Iceland still divided over deal to repay UK for online bank losses

By Peter Geoghegan
in Reykjavik

Public opinion in Iceland is split over a deal to repay the British government £2.35 billion for losses incurred following the failure of online bank Icesave.
Icelanders will vote on the issue in a referendum on Saturday, with opinion polls suggesting the result is too close to call.

A recent survey for Icelandic business weekly Vidskiptabladid put support for the new Icesave legislation at 52 per cent, with those opposed to the deal on 48 per cent.

A significant number of Icelanders are still undecided. In March 2010, an earlier agreement on Icesave was rejected by over 90 per cent of voters.

Icesave, a high-interest internet bank with the slogan “clear difference”, was created by one of Iceland’s largest banks, Landsbanki, in 2006. It operated in both the UK and the Netherlands, with over 400,000 customers in the two countries.

When the global downturn struck in October 2008, Lansbanki, along with two other banks, Kaupthing and Glitnir, were declared bankrupt. The total debts of the three banks, which were privatised in the late 1990s, was almost ten times Iceland’s GDP.

As Landsbanki collapsed the UK government stepped in to guarantee British depositors’ money. The Netherlands did likewise. Under the terms of the subsequent International Monetary Fund bailout, Iceland’s government agreed to accept a degree of taxpayer liability for the losses incurred in reimbursing Icesave customers.

Saturday’s vote comes after a deal was reached between the Icelandic government and their counterparts in London and the Hague was passed by Iceland’s parliament, the Altingi, but president Ólafur Ragnar Grímsson refused to ratify the bill, which would see Iceland repay over £3.6bn.

Speaking to The Scotsman in Reykjavik, Iceland’s finance minister Steingrímur J Sigfússon was cautiously optimistic the referendum will be passed. “It’s a lot to demand of the public to say “yes” to such an such an obligation but it’s something we have to do,” Mr Sigfússon said.

Not all Icelanders agree. Gisli Palmason, who runs an outdoor centre in Iceland’s remote Westfjords region, believes that the Icelandic government should not foot the bill for the failure of the country’s private banks.

The new deal is a significant improvement on the one rejected last year. Where Iceland was formerly asked to pay back its debt at a 5.5 per cent interest rate between 2016 and 2024, it now has until 2046 at a rate of 3.3 per cent.

A “no” vote would greatly strain relations between Iceland and Europe. It could also hinder the projected return to economic growth in 2011 as credit rating agencies downgrade the status of Icelandic debt.

Even if the referendum passes, the amount that the Icelandic government will pay is uncertain. The proceeds of a sale of Landsbanki’s assets, currently under way, will go towards repaying the British and Dutch governments.

However, it is estimated that the government will still be anywhere from £125 million to £1.5bn short.

This article first appeared in the Scotsman 7 April