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The Icesave Referendum

On April 9, Icelanders will head to the polls for a special referendum regarding a loan guarantee to Britain and the Netherlands. This is the second time Iceland will vote on the issue; last year, voters overwhelmingly rejected a similar ballot initiative.

In October 2008, the Icelandic bank, Landsbanki, collapsed, and with it its online Icesave branch, and the investments of 400,000 British and Dutch savors.  Iceland’s Depositors’ and Investors’ Guarantee Fund lacked the funds to compensate its investors and the Icelandic government initially refused to take responsibility for the failure of a private bank.  After consdierable negotiations, Iceland agreed to insure the liabilities of Icesave, while the British and Dutch governments  provided a 3.8 billion Euro loan to cover the deposit insurance obligations for their citizens.  In August 2009, the Icelandic parliament, the Althing, passed a bill setting out terms of repayment to the two countries for the loan. President Olafur Grimsson, however, refused to sign the bill, forcing a nationwide referendum on the issue. In March 2011, Icelandic voters overwhelmingly voted against the measure, with 93 percent casting “no” votes. The rejection resulted in severe diplomatic tension between Iceland and both Britain and the Netherlands. It also caused a downgrading of Iceland’s bond ratings.

On February 16, 2011, the Althing passed a new Icesave bill, with terms considered more favorable for Iceland. The new terms were the result of negotiations with the British and Dutch, and included lower interest rates on repayment as well as a revaluing of the debt. Once again, however, President Grimsson refused to sign the bill, meaning voters will once again be given the chance to weigh in on the issue.  While initial support for the referendum started out strong, recent polls have shown the gap narrowing. A survey taken on March 17 revealed that a bare majority, 52 percent, were planning on voting “yes”, while 48 percent planned to once again reject the proposal. The most recent poll, taken on April 5-6, shows that 55 percent of respondents planned on rejecting the referendum, while 45 percent would approve it.

It’s easy to criticize Icelanders (and indeed I am right now!) for not insuring their own banks, but I understand where they are coming from.  Think of the uproar over our bank bailout several years ago.  Now imagine if we were being asked to bail out AIG so we could pay back the bad investments of a bunch of British and Dutch! Different scenario yes, but the politics are similar. Furthermore, unlike our bailout, Iceland basically knows how much this will cost the average citizen.  Given the relative small size of the country, coupled with the high price tag  for the loan, the average Icelander is expected to shell out – not all at once of course – around 6,000 dollars.  Of course saying “no” will downgrade Iceland’s debt to junk bond status, and cripple EU membership talks.  It’s a bad situation to be in and the average Icelander is not to blame. Rich bankers in their country over-expanded, bad investors in other countries weren’t careful with their investments.  Now they have to share the loss.

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