Liechtenstein and Norway, as well as the European Commission have also filed written observations.

The Oral Hearing in the case took place on 18 September 2012. The judgment was delivered on 28 January 2013 and Iceland was cleared of all claims in the case. The decision of the Court was widely reported in the international media. The Financial Times addressed the Court's ruling in an editorial calling it "a victory for law and economic sense."