Iceland fights the thaw

For a supposedly powerless figurehead, Olafur Grimsson fancies his chances of taking on international capitalism - and winning. Iceland’s ceremonial president refused to sign a law that would indebt his national by €3.8 billion ($5.5 billion). This would cost each individual Icelander over $17,400.

The debt is owed to the British and Dutch Governments, which compensated their citizens who lost their money when Icesave, an Icelandic internet bank, went bust. Now Britain and the Netherlands want their money back.

But the way in they have sought to do so has aggravated more than it soothed. Britain used draconian anti-terrorism legislation to freeze Icelandic assents, and threatened to block Iceland’s EU application, as well as preventing it from accessing credit through the IMF. Once the payback was agreed, an interest rate of 5.5% in an age of low rates was seen as punitive.

Added to this fermenting unrest was the common sense argument of the man on the Reykjavik omnibus: “Why should I repay the debts of rich foreigners? It’s nothing to do with me.”

The Government’s plan to repay the debts was hugely unpopular. Opinion polls tracked an opposition high of 70%. Over 56,000 - about 23% of Iceland's voters – signed a petition to reject the Bill. Grimsson, traditionally viewed a legislative rubber stamp, heeded the protests and refused to sign the law. As a result, the Constitution automatically required a national referendum.

So, the Icelanders are currently deliberating their rights to vote away their debts.

Some may argue that these debts do not belong to the Icelandic people, but the international picture is far deeper. Once obligations are rescinded, the likelihood of future transactions is reduced. When the referendum was announced, Fitch, a debt rating agency, immediately downgraded Iceland debts and loans, increasing the costs of current and future credit.

The reality for tax-payers across the globe is a grudging acceptance of the state’s bailing out of reckless banks, on the basis that allowing the financial system to collapse would come at an unacceptably high price. Although these subsidies were provided with reluctance, it was a better option than catastrophic depression.

Yet, why should Iceland, home of the “rate tart” attracting under-capitalised dot com banks, escape the same fate that befell everyone else?

Icelandic exceptionalism probably isn’t the driver for this two-fingers to global capitalism, as a sense of pride. Britain, itself suffering from bail-out fatigue over its own failing banks, bullied its Nordic neighbour. The UK’s threats and strong-armed tactics detracted from the reasonableness of its position, and decreased the chance its repayment.

As the full implications sink-in over Iceland’s potential economic isolation should they vote “no”, a rational and pragmatic public discussion should raise support for the Government’s position. Before the campaign started, polled opposition to the Government fell to 56%.

But, the Icelanders have an opportunity to contribute to their own economic policy, which indeed is an international exception. By bringing along its people in its economic thinking, Iceland may avoid the discontent and extremism that has erupted elsewhere in Europe. Reykjavik’s humiliation may prove to its long-term advantage.