Lessons from Icesave: who is a depositor and who is an investor

The Guardian ran an editorial on Iceland prevailing in its interpretation of how deposit insurance is suppose to work.

the decision in favour of Iceland has thrown a far more troublesome spotlight on the legal relationship between all European states and the guarantees purportedly offered by their banks to retail depositors. 

Troublesome, or has the ruling highlighted the critical distinction between depositor and investor?

The Icesave ruling effectively defines a depositor as an individual or company from the host country and everyone else is effectively defined as an investor.

This distinction is logical because a deposit guarantee is really between the government and its citizens.

Can this deposit guarantee be expanded beyond a country's citizens?

Yes.  For example, if the country is a member of the EU.  In this case, the deposit guarantee is extended to the citizens of the EU member countries.  However, it is not extended to citizens outside of the EU.

Why are citizens outside of the EU treated differently?

Because they are really investors.  These citizens are making an investment choice.  They could deposit their funds with a bank in their country and receive a lower return or deposit their funds with a foreign bank and receive a higher return.

What advice would George Osborne today offer ordinary retail savers thinking of placing their savings with an online account offered by a bank based in a financially weak European member state? 

The advice should be that the retail saver should think of themselves as an investor.

The question they have to ask is does the higher interest income earned on the account adequately compensate them for the risk of not being repaid if the bank becomes insolvent.

And what sanction might a financially stretched government face if its desperate banks went chasing foreign deposits, knowing the accompanying guarantees were flimsy?

The lesson from the Icesave case is that foreign depositors must think of themselves as investors.  As an investor, they are responsible for all losses on their investments.  As a result, the need to ask the question of "will the deposit guarantee actually cover my deposits".

If it is a bank in an EU member country and the investor is from an EU member country, the answer is the deposit guarantee covers their deposits.

If it is a bank in a small, financially stretched, non-EU member country, the answer is the deposit guarantee does not cover their deposits.  This is a reasonable conclusion from a practical standpoint even if the deposit guarantee in theory did cover their deposit as there is no reason to believe that a small, financially stretched country could make good on the guarantee anyway.