UK to lend Iceland £3bn for Icesave compensation

Reaper

Story here. Seems to have gone up from early reports of £100m to £3bn!

Although everybody has been criticising the FSCS I think the real problem is that until now nobody has given them the money to pay out.

Maybe things will start happening now.

codetown

Reaper wrote: »

Story here. Seems to have gone up from early reports of £100m to £3bn!

Although everybody has been criticising the FSCS I think the real problem is that until now nobody has given them the money to pay out.

Maybe things will start happening now.

Cna't understand this.
Wasn't it cheaper to buy the whole Icesave and nationalise it as they did for Northern Rock? Or make the internet branch for NS&I?

I don't see the point in lending a sum which is huge and extremly risky when for much less (prob. 100-200m) they could buy the whole outfit and they rebuild it!

agsnu

No, it's not cheaper to buy the whole "Icesave" "as they did for Northern Rock".

The Government did not buy Northern Rock - they nationalised it, meaning they siezed control by an act of parliament. They did not pay the shareholders the market value - which is subsequently the subject of litigation.

The Government cannot nationalise Icesave, as the legal entity of "Icesave" is Landsbanki Islands hf, and Icelandic company. The Government cannot pass an act of parliament to sieze control of an Icelandic company.

I also don't think the Government could buy Landsbanki for £100-200m. The company has billions of dollars of assets and liabilities.

Also, the £100m loan earlier on was to provide short term liquidity to Landsbanki so that it may continue to trade as best possible given its receivership status.

codetown

What I mean is: instead of lending a lot of money in a risky loan to Iceland (will they even see it back?), why don't they make an offer to buy Icesave (with all its liabilities) and make it part of NS&I?

They would pay really much less immediately and would put at reast all the fears of customers (most of which would NOT want to have immediately their meony, but would be prepared to leave them there if it was a national bank!!!). Most of the liabilities are towards UK national entities anyway, so the government would have to cover it in case of Icelandic default!

I feel the total assets of Icesave minus the cost of buying it and minus the cost of liabilities would make buying it still very convenient for the UK governement.... (less costly and risky than lending 3bl to Iceland) and at the same time would make NS&I grow a lot and acquire a lot of savings (no loans, so no much risk there...)

DocProc

agsnu

You say:

I also don't think the Government could buy Landsbanki for £100-200m. The company has billions of dollars of assets and liabilities.

Shouldn't this be:

"The UK Government should surely be able to buy Icesave (Landsbanki Islands hf, an Icelandic company), for the reasonable amount of say £100m -£200m, because its liabilities so very greatly exceed it's assets." ?

See this: http://www.citywire.co.uk/professional/-/news/market-reports/content.aspx?ID=316722

...which says:

".....The Financial Services Authority (FSA) is expecting the Icelandic government to put Landsbanki into insolvency, meaning it will have to find up to £4.8 billion from its already over-stretched coffers to repay Icesave’s UK depositors.

A statement on the FSA consumer website said: 'The Icelandic authorities have taken Landsbanki, Icesave’s parent bank, into public ownership. The FSA is seeking further clarity from the Icelandic regulator about what this means for the UK branch of Landsbanki, which includes the Icesave operation....."

1echidna

codetown wrote: »

What I mean is: instead of lending a lot of money in a risky loan to Iceland (will they even see it back?), why don't they make an offer to buy Icesave (with all its liabilities) and make it part of NS&I?

They would pay really much less immediately and would put at reast all the fears of customers (most of which would NOT want to have immediately their meony, but would be prepared to leave them there if it was a national bank!!!). Most of the liabilities are towards UK national entities anyway, so the government would have to cover it in case of Icelandic default!

I feel the total assets of Icesave minus the cost of buying it and minus the cost of liabilities would make buying it still very convenient for the UK governement.... (less costly and risky than lending 3bl to Iceland) and at the same time would make NS&I grow a lot and acquire a lot of savings (no loans, so no much risk there...)

