12th May 2021

Icesave vote a threat to global finance?

  • "With only days left until the scheduled vote on the fate of the Icesave proposal, no one knows if it will actually go ahead" (Photo: European Commission)

The people of Iceland face the prospect of a referendum on the deal their government cut with the UK and the Netherlands in the wake of the Icesave collapse. Even though the deal is out of date. More favourable repayment terms have already been offered than those in the bill that may or may not be put to the ballot.

Many commentators think it could constitute a threat to the entire global financial system if people are allowed to vote their way out of massive debt.

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A notice hangs on the wall in a sports centre near Reykjavik. The centre will be closed on Saturday 6 March if a referendum is held on that day. With only days left until the scheduled vote on the fate of the Icesave proposal, no one knows if it will actually go ahead.

Few things shed as much light on the situation in Iceland as this notice. There might be a vote, but nobody has a clue what will happen if there is not. Will a new deal with the British and the Dutch see the vote called off? Will it be postponed to allow time to cut a deal? Will a better outcome be feasible once the votes have been counted, especially now that polls suggest the proposal will be rejected?

Is it true, as is rumoured, that the British would prefer it if the people of Iceland didn't vote on Icesave, since a popular mandate would strengthen Iceland's hand at the negotiating table? If that is the case, then at least Britain and Iceland agree on something – even if it is only that both consider the referendum a very bad idea indeed.

Government under pressure

Post-referendum, the government would find itself in the peculiar situation of the people having rejected a bill in which it has invested a great deal of effort and credibility. No surprise, then, that talk of a political crisis has become so loud that talk of the financial crisis that triggered it is now barely audible.

As with most elections, postal votes can be submitted for several weeks prior to polling day. Postal voters are usually a very specific category. After all, not everyone is able to turn up at a polling station on the appointed day. This time around, postal voters are asking if their votes will ever actually be counted – and they are not alone

Some people who are perfectly capable of making it to a polling station on the day are also demanding a postal vote. They want to make sure their opinion counts, whatever that opinion may be. They don't want to be cheated out of a referendum if the authorities get their way and find a justification for calling it off.

New deal sought in London

So why a referendum? Late last year, the Icelandic parliament passed a bill about Icesave's debt commitments after the British and Dutch rejected Icelandic reservations about the deal struck by the three states in the autumn. The reservations were financial in nature: the deal specified the amounts and times of repayments, despite the state of flux in which the Icelandic economy found itself.

The deal, which was totally in line with British and Dutch thinking, was put to the President. Early this year, he announced that he would refuse to ratify it, a stance backed by the signatures of around a quarter of the electorate. The ball was back in the government's court. It had to decide what to do with this piece of legislation. The opinion polls suggested that the people had already made up their minds.

The necessity of reaching a new deal with the British and Dutch has been discussed ever since the President made his call. Signs of progress have emerged in the last few days, with the British and Dutch responding to a new Icelandic proposal with a counter-proposal of their own – one they claimed was their final offer.

Iceland had stressed that assets from the Landsbankinn bankruptcy settlement should be used to repay Icesave debts. The British and Dutch wanted to hold the Icelandic state responsible for those repayments. To sweeten the pill, they offered variable interest rates this time, instead of the fixed 5.5% stipulated in the deal being put to the referendum.

This offer was initially described as final until Iceland rejected it – or at least until Icelandic representatives arrived in London for new talks at the behest of the British government. This time, the Dutch looked on from the sidelines, with most observers agreeing that their absence had more to do with the collapse of their own government than any reluctance to negotiate. Iceland has submitted a new proposal, based, it says, on ensuring that the British and Dutch do not make money on Icesave by charging excessive interest rates.

Media changes tone

The tone of overseas media coverage of the Icelandic stance has changed radically in recent weeks. The presidential veto caused many to reflect on the implacability of the British and Dutch approach. On Friday 26 February, the Financial Times published an unusually caustic editorial, slating the British authorities for taking an unnecessarily tough line and for their ‘grotesque mishandling' of the whole affair.

According to the FT, the focus on Iceland's responsibility has diverted attention away from the reality that European banking regulations are not designed to cope with large-scale international bank failures.

Many commentators connect the editorial with the British resumption of negotiations the very next day. It is believed that the British team fears a chain reaction across Europe if the Icelandic referendum rejects the deal.

According to the FT, if Iceland is deemed to be the main culprit but rejects responsibility, investors would no longer consider state bankruptcy to be quite so inconceivable. The wrath of the Icelanders, as the editorial describes it, might encourage the people of other countries to refuse to repay debts for which others bear the real responsibility.

Government held hostage by opposition

An extraordinary situation has now arisen, in which Icelanders want to vote on a deal that nobody actually intends to go through with.

The British and Dutch have already offered more favourable terms than those stipulated in the referendum bill. So won't everybody want to reject the old deal, secure in the knowledge that a better one is in the offing?

Well, not everyone, it would seem. Not the Minister of Finance, for example. He will vote for the worst of two possible outcomes, despite acknowledging that the referendum is past its sell-by date now that a better offer is on the table.

It is a difficult attitude to understand – perhaps he is unwilling to sever emotional ties with a bill upon which he placed such exaggerated emphasis, but it is far more likely that he just does not actually expect to have to cast his vote.

Þorsteinn Pálsson, a former prime minister and ambassador to London, fails to see how rejecting the deal in a referendum is supposed to strengthen Iceland's position. On 28 February, he said that the right thing to do would be to cancel the referendum and simply declare the law invalid.

In any event, a new deal would render the law irrelevant. After all, the British and Dutch have already made a better offer, and the opposition in Iceland now has the final say on any new deal. The British and Dutch have made political unity in Iceland a precondition, knowing full well that the government lacks the strength to push through a deal on its own. A political crisis of this nature shows up weakness, not strength.

High-level hypocrisy

Professor Harry Mintzberg (Canada) joined in the chorus of criticism of the UK and the Netherlands with an article in one of the Icelandic papers on 1 March. He described the Icesave case as ‘oppression' and said that it was ‘hypocritical' to hold the people of Iceland responsible for losses on a venture from which they would not have profited if all had gone well. He called on the people of Iceland to vote ‘no' in the name of the free market, capitalism and internationalisation.

Naturally, the British don't want the Icelanders to throw out the December Icesave bill in a referendum. That could lead to the very situation the FT warned about: People power turning against governments all over the world for pumping money into failed banks.

The Icelandic government doesn't want the referendum either, as it faces defeat on one of its flagship policies. How can it cling to power having held a referendum while working towards a new and better deal?

In the meantime, the ordinary man and woman in the Icelandic street still want the opportunity the make their feelings known in a practical way – by exercising their democratic right to vote.

Ragnhildur Sverrisdóttir is Icelandic journalist and her article first appeared in the Nordic Council of Ministers' newsletter "Analys Norden". All views expressed are those of the author. Translation by: Tam McTurk

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