Iceland votes on debt repay deal with UK, Dutch

AP News
Posted: Apr 08, 2011 1:15 PM
Iceland votes on debt repay deal with UK, Dutch

To repay or not to repay, that is the question.

Icelanders vote Saturday in a referendum to determine whether the nation will repay Britain and the Netherlands in full for compensating their citizens who had deposits in the failed online bank Icesave.

The debate has sharply divided public opinion, with the two sides fighting it out on television, in print and through social media. Some Icelanders have threatened to leave their island nation if the vote doesn't go their way.

An agreement for repayment was reached in December after long negotiations and was approved by Iceland's parliament in January. But President Olafur Ragnar Grisson, reacting to strong public opposition, vetoed the deal.

The latest agreement comes after months of new negotiations and debate over what really do the people of Iceland owe Dutch and British investors who poured money into an Icelandic bank that failed.

The Icelandic National Broadcasting Service presented a lengthy debate Thursday night, while Facebook and Twitter have been buzzing with opinions on the subject.

An opinion poll by Gallup Iceland, published Thursday, suggested the result was too close to call. Some 52 percent of those who had made up their minds said they would vote "no" and 48 percent said "yes," while 15 percent of the total sample were undecided.

The poll, based on interviews with 1,900 people from 31 March-7 April had a margin of error of 3 percentage points.

In one indication of how high tensions are, the tabloid newspaper DV received an anonymous letter containing death threats against former cabinet ministers who support the new agreement. Police are investigating.

Some 233,000 Icelanders are eligible to vote in Saturday's referendum. Final figures are expected early Sunday.

The dispute is a legacy of the collapse of Iceland's banks in 2008.

Icesave, in which 340,000 British and Dutch had invested savings to reap high interest rates, was a foreign-based branch of Landsbanki. After Icesave collapsed in October 2008, British and Dutch authorities borrowed money to compensate their citizens, then turned to Iceland for repayment.

The resulting disagreement became a morass of legal and financial uncertainties and diplomatic wrangling, with the U.K. and the Netherlands among other things threatening to block Iceland's bid to join the European Union unless the dispute was resolved.

A key question is ultimate cost of the debt, as the final sum has depended on the recovery of assets from the remnants of Icesave's mother bank, Landsbanki. The debt was initially set at $5.3 billion, a crippling blow to Iceland's 320,000 inhabitants.

More recent estimates put the cost of the deal at less than 50 billion Icelandic kronur ($435 million). Those costs are for interest only _ 3 percent for The Netherlands and 3.3 percent for the U.K. Fallback measures also allow for the repayment period to be extended until 2046. The recovered assets of Landsbanki are now expected to cover the principal of the Icesave debt.

Those who still reject the deal claim want to see the case settled in a European court.

"Taxpayers should not be responsible for paying the debts of a private institution. I think that sends the wrong message onto the market, and sets a wrong precedent," says Sigriur Andersen, a spokeswoman for the Advice group that opposes the agreement.

Andersen also rejects the deal because the repayment is in foreign currencies.

"That means that Iceland bears all risk in terms of the exchange rate," she said.

Those in favor want an end to the economic uncertainty.

"The dispute has been ongoing for three years and it has substantially slowed economic recovery," says Gylfi Magnusson, a former minister of economic affairs and a professor of economics at the University of Iceland. "It has been viewed by foreign investors as a serious risk factor. It has also resulted in a substantially higher cost of borrowing for Iceland."

Proponents of the "yes" vote also say it's too risky to go to court. If Iceland loses, it might have to repay the debt immediately and at substantially higher rates. They also argue that Iceland is legally obliged to repay since the deposits of all Icelanders were guaranteed in full when Icesave's mother bank collapsed.

For some, it all boils down to fairness.

"I'm voting yes because it's the more honest and sensible choice," says Vilborg Davisdottir, an Icelandic writer. "People's nationality should not be a determining factor regarding whether they are compensated for their deposits."