Last week I revealed details of a letter from the Permanent Secretary at the DCLG opposing John Denham's policy on ocal government reorganisation. As departmental accoiunting officer, the Perm Sec wanted to cover his back should any legal action ensue. A PQ revealed this was the first time this course of action had been taken since 1997 in that Department. However, an eagle eyed reader, who is clearly a diligent student of deposited parliamentary papers, alerts me to this letter from Treasury Permanent Secretary, Sir Nicholas Macpherson to Alistair Darling on 8 October 2008. In the letter, Sir Nicholas makes clear that both he and the Bank of England disagree with the Chancellor's intention to fully guarantee the deposits of British savers in Landsbanki. Interestingly the FSA was backing Alistair Darling.
Alistair Darling immediately wrote back and told his Perm Sec he was going ahead anyway. I don't know whether this has emerged into the public domain before, but it does shine a light onto the relationship between Cabinet Ministers and their Permanent Secretaries.
Have a read of Point 5. It says "There is a written undertaking from the Icelandic government to stand behind its financial services compensation scheme." Unless I am mistaken (and I may well be), isn't this the scheme which the Icelandic government has indeed reneged on?
Am I the only one that thinks this is a good example of how government should work. Checks and balances built in at the right stages? It's not about Perm Secs covering their backs, it's about a recognition that democratic power lies with elected ministers and not civil servants, but that civil servants have a very important role to play in offering impartial, evidence based advice in the public interest.
ReplyDeletethepoliticalbadger
An excellent spot (by whoever spotted it!).
ReplyDeleteBut I feel that this shows Government and the Civil Service working in perfect harmony, so to speak.
UK savers invested in Icesave (and the other Icelandic banks) in their tens of thousands. They were not like any other foreign bank, except maybe ING. I was one of those investors. We were told by the papers to treat them almost like any other bank - after all, how could a bank ever collapse? :)
If the Government was to guarantee all deposits in UK banks, it could clearly be seen as unfair not to help savers in foreign banks. We were normal people looking for the best rate of interest, not speculative hawks with money in 50 different bank accounts.
The Accounting Officer (i.e. the Perm. Secretary to the Treasury) raises concerns over value of money, the Minister considers them and makes a decision. Simple.
Besides...letting Icesave, etc, collapse would have destroyed so many peoples' savings that Labour would be on about 25% and not 30% in the polls right now!
Nice one Iain. Keep them coming! Another clever piece of research journalism by you and your reader(s).
ReplyDeleteReading about the so-called "assurances" of the Icelandic government helps to give focus to why HMG invoked anti-terrorist legislation to sequester Icelandic bank assets, although this caused outrage in Iceland. Clearly both the banks and the government of Iceland leave a lot to be desired in the trustworthiness department.
It also reminds that UK savers should think very, very carefully before investing in any foreign account, including all those "secure" tax haven ones.
We still haven't had any resignations or dismissals of senior accounting officers in those local authorities and other public bodies who blindly placed loads of ratepayers money into Iceland. One cannot help but wonder what on earth they are paid such large salaries for.
Iain - my understanding is not that the Icelandic government has reneged but that the Icelandic President has listened to mass protests at the extortionate interest that the British and Dutch governments are demanding that it pay in addition to repaying the capital sum.
ReplyDeleteWhen I last looked at it the UK was paying just under 2% on short0dated gilts and the Netherlands was paying less than 1% on its (safer) debt but they were asking Iceland to pay 5.5%.
Iceland's previous offer at what they think is a reasonable rate of interest was passed by the Althing and signed by the President and is still on the table for Darling and his avaricious cronies to accept.
No, the Icelandic government has not reneged on anything. The Icesave bill passed by 33 votes to 30 and was hugely controversial in Iceland because the people felt that Britain and the Netherlands were trying to attach unreasonable conditions to the deal.
ReplyDeleteThis is the second bill passed by the Alþingi trying to resolve Icesave. A previous bill, which would have suspended payments if Iceland's economy was not growing at a reasonable rate, was passed and signed by the President. The British and Dutch rejected it out of hand.
The second Icesave bill went to the Icelandic President (who has a role akin to the Queen or the Irish President) for ratification. As is typical in Iceland, a large part of the population lobbied the President saying that the terms of the deal were unfair and potentially crippling. He received petitions from approximately one-quarter of the population.
The President has refused to sign the bill. Instead, he has used a provision of the Icelandic constitution to call a nationwide referendum on whether the Icesave Bill should be passed. This will take place in March.
With a few exceptions (mainly in Daniel Hannan's favourite Independence Party that got Iceland into this mess), no one is arguing that Iceland owes nothing to Britain and the Netherlands. The real disagreement is over the level of compensation, the rate at which it should be repaid and if there should be a sunset clause. There is a huge debate in Iceland over the justice of socialising Landsbanki's debts when it could mean every Icelander picking up a tab for £20,000.
There are now three-way negotiations going on over Icesave, as it appears the British and Dutch are beginning to realise that there is a good chance the referendum will confirm the veto and collapse the Icesave negotiations back to step one.
I think what's going on in Iceland really shows a mature democratic process - politicians being held to account and people asking if they should be forced to bail out private companies.
This would appear to be another example of a "Ministerial Direction" as highlihted by you a couple of weeks ago in the case of Denham.
ReplyDeleteThis is the later Treasury justification for Darling spending £4.5 billion 'to minimise the exposure of, and costs to, taxpayers.' I kid you not 'minimise'.
