Iceland’s government is facing a massive public backlash against the use of taxpayers’ money to pay back Britain following the collapse of the country’s banks.
Icelanders are expected to deliver a resounding “No” vote in a referendum tomorrow on a £3.5 billion deal to compensate Britain and the Netherlands for deposits lost when Iceland’s banks collapsed at the height of the global financial crisis.
Locals largely view that deal both as bullying by bigger nations and an unfair result of their own government’s failure to curtail the excessive spending of a handful of bank executives that led the country into crisis.
A rising tide of anger fuelled by surging unemployment and soaring living costs pushed the Icelandic government into trying to agree to a new – more amenable - deal with its creditors.
At stake if a deal is not agreed is the country’s international credit rating, access to critical International Monetary Fund money and desired access to the European Union.
There were some signs of a breakthrough in last-ditch talks among the three countries this week, with Icelandic officials saying progress had been made on key points such as the level of interest being charged by the UK and the Netherlands.
But they admitted that progress would probably come too late to avert tomorrow’s poll defeat.
“Time has run out,” finance minister Steingrimur Sigfusson told parliament yesterday. “Technically, it could be scrapped any time until Friday night, but there are no such plans.”
The latest polls suggest that three-quarters of Icelanders plan to vote No.
A public slap-down would be a double-edged sword for Iceland’s Social Democrat-Left Green coalition government.
On the one hand, it could be a useful bargaining chip in talks with Britain and Netherlands, but also a severe blow to the ruling coalition’s authority after it agreed to the so-called Icesave deal late last year.
That deal outlines the payment of £2.3 billion to Britain and £1.2 billion to the Netherlands as compensation for funds that the governments paid out to around 340,000 investors as compensation after the Icesave internet bank collapsed.
Objections to the tough terms of the repayment plan grew quickly and Icelandic president Olafur Grimsson tapped into public anger by using a rarely-invoked power to refuse to sign the Bill into law in January, triggering this weekend’s referendum.
“I am going to say no on Saturday because it’s not fair and justifiable that the Icelandic nation should pay for other people’s mistakes,” said Benedikt Mewes, a cashier at the National Post Office in Reykjavik.
“The economic crisis has seriously affected all households and to accept this legislation would make our financial burden even worse.”
Because of Iceland’s tiny population – around 320,000 – the original deal would have required each person to pay around £90 a month for eight years – the equivalent of a quarter of an average four-member family’s salary.
That was a step too far for many ordinary Icelanders who resent forking out the money to compensate for losses incurred by potentially wealthier foreign investors who chased the high interest rates offered by Icesave.
There is also residual anger that Britain invoked anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since the cod wars of the 1970s over fishing rights in the North Atlantic.
Britain and the Netherlands offered better terms last week – including a floating interest rate on the debt plus 2.75%, representing a significant cut on the 5.5% under the original deal.
But Iceland continues to hold out for more, despite concerns that the lack of a deal will harm the country’s credit rating. Fitch and Standard & Poor’s have both warned they may downgrade Iceland if no deal was agreed.
A failure to settle the dispute also jeopardises £3 billion of desperately-needed bailout cash from the International Monetary Fund and will probably slow Iceland’s bid to join the European Union.
Both measures are seen as important to shoring up the country’s economy as it struggles to recover from a rout in which most of its banking system collapsed.
The Icelandic government has forecast the economy will contract 2% to 3% this year after shrinking 7% last year, and economy minister Gylfi Magnusson said it could be worse if the Icesave issue was not resolved soon.