Government guarantees protecting savings in foreign European banks are shaky.
A recent court ruling makes interesting reading (if you like that sort of thing). It shows that government guarantees protecting savings in foreign European banks are on very shaky legal ground.
In October 2008, the UK government stepped in to repay more than £3.5bn to 230,000 savers in Icesave, owned by Landsbanki, an Icelandic bank that collapsed at the beginning of the financial crisis.
Iceland's savings guarantee scheme, funded by Icelandic banks, should have covered more than £2.3bn of that under European law, but it was unable to pay out, having just promised to compensate customers for two other failed Icelandic banks.
The Icelandic government refused to cover the bill, but the Court of Justice of the European Free Trade Association (the EFTA Court) has just let it off the hook.
Guarantee schemes don't guarantee your savings
The reason the EFTA Court gave is that, under European law, the Icelandic government isn't responsible for repaying savers in failed banks.
The court believes that European governments are just responsible for setting up and supervising a guarantee scheme to be funded by banks – much like our Financial Services Compensation Scheme – but the state isn't obliged to compensate customers if the scheme fails.
The guarantee scheme also has to “function properly”, according to European Law, but the court ruled that if a scheme fails to pay out in some circumstances, such as in Iceland when the entire banking system collapsed, it doesn't mean it wasn't functioning properly. Since the banks were signed up to it and doing what they were required to do, the scheme was functioning.
The court also found that while savers always have a right to make a claim against a deposit scheme, that doesn't necessarily mean it actually has to pay out.
No discrimination, apparently
In addition, the court ruled that it wasn't discriminatory for Iceland to save its own depositors but not foreign ones, including UK savers.
The law specifies there should be no discrimination against different nationals. However, the court found that Iceland didn't break these rules. It partly explained that this was a result of a technicality, due to the way in which Icelandic depositors were saved.
Another reason it gave was that it was convinced that Icelandic depositors were saved as a necessary consequence of Iceland saving its banking system, rather than as an act of discrimination.
(If you're feeling anger towards Icelandic politicians, do you really think ours wouldn't do the same?)
There are no guarantees
Most governments across Europe rushed to save their own banks when the crisis struck (not Iceland, interestingly), but they're not actually obliged to save savers.
It's a strange use of the word “guarantee” in these European savings deposit guarantee schemes, when you're not actually guaranteed to get your money back.
This makes a mockery of the additional “guarantees” we have received since Icesave failed. European nations agreed to increase the minimum guarantee from €20,000 to €50,000, and then again to €100,000 (£85,000) from the end of 2010 to reassure customers. But the EFTA Court has just ruled that Iceland wasn't even obliged to meet its guarantees for €20,000-worth of compensation.
All this is not unheard of in banking and politics: labelling things as positively as possible for voters and customers – e.g. calling it a “guarantee scheme” – but having no or little real substance beneath it. It could explain why bankers and politicians often talk about “improving confidence” in the banking sector instead of trying to improve the banking sector itself.
There are some more savings scheme laws in the pipeline, which the EFTA Court optimistically referred to, but they look to me to not substantially change the current state of affairs: that European governments can get away with not paying foreign depositors in situations like these - if they wish to.
We'll still get some of our money back
While the ruling shows that it doesn't have to, the Icelandic government is committed to paying the UK back in full – eventually.
It wants to repay the whole lot, not just the £2.3bn that the savings guarantee scheme required, and it intends to do so by selling the remaining assets of the broken bank. However, it's probably going to take a great many years.
In the meantime, the UK has to pay its own costs for the court case. Worse, the government had to borrow in order to compensate Icesave savers, and it's being charged interest for it. Iceland isn't likely to repay that interest.
UK banks are better
The UK government is likely to think carefully before bailing out UK customers of foreign banks again, which should add to our existing concerns that foreign banks are less safe.
On the flipside, our politicians will always face great pressure to save UK customers of UK banks for as long as they are realistically able to do so, especially since the banking system can't work without savings.
Your money is never going to be 100% safe
If a country is both realistically unable to pay all its debts and finally ready to accept that, then it has no choice but to renege on some of its promises.
This doesn't just mean it will decide not to repay all its debts, it could also fail to keep its word on promises to citizens and taxpayers, such as savings guarantees.
Build your own defences
Clearly your savings are never 100% safe, but you can take steps to reduce the risks.
Once you've built up some significant savings, ensure your money isn't all in one place. Consider peer-to-peer lenders, investing, and also spreading your savings between more than one completely separate bank, while keeping an eye on the interest rates you're getting. If you do this, having some savings in a foreign bank will be less risky.
Compare savings accounts
More on savings:
The top fixed-rate savings bonds
Why savers should beware of variable savings rates
Savings providers that treat their customers right
Don't lock away your savings for five years
The best instant access savings accounts
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