ReplyDeleteAnd £800 million was not even guaranteed deposits.
"On 8 October 2008 the FSA announced that the UK branch of Landsbanki was in default for the purposes of the FSCS. The Chancellor announced that all retail depositors with the UK branch of Landsbanki would receive their money in full. The Government's objectives in taking action in relation to the UK branch of Landsbanki were to maintain financial stability and to minimise the exposure of, and costs to, taxpayers.
In total, around £4.5 billion has been paid. It is estimated that this includes £2.35 billion compensation that the UK Government paid out to depositors on behalf of the Iceland Depositors' and Investors' Guarantee Fund (DIGF), £1.4 billion paid out by the FSCS for deposits above €20,887 and below £50,000, and £800 million paid out by the UK Government in respect of deposits above £50,000.
In guaranteeing UK retail depositors of the Icelandic banks, the Treasury acted under its common law powers. The statutory authority for the Treasury to incur this expenditure was provided by Section 228 of the Banking Act 2009 (retrospectively)."
It is a pity we have to get to leaked Direction stage before we see examples of reasons being given by Ministers for overriding official advice. Why shouldn't they always have to give reasons, and let us know when the evidence or advice has pointed one way and they have ignored it or decided that other factors are more important? Isn't that accountability?
ReplyDeleteThe Financial Times is reporting another such memo on the taking over of Royal Bank of Scotland. The Permanent Secretary protests that the status of many contracts being taken over is unclear. He is directed to act by Darling.
ReplyDeleteWhat I fail to understand is why any bank accounts deposits were guaranteed in full by the tax payer's. When there is a statutory deposit guarantee scheme in operation it should be adhered to. Why should the tax payer bail out savers for the extra?
ReplyDeleteThe Icelanders should of course be liable for the £20K+ which their guarantee scheme provided and the moot point is the difference between the £50K UK guarantee and the Icelandic guarantee of £20K+.
Why should the Icelanders be placed in debt for centuries just because Brown and Darling decided to guarantee all deposits in full for political reasons?
Andy: You got a free pass, but you shouldn't have. If I knew that Icesave was a risk, then you must have too. Why were those interest rates so favourable do you think?
ReplyDeleteJust because the Icelandic government was a very generous one?
Or was there a reason?
A friend of mine did 20k in Icesave. When she got it back, after the panic, she put it into a Pakistani bank at 6.5%?
Why? Because she knew Gordon would guarantee it.
Now, Its not wrong you were bailed out. Hell, if RBS, Northern Rock and so on were bailed out, why not investors too.
But why pick up all the risk again?
Why not say , in future if you want to invest in a rising Brazilian market, Chinese bonds,Russian banks or the other BRICKs, then its YOUR money and YOU risk it, 'cause no one is bailing out UK investors in foreign banks. You go by the protection afforded in those countries..
It is interesting to see this advice. The compensation for losses of investors in these Icelandic banks was a gross and politically motivated misuse of public money. As I recall, these banks were frequently cited on BBC’s Money Box as offering savings rates well in excess of the rates generally being paid out by UK institutions. A greater rate implies a greater risk over and above the minimum deposit guaranteed by the government of the bank’s host country. Savers in the Icelandic banks should have been aware of this and of the terms on which they made their investments.
ReplyDelete“We were told by the papers to treat them almost like any other bank” – what a pathetic cop-out. What about personal responsibility?
Government should not be intervening to save people from the consequences of their own stupidity. Nor, as the letter suggests, was there an overwhelming public interest case in favour of the intervention. The losses incurred by these savers are very unlikely to have caused a run on UK banks.
It is so typical of the current age that the relatively wealthy investors in Icesave, who were creaming off inflated interest from their deposits, were compensated in full, while the vast majority of the very poor people who contributed to the Farepak Christmas saving scheme received almost none of their money back and none from the public purse. The government had no obligation to help either group, but chose to help the more wealthy and less vulnerable of the two. There was no rationality or justice in this decision, just political self-interest.
It is a pity Darling did not listen to Sir Nicholas’ admonitions.
I tend to agree that this shows the Ministerial/official relationship working well. Ultimately, officials advise but ministers decide; and so long as those decisions are taken transparently (as this shows they are) then the public can come to their own decision as to whether or not that was the correct course to follow.
ReplyDelete(Good piece of research though).
, I see no justification whasotever for tax payers to bail out rate tarts, who foolishly believed thought they had got a super deal from a country with a population the size of Croydon’s. The biggest suckers were Coucils, which tells you a great deal about the ways people behave with other people’s money.
ReplyDeleteThe European Union is getting off the hook here and it should, not . The EU is often assumed to be only certain institutions associated within the wider European movement but that is to misunderstand its nature.
In this case Iceland’s theoretical bona fides were established under the pass porting rule by which the FSA are not allowed to second guess financial service Providers from any participating country.They have to be on the FSA register giving all the appearance of having been checked out in the way we have been used to for decades . The consumer was not alerted to the fact the FSA were powerless in all this. This was deliberate and part of the drive to homogenize European markets running rough shod over local differences, old safeguards and hiding risks. The FSA do not want it to be advertised that in many ways they have become another institution hollowed out by the EU to disguise a fundamental shift of competence from us to the EU. People might start to ask what we are paying for
Iceland was and is a Participating country and although not an EU member it was included in this homogenizing measure which emanates from the EU and is an ongoing grand project
The EU made the dodgy Iceland option seem less of a gamble than common sense would tell you it was the FSA are complicit in the cover up and there is much more of this to come