February 29, 2024

British and Dutch to Sue Over an Icelandic Debt

The prospect of legal action, likely to take more than a year to resolve in an international court, arose this weekend after Iceland’s voters rejected a deal for the country to repay Britain and the Netherlands over 30 years starting in 2016.

It extended a bitter dispute that began in 2008 when Iceland’s overstretched banks failed. With assets eight times the country’s gross domestic product, the banks could not depend on the government to bail them out as some European countries, like Ireland and Britain, had done for their banks.

As a result, the 400,000 depositors in Britain and the Netherlands, who had been lured by the high interest rates of Icelandic banks, were reimbursed by their governments. Those countries are now seeking to recover that payout, which approached 4 billion euros ($5.8 billion).

The deal submitted to the voters was approved by the Icelandic Parliament in February. It had better terms for Iceland than an earlier accord, which was modified in hopes of winning voter backing.

The government of Prime Minister Johanna Sigurdardottir had pushed hard for approval, arguing that Iceland, amid a financial rescue program backed by the International Monetary Fund, needed to put the issue behind it if it hoped to re-enter international financial markets and join the European Union.

But after a devastating recession and with animosity toward bankers still running high, Iceland’s electorate was not swayed. With close to 90 percent of the ballots counted, 59 percent had voted no.

There is also a strong residue of anti-British sentiment dating back to 2008, when Britain used antiterror laws to freeze the assets of one of the failed institutions, Landsbanki.

More than anything, the vote was driven by a view that the liability was just too much for a small economy to shoulder, no matter how favorable the terms.

Speaking on a television program over the weekend, Danny Alexander, a treasury official in the British government, described the referendum result as “disappointing,” and said Britain was obliged to do all in its power to seek repayment, especially while running a fiscal deficit of close to 10 percent of its gross domestic product.

The case will be taken up by the European Free Trade Association Surveillance Authority, an international court based in Brussels.

Government officials in Iceland said that they expected the process to take more than a year but added that they had enough central bank reserves to cover the country’s short-term financial responsibilities.

The International Monetary Fund in the past has said that a resolution of the dispute over the depositor claims is not a condition for its Iceland program to proceed as long as other creditors do not abandon the country.

In a statement, the government said over the weekend that it was committed to the I.M.F. program, though it said the next review of the program, due April 27, would be delayed several weeks for unspecified reasons.

Article source: http://www.nytimes.com/2011/04/11/business/global/11krona.html?partner=rss&emc=rss

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