ICELAND (2)

Some two years ago, Iceland's voters decided in a referendum not to compensate British and Dutch depositors in Icesave, an offshore internet bank that offered high deposit rates until it crashed and burned. Icelandic depositors were compensated, foreigners could go hang.

At the time, I didn't think that this was such a good move, not least because the U.K. and Holland would be taking Iceland to the EFTA Court, and the consensus was that they would win. In part because the Icelandic Government's decision to nationalise Icesave's parent, but do nothing for the foreigners, was discriminatory, a key taboo in both EFTA and E.U. law.

Somewhat surprisingly, however, the Court has now decided in favour of Iceland, a judgment which can not be appealed. This has two consequences. The first, a big short-term boost for Iceland, is that it gets out of paying some Euro4 billion, which presumably has raised cheers in Rejkjavik. The second, whose main ramifications are for the longer term, is that it shows just how difficult it is to regulate international financial institutions, particularly those that are in trouble. European politicians wishing to strengthen E.U.-wide bank supervision will use this judgment to bolster their case.

Walter Blotscher