Icelanders were coming to terms Tuesday with a new crisis sparked by their president’s veto of an unpopular bill designed to repay Britain and the Netherlands billions lost when Icelandic banks collapsed.
The island nation, a former superstar of the financial world that was among the hardest hit by last year’s financial crisis, now faces having vital economic aid cut off. Its hopes of joining the European Union (EU) may also fizzle.
The bill will be put to a national referendum, but a recent poll showed almost 70 percent of voters oppose its terms. British and Dutch governments have both warned that a further rejection could result in them vetoing an Icelandic bid to join the EU, which Iceland's government sees as crucial to the country’s recovery.
The controversy is rooted in the collapse of Icesave, a subsidiary of the Icelandic bank Landsbanki that operated only in Britain and the Netherlands. High interest returns had tempted tens of thousand of British and Dutch customers to invest savings.
The British and Dutch governments stepped in after the collapse to compensate savers for their losses, and expect to be repaid more than $5 billion by Iceland.
How much debt per citizen?
But critics of the bill that would have paved the way for that repayment say Icelanders would be burdened with debts of up to $18,000 per citizen, including interest payments.
Influenced by a petition signed by more than a quarter of his country’s population, Icelandic President Olafur Grimsson rejected the bill, saying that popular feeling was too strong to proceed without a referendum.
The vote will be held within four to eight weeks, during which Iceland’s government would appear to face an uphill struggle to convince the country's 243,000 voters to endorse the bill.
The task of convincing voters to accept the bill and honor the repayments falls to a left-wing coalition that last year unseated a massively unpopular government run by free marketeers. Ironically, the former government party is now experiencing a rise in popularity on the back of its opposition to the bill.
Not part of the international system?
British Financial Services Minister Paul Myners said that Iceland risked pariah status if its voters went against the bill in a referendum.
"The Icelandic people, if they were to reach that conclusion, would effectively be saying that Iceland does not want to be part of the international financial system, that Iceland doesn't want to have access to multinational, national, and bilateral funding, and doesn't want to be regarded as a safe counterparty with whom to do business,"” he said.
In Iceland, novelist Andri Magnason, whose work includes the 2006 best-seller "Dreamland: A Self-Help Manual for a Frightened Nation," says that his fellow citizens were growing weary of the international spotlight and just wanted the Icesave saga to “go away.”
“This is a really time-consuming debate, and people are becoming quite depressed at the prospect of months more of it,” he says, speaking from his home in the old part of the capital, Reykjavik.
He added that there was also still much resentment toward the perceived use of strong-arm tactics by the Dutch and British governments when it came to arranging the repayments – and particularly Britain’s unprecedented use of antiterrorist laws to seize Icelandic banking assets in the UK last year.
“I think that the governments of the UK and the Netherlands might be happy to have a scapegoat at the moment to divert form their own problems,” he adds.
“As for Icesave, I think it was quite astonishing that people who saved with it did not accept that there was a risk. The fundamental concept of interest rates is risk.”
Meanwhile, Robert Wade, a professor of political economy and development at the London School of Economics, warned that the controversy over the Icesave repayments obscured grave dangers on the horizon.
“In a way, this is a distraction from the much more immediate problem of the gigantic international loan which the Icelandic central bank has had to take out – a loan equal to between 18 and 20 percent of GDP,” he says.
Iceland is relying on a $2.1 billion loan from the IMF as well as a $2.5 billion loan from Scandinavian countries.