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Silja Bára Ómarsdóttir

Silja Bára Ómarsdóttir

Posted: March 4, 2010 03:07 PM

A Small Country with a Big Problem

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Iceland was one of the first victims of the financial crisis in 2008. Ever since early October of that year, the country has been dealing with the problems caused by internet savings accounts opened by one of its banks in the UK. These accounts, called Icesave, were aggressively marketed in the UK and Netherlands, with accounts scheduled to open elsewhere right up to the crash. Hundreds of thousands of accounts were opened. The problem is that the Deposit Insurance Fund expected to cover them was in Iceland, where the population is only 300.000. When time came to pay the minimum insured amount, the fund was lacking. The British and Dutch authorities paid depositors in their respective countries and billed Iceland.

Fifteen months later, two deals have been made in an attempt to settle the terms of a loan. The first one was renegotiated in the Icelandic Parliament and passed in late August 2009. The changes made were unacceptable to the UK and Netherlands. The second deal, passed by Parliament in a late night vote on December 30th was rejected by the President on January 5th. According to Iceland's Constitution, this means the act must be put to a referendum, scheduled for March 6th. The problem is that a new negotiating team has been speaking with the British and a better deal is on the table, even though it hasn't been agreed upon yet. Iceland is holding its first referendum in the history of the republic on a moot question.

It appears clear that the bill will be voted down on Saturday. The one thing that is unclear as of yet is the impact a low turnout will have on the outcome of the vote. Polls indicate that over 70 percent would vote to void the bill passed by parliament in December, but none of the polls have measured (or at least they haven't published) likely turnout. The results could therefore be closer than the polls suggest.

In the most likely case, a majority of those casting their vote will choose to void the bill. For Iceland, the bill's rejection means a continuation of the ongoing talks with the Dutch and the British, and a prolongation of the extremely high risk premium for Iceland and Icelandic companies. Iceland has a loan agreement with the IMF and the terms of Iceland's loan package appear to have been held hostage by the Icesave dispute. Only after the first bill was passed in August was a review completed of the terms and loans paid out. A further delay is likely to lead to the same result, with loan payments and reviews being stalled, at great expense to the Icelandic economy. This delay is again likely to exacerbate the problems of the government, which has pushed hard for the passing of the bill, and in particular weaken the position of Minister of Finance Sigfusson, who has put his reputation and political life on the line for the deal. The government may be so weakened by the end of this affair that it would consider bringing in a third party. This again would probably serve to weaken the Left Green Movement, which is the only party to uphold environmental perspectives against the interests of damming and heavy industry, often to the dismay of the Social Democrats, who are the senior coalition partner.

The "no on Icesave" will come as no surprise to the Dutch and British, as at least the British have already proposed a significantly better deal to Iceland than the one approved by Parliament in December. This is already under negotiation between them and Iceland. The demands of the "pots and pans revolution" of last year included the increased use of referenda, and this has now been established. The problem is that there has been no change in how to decide what issues will be put to a referendum, so it is up to the opinion of one man whether the nation gets to have a say. The impact is therefore far more important domestically than internationally. Iceland's problem is huge for the country itself. Unfortunately, it's not so big for the other parties involved.