Icelanders Reject Deal to Repay U.K., Netherlands

NEWS, 11 Apr 2011

Charles Forelle – The Wall Street Journal

For the second time, Icelanders voted down a deal to repay Britain and the Netherlands billions of euros lost in the island nation’s 2008 financial collapse—at once a bold popular rejection of the notion that taxpayers must bear the burden for bankers’ woes and a risky outcome that will complicate Iceland’s efforts to rejoin global markets.

The money in question, about €4 billion ($5.78 billion), was placed by British and Dutch depositors in an Icelandic Internet bank called Icesave and then lost when Icesave’s operator, Landsbanki Islands, collapsed along with the rest of Iceland’s big banks in October 2008.

According to preliminary results midday Sunday, nearly 60% of voters rejected repaying the British and the Dutch governments, who had stepped in to compensate the Icesave depositors when Iceland’s deposit-insurance system ran out of money.

The deal was the result of months of negotiation that saw Iceland win far better terms for the repayment. An earlier agreement was demolished—93% of voters said no—in a another referendum, in March 2010.

But Iceland’s president in February vetoed a parliamentary bill that would have sealed the new deal. That triggered Saturday’s referendum.

Both Britain and the Netherlands expressed disappointment and indicated they would fight it out with Iceland in court. “The time for negotiations is over,” said Jan Kees de Jager, the Dutch finance minister.

Iceland is a member of the European Economic Area, which means it has signed up to many of the European Union’s financial and trade rules—among them a requirement that countries maintain deposit-insurance systems.

The EFTA Surveillance Authority, a body that polices the EEA agreements in Iceland, Norway and Liechtenstein, has already started legal proceedings against Iceland. The authority says Iceland violated rules by not backing Icesave depositors—and by reimbursing domestic depositors but not foreigners.

The dispute will be heard by the Luxembourg-based EFTA Court.

The Icelandic government said the result of the referendum would delay “by some weeks” the next assessment by the International Monetary Fund of Iceland’s progress toward economic recovery. The IMF and Nordic nations rescued Iceland with a bailout.

The government said the referendum result wouldn’t affect Icelandic government bond repayments in 2011 or 2012.

But it seemed clear that Iceland, already isolated by the financial-system collapse, would remain in a tenuous position. Though neither Britain nor the Netherlands addressed the matter Sunday, either country could veto Iceland’s pending application to join the European Union.

Iceland’s banks collapsed in 2008 after years of swelling up on foreign loans. When their funding dried up after the Lehman Brothers collapse, the banks found themselves short of cash, and the Icelandic central bank had little foreign currency to offer them.

The Icelandic krona sunk like a stone, and foreign exchange still remains limited. Capital controls keep foreign assets from fleeing Iceland.

Still, the banking disaster is widely seen in Iceland as the folly of a few financiers, and there has been substantial popular resistance to assuming their debt.

“A large majority of Icelandic voters has thrown out the immoral notion that odious private debt can be nationalized as an afterthought,” said Frosti Sigurjnsson, a spokesman for a group of anti-Icesave campaigners, in a statement.

The deal rejected Saturday called for Iceland to pay around £2.35 billion to the U.K. and €1.32 billion to the Netherlands—a sum that equals about half a year’s economic output on the island of 300,000. It would have until 2046 to repay at an interest rate of around 3%.

But Iceland estimates that it will be able to cover as much as 90% of the sum with proceeds from the sale of the defunct Landsbanki’s assets, and thus a small fraction would come directly from the pocket of taxpayers.

Ainsley Thomson and Archibald Preuschat contributed to this article.

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