The decision by the UK government a few months ago to use anti-terrorism powers over the case of Icelandic banks in trouble has caused deep resentment in Iceland. As this article suggests, such a tactic is hardly a way for Britain – now in deep debt – to make friends with foreign investors. Of course, Mr Brown may have made the calculation that he will be out of power in a few months so why care? But even so, the use of such powers represented a new low for UK diplomatic relations. It also proves the age-old truth that if governments acquire new powers, they will use them in ways far beyond their original scope.
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A tactic that could come back to haunt the UKJuly 23rd, 2009 |
 17 comments to A tactic that could come back to haunt the UK |
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Except that anti-terrorism powers were not used ….
The relevant powers are contained in the “Anti-terrorism, Crime and Security Act 2001”. They are general emergency powers and are not limited to the context of terrorism.
The confusion arises because the Act is commonly known as the “Terrorism Act”, but as its full title shows anti-terrorism is only one of things it covers.
Aha, but I believe that particular power was justified to Parliament on anti-terrorism grounds (by David Blunkett iirc). If it were an ordinary criminal law being justified, it might have been implicitly limited in intent and so its deployment limited. But no such luck with this “power”: it was indeed used outside the scope that justified its being passed.
Could the message to the finance community just as easily be that countries must abide by their financial obligations, and if they don’t draconian measures are justified to force them to? Taken that way I would think this would increase our creditworthiness to possible lenders, as they know they can use their own countries laws against us, just as we used our laws against Iceland.
Paul, my understanding is that assets of one bank were seized because another bank owed money. The message is therefore, invest in Britain at your peril because if another company from your country does not abide by its financial obligations then we may come after you.
From the article:
I fail to see what the British government’s behaviour has to do with capitalism. He seems to be saying, “we behaved like free market capitalists, and the socialists didn’t like us, so we’re going to become socialists so we have more friends.”
Rob – My impression, and I know laughably little about it, is that the assets of Landsbanki and the Icelandic government were seized to help pay the guarantees in place for Landsbanki and two other Icelandic banks. I’d guess, though I don’t know, that the Landsbanki assets didn’t cover its own liabilities, let alone those of the other two banks; if that’s so then the assets of one company weren’t taken to cover the liabilities of another.
Nick – According to Wikipedia, and a very dull reference it gives, “the government had defeated attempts to restrict Part 2 to terrorism-related cases during the passage of the Bill through the House of Lords.” I’m not sure how that sits with your ‘original intent’ argument?
The terrorism act was indeed only applied to Landsbankinn, but the assets of another bank, Kaupthing, were frozen by the UK government at the same time.
Alistair Darling said at the time (according to the BBC): “We are freezing the assets of Icelandic companies in the United Kingdom where we can. We will take further action against the Icelandic authorities wherever that is necessary to recover money.”
Companies were punished because of where their owners were born, not because they were held to be directly responsible for anything connected to Landsbanki or Icesave. It was a hideous expression of collectivist, nationalist thought.
The whole thing also brings to the surface the whole idea of deposit insurance. Specialists had been warning UK depositors about Icesave for months, but people were lured by high interest rates and the promise that the government (Icelandic or British) would bail them out if the Icelandic bank would bottom out.
Icelandic politicians handled the crisis spectacularly badly, both policy-wise and PR-wise, and the more crafty Messrs. Brown and Darling jumped on the chance to shift attention and blame on to Iceland. They wanted the UK public to see them take firm action and what action is firmer than labeling a fellow western, NATO member, nation as a Terrorist haven (slight hyperbole, but still)?
Disclamer: I’m Icelandic.
I’d agree that there was rhetorical sleight of hand in the passing of this legislation – a lazy tactic, verging on the dishonest. As with other similar laws (e.g. R.I.P.A.) the Government’s focus, both in Parliament and in the media, was on the terrorist threat. It would have been far more transparent to pass an Emergency Powers Act and to make clear that terrorism was only one among a number of threats that it was intended to deal with.
So, yes, it is really the Government’s own fault that this has returned to bite them. I have very little sympathy for them, but the fact remains that these are both in law and in the original intention not anti-terrorism, but general emergency powers.
The irony is that they have proved to be of very little use against terrorists: it is in the other instances, if anywhere, that their value lies, tho’ in the case of Iceland their use was a sledgehammer to crack a nut.
My Treasury contacts suggest that the motivation was political (to be seen as active and decisive), but as usual with Brown it wasn’t thought through. The same result (protecting British assets) could have been achieved by other means – less dramatic at the time (and so less politically attractive), but without the blow back.
Bjarni – They did seize those assets, but according to the FSA “Kaupthing Singer & Friedlander no longer meets its threshold conditions, and is likely to be unable to continue to meet its obligations to depositors…The FSA concluded that KSF is in default for the purposes of the Financial Services Compensation Scheme”
From that it seems that the assets were grabbed because KSF was, if not in the same trouble as the other two, at least headed in the same direction. Can you explain why my understanding is wrong? Thanks!
