Marketplace Scratch Pad

Iceland says no way, UK

Scott Jagow Jan 6, 2010

What an intriguing battle taking place between Iceland and the British and Dutch governments. Icelanders might tell Britain and the Netherlands to go stick it with their demands to be paid back for bailing out the depositors of a failed Icelandic bank. It’s somewhat of a referendum on our economic times.

Read more about the story here, but to sum up: Iceland’s president vetoed a bill that would’ve promised to pay back the Brits and the Dutch for rescuing the depositors of Landsbanki Islands in 2008. Hundreds of thousands of British and Dutch depositors — of their own free will — sunk money into the bank through an Internet arm called Icesave. They were lured by high interest rates.

But then, Iceland’s three major banks collapsed and wiped out the country’s equivalent of the FDIC insurance fund. There was no money left to pay back the Icesave depositors. So, Britain and the Netherlands bailed them out and asked Iceland to pay the money back.

Instead of agreeing, Iceland’s President Olafur Grimsson said he would put the issue to a vote of the people. The polls suggest Icelanders will say no, big time. More from the Wall Street Journal:

Almost since the onset of the financial-system collapse in October 2008, Icelanders have blamed a cadre of greedy bankers for turning a prosperous nation into an international economic pariah. There is strong resistance to piling debt on ordinary citizens to undo the bankers’ mess. The bill would have seen Iceland repay the U.K. ($3.79 billion) and the Netherlands ($1.89 billion) over 15 years. That amounts to nearly $20,000 for each of the 300,000 Icelanders.

It also amounts to 40% of Iceland’s GDP. But if Iceland doesn’t agree to the repayments, it might not be allowed to join the European Union. And perhaps worse, the International Monetary Fund might withhold aid to a country already in severe financial pain. Iceland’s economic situation is so bad, the credit rating agencies downgraded the country for not taking on the extra debt.

So, Icelanders have a choice, somewhat akin to the choice many Americans face at the moment. Walk away and take a whack to their credit (and credibility), or continue to drown in debt. Here’s how one British official sees it:

“The Icelandic people, if they were to (reject the measure), would effectively be saying that Iceland does not want to be part of the international financial system, that Iceland doesn’t want access to multinational, national and bilateral funding and doesn’t want to be regarded as a safe counterparty with whom to do business.”

But many are cheering Iceland’s resolve for resisting the payback of investors who took a financial risk. From Mish’s Global Economic Trend Analysis:

The irony in this mess is that Fitch immediately downgraded Iceland. Heck, the way I see it Iceland ought to be upgraded. With a debt overhand from the IMF, Iceland would have had a default looming over its head for a decade with it citizens struggling under a burden of that debt for a decade or longer.

Iceland may have other problems but at least that one was resolved (hopefully), the quick and painless way. And that should have been the model for US banks as well. The stockholders and bondholders should be the first ones wiped out. Instead Bush started and Obama continued with a policy to punish the innocent to bail out the wealthy, leaving the average taxpayer deep in the hole, against the clear will of the majority.

Felix Salmon is rooting for his country to leave Iceland alone:

I’m quite ashamed of the bullying tactics being used here by the UK government…

If the UK were picking on a country its own size, here, I wouldn’t feel so bad. But Iceland is tiny, and has no real means to fight back, other than essentially saying “OK, then, hit me.” Which is what it’s just done. I hope that the UK doesn’t follow through on its threats — even if that means damaging its own credibility going forwards.

What do you think Icelanders should do?

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