- The Washington Times - Sunday, March 7, 2010

UPDATED:

REYKJAVIK, Iceland — Voters in tiny Iceland defied their parliament and international pressure to resoundingly reject a $5.3 billion plan to repay Britain and the Netherlands for debts spawned by the collapse of an Icelandic bank.

According to results released Sunday, just more than 93 percent of voters said “no” in Saturday’s ballot, while only 1.8 percent voted “yes.” The rest were blank or spoiled ballots. The results were based on a count of all but 2,500 of the 143,784 votes cast.

Despite the vote, the Icelandic government said it would continue talks with Britain and the Netherlands on a new agreement.

The two nations want to be reimbursed for money they paid their citizens with deposits in Icesave, an Internet bank that collapsed in 2008, along with most of Iceland’s banking sector. Ordinary Icelanders say the repayment schedule was too onerous. Some blew whistles and set off fireworks in the center of the capital, Reykjavik, as the referendum results were announced.

“This is a strong “no” from the Icelandic nation,” said Magnus Arni Skulason, co-founder of a group opposed to the deal.

“The Icelandic public understands that we are sovereign and we have to be treated like a sovereign nation — not being bullied like the British and the Dutch have been doing.”

The overwhelming margin reflects Icelanders’ simmering anger at bankers and politicians as the island nation struggles to recover from a financial meltdown. President Olafur R. Grimsson, who sparked the referendum by refusing to sign the repayment deal agreed by Iceland’s parliament, said Icelanders resented having to pay for the actions of a few “greedy bankers.”

He said, however, the British and Dutch would get their money back eventually. The two countries already have offered Iceland more favorable repayment terms than the deal voted on Saturday.

“The referendum was not about refusing to pay back the money,” Mr. Grimsson told the BBC. “Iceland is willing to reimburse those two governments, but it has to be on fair terms.”

Iceland, a volcanic island with a population of just 320,000, went from economic wunderkind to fiscal basket case almost overnight when the credit crunch took hold.

After a decade of dizzying economic growth that saw Icelandic banks and companies snap up assets around the world, the global financial crisis wreaked political and economic havoc. Iceland’s banks collapsed within a week in October 2008, its krona currency plummeted, and a wave of popular protest toppled the government.

The new left-of-center government has been trying to negotiate a plan to repay $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid to about 340,000 of their citizens who had accounts with Icesave, an Icelandic Internet bank that offered high interest rates before it failed along with its parent, Landsbanki.

Failure to settle the dispute could have repercussions for Iceland’s economic recovery. The International Monetary Fund has agreed to lend Iceland $4.6 billion, but the agreement is linked to repaying its international debts. The months taken to reach the original Icesave deal were responsible for holding up the first tranche of IMF funds last year.

Last-minute talks on Icesave broke down last week, despite the debtor countries saying they had offered better terms for a new deal, including a significant cut on the 5.5 percent interest rate in the original deal.

That would have required each Icelander to pay around $135 a month for eight years — about a quarter of an average four-member family’s income.

Despite the referendum result, both sides said they were confident a deal eventually would be reached.

The Icelandic government said in a statement there had been “steady progress toward a deal” in the past few weeks, and Prime Minister Johanna Sigurdardottir said officials would resume talks with Britain and the Netherlands now that the referendum was over.

Dutch Finance Minister Jan Kees de Jager said he was disappointed the agreement had been rejected, but called the referendum “an internal matter for Iceland.”

The Dutch Finance Ministry said in a statement that it and Britain were committed to finding a solution “in line with international standards.”

British Treasury chief Alistair Darling said his country was prepared to be flexible, and acknowledged it would be “many, many years” before Britain was repaid.

Many Icelanders remain angry at Britain for invoking 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 the Cod Wars of the 1970s over fishing rights.

There also have been fears that Britain and the Netherlands would 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.

Darling struck a conciliatory note Sunday.

“You couldn’t just go to a small country like Iceland with a population the size of (the English town of) Wolverhampton and say: ‘Look, repay all that money immediately,’” he told the BBC. “So we’ve tried to be reasonable. The fundamental point for us is that we get our money back.”

Jill Lawless reported from London.

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