I feel sorry for Iceland

by Ed Bowsher on 05 January 2010  |  3 comments
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Iceland’s president is refusing to compensate Britain and the Netherlands for last year’s payouts to Icesave savers. I can understand why the President feels that way, but Iceland will have to back down in the end.

The Icesave saga goes on and on. On New Year's Eve, Iceland's parliament voted to pay £3.4bn to the British and Dutch governments. That sum would be compensation for the governments' payouts to Icesave customers when the online bank collapsed in 2008. 

But today Iceland's president said he wouldn't sign the bill into law which means there will now be a referendum on the compensation package. 

I'm no expert on Icelandic politics but my hunch is that we could see a repeat of Ireland's recent "repeat referendum" on the Lisbon Treaty. In other words, the Icelandic people will vote to reject the compensation package but will then be persuaded to change their mind in a second poll a few months later. 

I feel sorry 

Opinion polls show that around 70 per cent of the Icelandic population are opposed to the measure and I can understand why. The total sum amounts to half of Iceland's annual GDP and is equivalent to 12,000 Euros per person on an island nation of 320,000. 

Just as in the UK, ordinary Icelanders can't see why they should have to clean up a mess created by greedy bankers. 

But Iceland will have to pay up in the end. The country needs help from the IMF or its economy could collapse, and Iceland also wants to join the EU. Britain and the Netherlands are in a very strong negotiating position. 

In fact, if Iceland doesn't knuckle under, it could reach a situation where it can't repay its debts. The fashionable jargon for this scenario is a 'sovereign debt crisis.' Of course, Iceland isn't the only country in this situation and I suspect that sovereign debt is going to be one of the big themes of 2010. 

What about ordinary savers? 

UK savers with Icesave have long since received their compensation from the UK government. Today's news makes no difference to them. It also makes no difference to people who had money in offshore accounts with Icelandic banks in places such as Jersey. They've not received any compensation and are unlikely to do regardless of what the Icelandic people decide to do.