Iceland's no vote on Icesave was a public display of anger

Which way now? The neoliberals who created the bubble are resurgent, but many Icelanders want to move away from finance. My analysis from the Guardian’s Comment is Free.

Even before the final result was in, the tenor of national and international reaction to the Icelandic public’s latest rejection of a deal for Icesave was crystal clear. “We must do all we can to prevent political and economic chaos as a result of this outcome,” prime minister Johanna Sigurdardottir said early yesterday morning. Around the same time, at the Treasury in London, Danny Alexander warned that the British government would see Iceland in the international court.

In all likelihood, the UK government will eventually claw back the £2.35bn lost when it stepped in to guarantee British depositors’ cash in Icesave accounts, but the “see you in court” rhetoric from Westminster won’t go down well in Reykjavik. Many Icelanders still hold the then prime minister Gordon Brown responsible for worsening the crisis (or kreppa as it’s known in Iceland) when he decided to use anti-terrorism laws to freeze the assets of Icelandic banks in the autumn of 2008.

Despite arguments to the contrary, the size of the Icesave debt owed by the Icelandic government is relatively small – even for a country of just 320,000 people. A sale of assets belonging to Landsbanki, the bank that created Icesave, will provide much of the cash to reimburse the British and Dutch governments. Indeed, earlier this year an independent report estimated that the Icelandic people might be on the hook for as little as £125m (or as much as £1.5bn, still a minor sum compared with other government debts).

The main motivating factor behind Saturday’s no vote was anger, not economics. Icesave has become a psychological symbol of the collapse for many Icelanders, a visceral reminder of how much they lost but also of the international community’s role in the kreppa. Vast swaths of the Icelandic public remain wholly opposed, not unreasonably, to the notion that their government should be responsible for the debts of private banks in global markets.

Last week, a cartoon in the newspaper Morgunblaðið depicted Iceland as a weak child in a playground been beaten up by three bigger boys. The names on their hoodies? Standard, Poor and Moody – in reference to the companies who have been rating European countries’ creditworthiness.

The strongest political opponents of the Icesave deal were the very neoliberal voices responsible for Iceland’s economic collapse in the first place. The editor of Morgunblaðið, which spearheaded the campaign against the vote, is none other than former prime minister and ex-head of the central bank, David Oddsson. As head of the rightwing Independence party, Oddsson, a Milton Friedman acolyte, privatised the nation’s banks – with disastrous consequences.

When the crash came, the total debt of Iceland’s three privatised banks was almost 10 times the GDP. Most ordinary Icelanders are still paying off massive debts on houses, cars, university degrees and much else.

Yet, less than two and a half years later, the centre-right Independence party is enjoying a resurgence. Defeated in the 2009 general election for the first time in its history, the party is now polling around 40%, while Jóhanna Sigurðardóttir’s coalition of Social Democrats and Left-Green representatives’ grip on power looks increasingly precarious.

The neoliberal dogma that turned Iceland into the world’s biggest hedge fund hasn’t gone away, but at the same time many Icelanders would like to see their country move away from finance and aluminium smelting and become the world’s first fully sustainable society. It certainly is possible: Iceland has fishing rights to 1% 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.

As the first anniversary of the eruption at Eyjafjallajökull draws near, the dust is finally beginning to settle on Icesave. Now the battle for Iceland’s social and political future really begins.

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