After seeing his house surrounded by a torch-wielding mob, Iceland’s president yesterday stunned the world by vetoing a parliament bill committing the country to paying back the €3.8 billion of British and Dutch citizens’ money it lost. The bold move triggered a shock wave of recrimination across the world: the country’s debt was instantly downgraded to junk status, the IMF hinted it may withhold the $2.1 billion it loaned the country in November and the UK threatened to veto Iceland’s bid to join the EU.
So now who’s going to make the incredibly difficult and complicated decision on whether or not to pay back the ‘other people’s money’ Iceland lost? Joe Q. Public, that’s who. The issue will now go to a public referendum on 20 February.
What happened is this: Over the past decade or so Iceland decided to make a bold (and eventually disastrous) foray into the world of high finance. It’s banks started using customers’ savings to make risky investments, and for awhile Iceland was riding high on enormous wealth. However with the onset of the global economic collapse in 2008, Iceland imploded. Its banks went bankrupt, and its currency collapsed.
One of those banks was IceSave, an online bank used mainly in the UK and the Netherlands. When that bank collapsed, its British and Dutch depositors lost all their savings. Under the European deposit banking system (the equivalent of the FDIC in the US), Iceland was responsible for paying those consumers back. But since Iceland was broke, the UK and the Netherlands had to loan them the money to pay back the consumers (£2.3 billion and €1.3 billion respectively). The Icelandic parliament had to pass a bill to repay that money, and that is what the president, Olafur Ragnar Grimsson, vetoed.
He did so after weeks of angry protests in Iceland, where the public is hostile toward the repayment bill. On New Years Eve, a mob of angry Icelanders with torches (I kid you not, look at the photo!) showed up at the president’s house, presenting him with a petition against the repayment bill by over 60,000 Icelanders, almost a quarter of the island nation’s population.
Now the only way to pass the bill is to put it to a referendum, which is a risky move considering public opinion is heavily against the bill right now. If the question is, |Do you want your government to pay a whole bunch of money to other countries and thereby raise your taxes?” it may be a tough sell. The government will have to work tirelessly over the coming weeks to alert the Icelandic population to the dire consequences that would follow if Iceland defaults on its international obligations. To me it seems pretty clear cut, but Joe Q. Public has a poor track record of understanding the importance of the international community. Referendums have a tendency to produce the most conservative and most nationalistic results.
Then again, if it passes the referendum it could shield the government from the consequences of making a very difficult and unpopular decision. In the end, the Icelandic public may have to just hold their noses and vote ‘yes’ after being faced with the consequences of the alternative. Then the government can’t be made to be a scapegoat – after all, the people would have approved it themselves. One wonders how the political landscape would be different today if the first financial bailout in the United States had been passed by a referendum. Given that most economists agree it was necessary at the time to avert a global financial collapse, it would have been an almost unconscionably risky move to put such an important decision in the hands of the public.
Then again, Iceland isn’t the United States. It’s a small and well-educated country where accurate information can be disseminated quickly. One hopes this means the Icelanders will vote yes. But in the mean time, the government is having to scramble to assure the international community that it isn’t about to become a pariah state. Iceland’s financial minister is in Norway today desperately trying to assure the Scandinavian states, on whom Iceland depends for its survival, that the money will be paid back.
It is unclear how Iceland would pay the money back if the referendum result is ‘no’. But what is clear is that if Iceland defaults on the repayment its economy will collapse. It will be refused EU membership, refused an IMF loan, and noone will lend it money. And in the end, that would cost the Icelandic public much more than €3.8 billion.