Public anger is understandable but there will be a price to pay

In MANY respects, a lengthy legal battle over the Icelandic public’s latest rejection of a deal for Icesave is the least of the country’s worries.

Finance minister Steingrímur Sigfússon was at pains to stress yesterday that the “no” vote will not affect Iceland’s application to join the EU.

But the result has placed a huge diplomatic strain on relations with European neighbours, just as
country is trying to move out of self-imposed international isolation.

There will be economic ramifications, too. Ahead of the vote, credit rating agency Moody’s warned a rejection of the deal would see the status of Icelandic debt further downgraded. Although Iceland is expected to return to growth in 2011, a downgrade could have a serious impact on the country’s short-to-medium-term economic prospects.

The latest Icesave deal was a significant improvement on that rejected by 93 per cent of voters last March. The interest rate was reduced from 5.5 per cent to 3.3 per cent and the country would have had until 2046, not 2024, to complete repayments. However, vast swathes of the Icelandic public remain wholly opposed, not unreasonably, to the principle that their governments should be responsible for the debts of the country’s private banks, in this case Landsbanki and its internet arm Icesave.

Two and a half years on, public anger at the role of the political classes and the international community remains high. The government in Reykjavik, a coalition between Social Democrats and the Left-Green movement, is unpopular and might not survive this latest reversal. The fact that the British government is Icesave’s major creditor did not help the “yes” cause, either. The decision by Gordon Brown to use anti-terrorism laws to freeze the assets of Icelandic banks after the 2008 crash is still a source of bitterness.

This latest “no” is not necessarily the end of the world for Iceland. It has fishing rights to 1 per cent of the world’s stock, produces more energy per capita than just about any nation on earth and has a long history of self-preservation. But it will need to harness all this – and reject the neo-liberal dogma of a resurgent Independence Party – to get back on its feet.

This article appeared in the Scotsman 10 April