June 19, 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

Icelanders Again Reject Icesave Debt Deal

Policymakers have said a ‘no’ in the Saturday referendum meant the dispute will end up in a European court. Economists have said the uncertainty is hurting efforts to drag Iceland out of recession, end currency controls and boost investment.

“The worst option was chosen. The vote has split the nation in two,” Prime Minister Johanna Sigurdardottir told state television, saying it was fairly clear the ‘no’ side had won.

State television said almost 60 percent of voters had rejected the agreement, based on results from five out of six voting districts, including the capital Reykjavik.

Many voters were against taxpayers footing the bill for irresponsible bankers. Just over 169,000 votes had been counted out of the 230,000 eligible voters.

Iceland’s prime minister, who has predicted a ‘no’ vote would cause economic uncertainty for at least a year or two, did not say whether the government planned to resign.

“We must do all we can to prevent political and economic chaos as a result of this outcome,” she said.

The debt was incurred when Britain and the Netherlands compensated their nationals who lost savings in online “Icesave” accounts owned by Landsbanki, one of three Icelandic banks that collapsed in late 2008.

Britain and the Netherlands both said they were disappointed by the vote.

“It is obviously disappointing that it seems that the people of Iceland have rejected what was a negotiated settlement,” Britain’s Chief Secretary to the Treasury Danny Alexander told BBC television.

“Of course we respect the will of the Icelandic people in this matter and we are going to have to now go and talk to the international partners with whom we work, not least the government of the Netherlands. It now looks like this process will end up in the courts,” he said.

Sigurdardottir said Iceland would now defend its case before the court of the European trade body overseeing Iceland’s cooperation with the EU, the EFTA Surveillance Authority (ESA). Economists have said this route could be much costlier.

Economic Affairs Minister Arni Arnasson told the television he would be in touch next week with ESA, which said last year, in a first stage in legal proceedings, that Iceland should pay compensation to Icesave depositors.


Icelandic lawmakers in February backed a repayment plan agreed with creditors, but the president refused to sign the bill, triggering the vote. In March 2010, Iceland rejected an earlier Icesave repayment blueprint in a referendum.

“I know this will probably hurt us internationally, but it is worth taking a stance,” Thorgerdun Asgeirsdottir, a 28-year-old barista, said after casting a “no” vote.

Svanhvit Ingibergs, 33, who works at a rest home, said: “I had no part in causing those debts, and I don’t want our children to risk having to pay them. It would be better to settle this in a court.”

Iceland is still pulling itself out of the recession which hit it after its bank crash, and policymakers and economists have said solving the Icesave issue would help the country get back into international financial markets.

Getting such funding is also part of a plan to end the controls on capital flows it imposed in 2008 to stabilize a tumbling currency.

“In our view it is unlikely that the capital controls will be fully lifted until the bulk of the Icesave debt is repaid, and the currency risk thus has been reduced,” Islandsbanki economist Jon Bentsson said.

The controls have left an estimated equivalent to a quarter of Iceland’s gross domestic product in the hands of foreign investors, many of whom are expected to want to pull out. Ratings agencies follow the vote closely. Moody’s has said it may lower its credit rating on Iceland in case of a ‘no’.

Standard Poor’s analyst Elieen Zhang said a ‘no’ vote “might possibly result in a lengthy legal process and further uncertainties regarding the ultimate fiscal cost.”

(Additional reporting by Sara Webb in Amsterdam and Avril Ormsby in London; Editing by Jon Hemming)

Article source: http://www.nytimes.com/reuters/2011/04/10/business/business-us-iceland-referendum.html?partner=rss&emc=rss