News of the finance

Icelandic voters have overwhelming rejected a bill that would have required the public to pay nearly half of its GDP to Great Britain and Holland to compensate for the failure of a private bank. 

Ninety-three percent voted against the so-called IceSave Bill, which asked the island nation to take on US$ 5.3 billion in debt. That amount equals 45% of Iceland’s 2009 GDP and breaks down to US$ 16,400 of debt for every man, woman, and child in the country. 

Rapid deregulation and easy loans spurred by currency and other speculation over the last decade allowed one bank, Landsbanki Islands, to create an Internet banking system named IceSave. It was marketed to investors, mostly in Great Britain and Holland, as a safe and easy place to put their money with high interest rates, which the Icelandic banks were able to offer due to the strength of the Icelandic krona. 

Iceland’s troubles began with the spectacular economic crash of October 2008, when all three of the country’s banks collapsed and were put under government control in the span of a week’s time. IceSave customers found their accounts had been suddenly closed and their money gone. 

In an effort to freeze the financial contamination from spreading through the rest of the British economy and elsewhere, UK PM Gordon Brown put Iceland on the country’s terrorist watch list, which immediately froze any financial assets Icelanders had there. 

Britain and Holland later sued Iceland to recover the lost assets its citizens had in IceSave. 

In an effort to pay off the debt, Iceland took out an IMF loan and the newly-installed Left-Green Socialist Party placed exorbitant taxes on petrol and alcohol, as well as increasing taxes on its wealthiest citizens. A bill was introduced in the Icelandic parliament, the Althing, which became known as the IceSave Bill. 

After a passionate debate in the Althing, with some parliamentarians even calling for Iceland to default on its loans, the bill passed with 33-30 majority. 

Olafur Ragnar Grimsson 

The Icelandic people mobilized after the Althing vote in protest over how much debt would be incurred and began circulating a petition calling President Olafur Ragnar Grimmsson to not pass the bill into law. 

Nearly a third of the nation signed the petition. 

Seeing the negative response to the bill and not wishing to commit political suicide, President Grimmson decided to not sign it. Instead, he turned the bill over to a public referendum. 

“Ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers,” President Grimmson said when he announced his turning over the bill to public referendum. 

This weekend’s vote has already had repercussions for Iceland by the International banking interests. Its IMF loan is now in limbo and Fitch Ratings was prompted to cut Iceland’s credit grade to junk. Moody’s Investors Service and Standard & Poor’s have signaled they may follow suit if no settlement is reached. 

The Icelandic government says it already has begun looking for other ways to pay off the debt. “The government’s survival doesn’t rest with this Icesave vote,” Prime Minister Johanna Sigurdardottir told RUV after the preliminary count was announced. “The government coalition remains solid,” Finance Minister Steingrimur Sigfusson told RUV. 

One alternative to paying off the debt would be to sell off the troubled bank responsible for starting the mess. Landsbanki assets are currently valued at 90p in the £1 and could pay off most of the £3.4bn owed to Britain and the Netherlands. 

Government leaders are looking to re-negotiate a deal with Great Britain and Holland which focuses on lowering the interest rate on the amount owed. 

The island’s economy shrank an annual 9.1 percent in the fourth quarter of last year, the statistics office said on March 5, and contracted 6.5 percent in 2009 as a whole. 

Household debt with major credit institutions has doubled in the past five years and reached about 1.8 trillion kronur ($14 billion) in 2009, compared with the island’s $12 billion gross domestic product, according to the central bank. 

Icelanders, the world’s fifth-richest per capita as recently as 2007, ended 2009 18 percent poorer and will see their disposable incomes decline a further 10 percent this year, the central bank estimates. 

Grimsson, who has described his decision to put the depositor bill to a referendum as the “pinnacle of democracy,” says he’s not concerned about the economic fallout of his decision. 

“The referendum has drawn back the curtain and people see on the stage the matter in a new perspective,” he said in an interview. “That has strengthened our position and our cause.” 

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