This ties back into a previous thread about bankruptcy rules (Chrysler and all that). The problem, as the post suggests, is that foreign investors dealing with Britain and the US are now alerted to the fact that the company/insolvency law regime as it appears on its face is liable to be subverted for political or economic advantage either by the use of laws that (on their face) have nothing to do with company/bankruptcy law, or by the imposition of new rules on the on the grounds of “emergency” or suchlike.
Money likes certainty and predictability. The effect of this uncertainty will therefore be to (i) increase the cost of doing business (particularly raising money) in the UK and the US, and (ii) deter investment in the first place. It is short-termism at its worst.
This ties back into a previous thread about bankruptcy rules (Chrysler and all that). The problem, as the post suggests, is that foreign investors dealing with Britain and the US are now alerted to the fact that the company/insolvency law regime as it appears on its face is liable to be subverted for political or economic advantage either by the use of laws that (on their face) have nothing to do with company/bankruptcy law, or by the imposition of new rules on the on the grounds of “emergency” or suchlike.
Money likes certainty and predictability. The effect of this uncertainty will therefore be to (i) increase the cost of doing business (particularly raising money) in the UK and the US, and (ii) deter investment in the first place. It is short-termism at its worst.
Paul (sorry for replying so late).
The Kaupthing consortium would very probably have collapsed no matter what action the UK government would have made. Indeed both Landsbanki and Kaupthing were doomed when Glitnir went under. Each bank was a creditor to the other two and they probably couldn’t shoulder the losses sustained if one of them went. However the freezing of Kaupthing assets in London was the bullet that killed the bank.
If I remember correctly, and the Darling quote above supports that, the freezing of Kaupthing assets wasn’t – at the time – said to be an independent action, but directly related to the collapse of Landsbanki.
When Lehman went belly up, the UK government didn’t freeze US assets in Britain. Why is the Icelandic example different?
Bjarni – Well I don’t *know* why the two were handled differently, but I’d imagine it was because the Icelandic trio were retail banks that had provided legally binding guarantees that they had stated they wouldn’t (and indeed couldn’t) abide by. In contrast Lehman was an investment bank that did not have such guarantees (though there were some contractual obligations that had to be resolved).
Laws made in response to terrorism, and other crises situtations, are often bad laws.
“We must do something” – leads to things like the “Dangerous Dogs Act” and other bad jokes of British government over the years.
Also a law drafted to hit one group does not stay with them.
In the United States the RICO statutes were supposed to hit “only the Mafia” and ended up being used generally.
In Britain only Enoch Powell stood up in the House of Commons to denounce the proposal to take the assets of drug dealers without proof that these assets were the results of illegal drug dealing – BOTH because it was bad law, and because it would end up being used on nondrug dealers as well (as it has been).
I had better guard myself against the smear merchants.
Racism is evil, racism boo hiss. I do not support things that Enoch may or may not have said about race.
I’m pretty ignorant of the details of the Icelandic banks’ failures, but were the “legally binding guarantees” which Paul mentions those of the banks themselves or those of the Icelandic government (or some sort of governmental deposit insurance fund similar to the US’s FDIC)? If they weren’t governmental guarantees, why is the Icelandic government being forced to make them good (which is what the linked article suggests)?
Just a small point: the terms and conditions stated clearly that if the Icelandic compensation scheme was not able to pay up the UK’s FSCS would. This was misleading; they would only pay the balance over the the first £16000. I’m sure that some investors would have taken comfort from the fact that the legally binding terms on which they made their deposits said that they were protected in exactly the same way as if their money had been with Barclays. I’ve always wondered if that was one of the reasons why the government moved so quickly to protect Icesave depositors because I’m quite sure someone would have pointed out how misleading those T&Cs were and how embarrassing it would prove given that the FSA must have approved them before Icesave was allowed to take deposits in the UK.
In the case of Icesave the Icelandic fund was obliged to cover up to 16.000 pounds per account, but not more. The Icelandic finance minister said in telephone conversations with Mr. Darling that Iceland would abide by her obligations. Similar guarantees were made by other officials.
However (and this ties into what I said about the complete balls-up the Icelandic government made of the thing) at the same time the Chairman of the Cetnral Bank said that we shouldn’t compensate foreign depositors. Around that time a law was passed that guaranteed 100% of all domestic deposits, but not those in other countries. These two were among the things that triggered the use of the Terrorism act.
I understand that you could defend the action taken by the UK government, but Iceland never could not pay, terrorism law or not. The UK has a million ways to squeeze Iceland diplomatically. F.ex. They could (and did for a time) block aid from the IMF. They could block or delay admittance into the EU. To think that a nation of 300.000 could really win in a face-off with the UK is ridiculous.
(I know we did during the Cod-wars, but the world is very different now. Iceland isn’t any longer the strategically important bulwark to Soviet imperialism so we can’t do what we did then, which was to threaten to leave NATO and kick out the US Army base. )