05/05/2010 05:12 am ET Updated May 25, 2011

Iceland's Referendum -- At Last the People Can Choose

By Ann Pettifor and Jeremy Smith, Advocacy International.

The people of Iceland have a deep democratic tradition. In Saturday's referendum they have the opportunity to assert their sovereignty and autonomy.

Their leadership and example will encourage people in other democracies to reject harsh cuts in public services and living standards made at the behest of the very people and institutions -- the bankers and the regulators -- responsible for the crisis.

For through the wholesale nationalization of private losses, we are all -- not only in Iceland -- asked to pay the price of private, reckless risk-taking.

The Sorry Saga So Far

It all dates back to October 2008 when the Icelandic bank, Landsbanki, collapsed, and the British and Dutch governments decided to bail out their own citizens who had savings in Landsbanki.

They then turned to the Icelandic government and demanded reimbursement. Under European law, each country must have a compensation scheme (up to a defined limit) for when a bank goes bust. But no one had envisaged -- or funded for -- a large-scale meltdown such as occurred in Iceland. So Iceland's (private law) Fund couldn't pay up.

There follows a long saga of the British and Dutch trying to force the Icelanders to accept a retrospective "loan" on harsh and one-sided terms, so that they can get a sovereign guarantee from the Icelandic government to enforce it!

The terms would impose a new debt burden of 12,000 Euros per Icelander (man, woman and child). The Financial Times rightly calls their tactics 'bullying' -- they include blocking new aid from the IMF and others unless Iceland accepts the terms.

And that is what the referendum is about -- whether to authorise the government of Iceland to give a sovereign guarantee that come hell or high water, the British and Dutch will be repaid -- including high, profiteering rates of interest.

And without the Dutch and British sharing a single Euro of the burden.


A key principle in resolving the dispute is co-responsibility. Iceland's President Grimmson has made a similar point, referring to "a shared international responsibility."

The previous Icelandic government allowed a deregulated financial sector to run wild. The subsequent collapse of Iceland's banking sector was not a sudden bolt from the blue. The risks were visible and widely reported. And the deposit guarantee scheme was totally under-resourced to deal with a systemic meltdown.

So Iceland cannot escape some share of political responsibility for the Icesave fiasco.

But Iceland was far from alone in this negligence. The political establishments of Britain and the Netherlands -- indeed, those of the European Union and EEA as a whole -- encouraged financial deregulation and a more extensive Single Market in financial services, without almost any regard for the wholly predictable risks of large-scale economic failure.

Not a Sovereign Debt Crisis

The British and Dutch governments have, by political sleight of hand, given the world the impression that this is an issue of sovereign debt default.

This is quite false. It is a crisis of EU regulatory failure, and of the Anglo-American economic model.

The British and Dutch governments chose, for understandable reasons, to compensate domestic Icesavers whose deposits were at risk. They did this without consulting the government of Iceland. But from the start, they used economic and political force majeure to try to place the whole burden of compensation on to the state and people of Iceland. Only retrospectively, and through duress, was an agreement made with Iceland's Depositors and Investors Guarantee Fund to compensate the British and Dutch governments for the cost of bailing out their own citizens.

This retroactive arm-twisting is now defined as a loan contract - even though the "loan" was not contracted at the outset by the borrower, but forced on it by the "lenders". And the UK and Dutch governments' fiercely desired, but missing, link of an onerous sovereign guarantee is still.... missing!

The terms

The proposed interest rate of 5.5% is particularly unfair, and contains a large element of profiteering, given that the UK's Financial Services Compensation Service has, according to the UK Treasury, "financed its payout [to UK depositors] through a loan from the Bank of England."

The Treasury does not disclose the rate of interest on this loan -- a rate over which it had absolute discretion. The Bank of England's base rate is today 0.5% (1.5% in January, 2009). The ECB's base rate was 2.0% in January 2009, yet the Netherlands government had even greater audacity in seeking, initially, interest at 6.7%!

What Are the Strategic Options for Iceland and Its People?

One option in the referendum is for Iceland to accept the proposal based on force majeure, to pay the full price demanded (cuts in public services, unemployment, widespread emigration...) and hope to slowly rebuild the fabric of the Icelandic economy. However this strategy will make recovery and reconstruction in the short run well nigh impossible.

And in the long run, as JM Keynes argued, we are all dead!

All other options would be enhanced by a strong rejection of the UK/Dutch proposal, since the bigger the turnout for a 'no' vote, the stronger Iceland's negotiating position will be, whichever option is adopted.

The dispute could be referred to the courts, to arbitration or (preferably) mediation. It is a striking feature of the story so far that the UK and Dutch governments have gone to great lengths to avoid legal resolution of the dispute, despite the Icelandic government's constant denial of legal liability.

This may be sensible, since the 1994 Directive is badly drafted, and the outcome unpredictable for all.

Winning Hearts and Minds

After the referendum it will be vital that the government and people of Iceland inform and win over public and official opinion in Britain and the Netherlands, and the EU.

To date, the issues have not been clearly explained to the British and Dutch publics. As a result, the two governments are under little public pressure to change their strong-arm tactics.

The voices of the Icelandic government and of Icelandic civil society need to be heard more loudly in more targeted campaigns in the UK, the Netherlands and EU. Coming general elections in both countries will make this difficult in the short-term, but in the long-term the Icelandic position is bound to prevail -- if put across coherently.

Now is the time to spread more understanding of the issues -- the shared responsibility, the flawed and excessive nature of UK and Dutch government demands, their impact on ordinary Icelandic citizens, and the positive ideas and proposals that emerge as a result of democratic debate in Iceland.

In this way we can lay the foundation for a just resolution of the dispute.

And maybe, just maybe, the message from Iceland may be heard by ordinary citizens in other, larger nations, being told they have to make huge sacrifices to pay for the recklessness of bankers and the failures of look-the-other-way "regulators". We, the people will decide!

Democracy -- now, there's a radical idea...