Iceland expected to turn down bank failure repay

REYKJAVIK, Iceland (AP) — Economically struggling Icelanders resentful of international pressure were expected to vote down a $5.3 billion plan Saturday to pay off Britain and Holland for the debt spawned by the collapse of an internet bank.

A “no” vote would create another obstacle on Iceland’s difficult road out of a deep recession, jeopardizing its credit rating and make it harder to access much-needed bailout money from the International Monetary Fund. It could also harm Iceland’s chances of joining the European Union.

The global financial crisis hit particularly hard in Iceland, a volanic island with only 320,000 people. The country’s three main banks, hobbled by massive debts run up during a period of rapid expansion, collapsed within the space of a week in October 2008, and the country’s currency, the krona, plummeted.

One of the banks that collapsed was Icesave, an Icelandic Internet bank that offered high interest rates before it failed along with its parent, Landsbanki.

Saturday’s referendum is expected to reject the payment of $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid to around 340,000 of their citizens with Icesave accounts. Many Icelanders object to the terms of the deal, not the idea of payment itself.

Britain and the Netherlands have been pushing hard for repayment and there have been fears that they will take a hard-line stance on Iceland’s application to join the EU and refuse to approve the start of accession talks until an Icesave deal is signed into law.

But because of Iceland’s tiny population, the deal would require each person to pay around $135 a month for eight years — the equivalent of a quarter of an average four-member family’s salary.

Many ordinary Icelanders who resent forking out the money to compensate for losses incurred by potentially wealthier foreign investors who chased the high interest rates offered by Icesave.

There’s also residual anger that Britain invoked anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since Cod Wars of the 1970s over fishing rights in the North Atlantic.

President Olafur R. Grimsson tapped into the public anger and used a rarely invoked power to refuse to sign the so-called Icesave bill after it was passed by parliament in December.

Since then, opinion polls have indicated that a strong majority intend to reject the plan. The Social Democrat-Left Green coalition government and the center-right opposition say the country could get better terms in negotiations with Britain and the Netherlands.

Britain and the Netherlands offered better terms last week — including a significant cut on the 5.5 percent interest rate in the original deal hammered out at the end of last year.

The British say their “best and final offer has been turned down.”

But Iceland continues to hold out for more, aware that any new deal must win substantial political and public support.

“I voted no,” said Rognvaldur Hoskuldsson, a 36-year-old machine technologist, after casting his vote Saturday morning. “We have to send a message that these countries are not going to profit from this situation.”

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