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What’s next after the Icelandic ‘no’ to a repayment deal?

Text by FRANCE 24

Latest update : 2010-03-08

After the landslide ‘no’ vote in Iceland’s referendum on the Icesave repayment plan, what happens now? FRANCE 24 takes a closer looks at the implications of this ‘no’ vote domestically, internationally and, most importantly, financially.

An overwhelming 93.2% of Icelanders rejected a repayment deal on Saturday to reimburse the British and Dutch for billions of euros of losses after the collapse of Icesave bank accounts operated by the Icelandic bank Landsbanki from 2006 in the UK and later also in the Netherlands.

The repayment plan had previously been approved by the Icelandic government in December, but it was discounted by President Ólafur Ragnar Grimssn in January due to what he viewed as its ‘harsh terms’, which ultimately lead to Saturday’s referendum on the issue.

The previous agreement would have involved a repayment scheme of 3.8 billion euros (3.4 billion pounds, 5.2 billion US dollars) to be completed by 2024.

The result of this referendum – the first to be held in Iceland - now means a further period of uncertainty for Iceland, as well as the Dutch and British governments.

FRANCE 24 takes you through the crucial points surrounding the vote and what it all means:

Does the referendum mean that Iceland will not repay Icesave’s debt?

There has been much confusion about what the referendum in Iceland was in fact about. Many mistakenly believed that it was to decide whether Iceland would pay the money back or not, but it was in fact simply a referendum on the terms of the payback. There has never been any doubt that Iceland would repay at least some of the losses. On Saturday, Icelanders simply rejected the terms of the initial repayment plan, with President Grimssn stating that “the people of Iceland will not accept unfair terms”. The ‘no’ vote simply means that Iceland, the United Kingdom and the Netherlands will have to return to the negotiating table as quickly as possible.

However, there is one significant problem: the now rejected agreement was more favourable to Iceland than previous repayment packages.

Why have Icelanders voted ‘no’?

The financial agreement originally put together would have meant repayments of 15,000 dollars for each of the 320,000 people living on the island, according to Reuters. Understandably, Icelanders did not understand why the taxpayer should pick up the bill after the collapse of a private bank. Many also considered the repayment conditions - and particularly the high 5.5-percent interest rate agreed upon - to be exorbitant.

FRANCE 24’s correspondent in Iceland, Rosa Björk, explains: "Some Icelanders wanted to express their opposition to the principle of repayment, while others sought to punish the incumbent government.”

Many Icelanders also felt that the British government in particular overreacted to the collapse, using terrorism legislation to freeze all Icelandic assets in the UK and ensure that they got their money back.

For many, the previous agreement was regarded as an injustice akin to the Versailles Treaty [which imposed significant reparations on the Germans after the First World War], says Björk.

How did the British and the Dutch react?

The British Chancellor of the Exchequer and the Netherlands’ Minister of Finance have both stated publicly that they felt the referendum was primarily a domestic matter. They also have both made it clear that they are ready to restart negotiations. Alistair Darling, the British Chancellor of the Exchequer, told the BBC that "the main thing is that we recover the money, but we remain open on the conditions."

Does this result threaten the position of the Icelandic government?

"Despite the ‘no’ the government still has popular support," says Rosa Björk. However, many observers feel that support for Prime Minister Johanna Sigurdardottir’s administration is slipping and that, as yet, the opposition is not solid enough to challenge the government.

Parliamentarians are currently awaiting a parliamentary report into the collapse of Icesave which should shed some light on who is responsible.

It is difficult to imagine, however, that the government will not face some collateral damage in the wake of the Icesave affair. Iceland’s government has been in power during a crisis which has seen the country go from being the fifth-richest per capita in the world in 2007 to one that is today facing the very real prospect of financial ruin.

Will this referendum have an economic impact on Iceland?

Even though the vote was simply on the terms of the repayment, it has triggered further financial consequences.

This failure to sign off on the agreement means Iceland’s 4.6 billion dollar International Monetary Fund-led loan is now hanging in the balance. The IMF and Nordic countries promised to help kickstart Iceland’s economy, but after benefitting from initial payments, much of the cash is now frozen pending resolution of the Icesave debt issue. However, the country’s central bank governor said on Monday that Iceland is likely to reach a debt deal with Britain and the Netherlands in a matter of weeks, which should enable the IMF and Nordic loans to come through.

But this is not the only fire on the horizon: rating agencies were also been making noises of rumbling discontent on Monday, indicating that they are ready to review their rating of the country if swift action is not taken.

Iceland must reach a swift agreement with the UK and the Netherlands so that it can begin to benefit from foreign-backed aid to boost its tottering economy and rebuild its battered international reputation.


Date created : 2010-03-08


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