The problem is that in the present climate the assets of Landsbanki (and lots of other banks) are a moving target as the recession deepens. There is a grave risk of the UK gov't ending up with substantial losses as there was (is) with Northern Rock. Additionally it would not be simple or straight forward to negotiate. The loan of £3bn strictly for payment of Icesave UK customer seems a simple straight forward way of cutting through the complexity and getting UK customer their money.

altocumulus

1echidna wrote: »

The problem is that in the present climate the assets of Landsbanki (and lots of other banks) are a moving target as the recession deepens. There is a grave risk of the UK gov't ending up with substantial losses as there was (is) with Northern Rock. Additionally it would not be simple or straight forward to negotiate. The loan of £3bn strictly for payment of Icesave UK customer seems a simple straight forward way of cutting through the complexity and getting UK customer their money.

What substantial losses was (is) with Northern Rock?

Upto June 2008 they had paid back a fair amount, and they have gained many new customers.....

1echidna

altocumulus wrote: »

What substantial losses was (is) with Northern Rock?

Upto June 2008 they had paid back a fair amount, and they have gained many new customers.....

OK Northern Rock may eventually be a success story but Landsbanki is in a different jurisdiction, may have greater liabilities and it would certainly be more complex and prolonged to negotiate a deal.

moneysavingmatthew

altocumulus wrote: »

What substantial losses was (is) with Northern Rock?

Upto June 2008 they had paid back a fair amount, and they have gained many new customers.....

Northern Rock is going to cost the tax payer billions.

Basically the problem is the mortgage book - they have managed to shrink the loan by about 50% but that is princiapally because those with good credit have moved their mortgages to other lenders for bette rates. As the mortgage book shrinks the quality of the borrowers (in terms of ability to pay off debt) will decrease so more and more will default.

If you imagine a lot of these 'bad' creditors borrowed between 100 and 125% of their property and a lot of those properties have now decreased, say, 20%. Give it another 9 to 12 months and someone who borrowed £250,000 on a £200,000 property is probably setting with a debt of £249,000 on a property now worth £140,000 which will probably fetch £130,000 at auction.

That means we, the taxpayer, are in the hole for £129,000 each time htis happens and we don't have any good debtors left in Northern Rock to subsidise the shortfall.

Northern Rock had £21bn of these 125% mortgages....the value of properties secured against this debt is probably currently in the region of £14bn.

MarkyMarkD

They were not all 125% by a long chalk, so you are exaggerating the impact of the problem. And not all of those (by a long chalk) will default.

So rather than the £7bn exposure you have guessed at, the reality is probably a huge amount less - maybe £1bn or less?


Regarding the original post, it makes a lot more sense for the UK government to lend the money to the Icelandic government, so that it can in turn lend it to its own FSCS equivalent, so it can pay the money to our FSCS, so that our FSCS can pay out the amount due. Although that sounds convoluted, it's keeping the financial cost where it lies.

The alternative being mooted was for UKG to lend UK FSCS the money, so that UK FSCS could pay it all out. That would have left UK FSCS with the risk of recovering the funds from the Icelandic FSCS which clearly doesn't have the money to meet its debts.

And UK FSCS is code language for "UK banks and building societies" who can well do without getting stitched up for the whole cost of Landsbanki's mess-ups.

codetown

I feel there is a huge difference between Northern Rock and Icesave.
Icesave was ONLY savings. It cannot be so bad to acquire 300k savings customers (so NO loans). IT is just straight money to use and you don't need to keep up the interest either, as saving protection would be a sufficient element for most customers!

Some economic reports said last week that the assets of Landbanski in UK only were almost on their own sufficient to cover the whole liabilities.
So, what's the real problem? Assuming they could cover only 70% of the liabilities, the UK government would have to pay out of its own pocket just the 'small' difference to acquire it all and do whatever they want with it (e.g. nationalise it within the NS&I).
Of course the valuation of the assets would have to be accurate to check that there are no huge losses there, but my understanding of the crisis was that Landbanski (as others) were mostly hit by the huge differential crona/GBP and crona/eur and not with bad asset acquisitions.