February 20, 2011 7:08 pm

Iceland’s president blocks Icesave deal

Iceland’s president has again blocked a deal for the country to repay Britain and the Netherlands €4bn ($5.4bn) lost in the failed Icesave bank, triggering another referendum a year after a previous agreement was overwhelmingly rejected by Icelandic voters.

The decision added another twist to a saga that has cast a shadow over Iceland’s economic recovery efforts and thrown its bid to join the European Union into doubt.

Iceland’s parliament approved a revised repayment plan last week, raising hopes the dispute would soon be settled. But Olafur Ragnar Grimsson, president, said a precedent had been set for the people to have the final say.

The deal involves money lost by British and Dutch depositors who held accounts with Icesave, the online arm of Landsbanki, which collapsed along with the rest of the Icelandic financial sector in 2008. Those customers have already been reimbursed from their domestic deposit insurance schemes, leaving the UK and Dutch treasuries out of pocket.

London and The Hague have threatened to hold up Reykjavik’s EU application until the money is repaid.

Efforts by the Icelandic government to settle the debt have been repeatedly thwarted by public anger over taxpayers being asked to pay for the mistakes of bankers and regulators.

Mr Grimsson’s decision represents a blow to the Icelandic government and its UK and Dutch counterparts, which had hoped their latest deal, agreed last December, would finally bring resolution.

In a concession to Iceland, the interest rate on the debt was cut to 3.2 per cent, compared with 5.55 per cent previously, and the repayment timetable lengthened.

At a press conference on Sunday Mr Grimsson acknowledged the new terms were “more advantageous”. But he pointed to opinion polls showing that most people wanted a referendum, with 40,000 people – a fifth of Iceland’s electorate – having signed a petition calling for a vote.

Mr Grimsson said the referendum would be held “soon”.

Last year’s vote marked the first time in Icelandic history that the president – a mostly ceremonial figure – had used his power to refer legislation to a plebiscite. Mr Grimsson’s decision to do so again is sure to infuriate Johanna Sigurdardottir, prime minister, and her government, which has been badly weakened by its two-year struggle to get an Icesave deal passed.

The government had hoped the president would take account of the fact the new deal was approved by a bigger parliamentary majority – 44 votes to 16 – than the previous one and that the main opposition party was involved in negotiating the terms. Opinion polls show that the agreement enjoys much wider support than the one rejected by more than 90 per cent of voters last March. But the government still faces a tough battle to win a majority, with doubts over its ability to survive another No vote.

The government insists at least 86 per cent of the Icesave debt will be covered by assets salvaged from Landsbanki, reducing strain on the public purse.

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