Brits on Ice or Return of the Cod Wars?

In a stunning turn of events, the citizens of Iceland voted more than 93 percent against a referendum that would required them to repay the British and Dutch governments for money they fronted to bail out depositors of Icesave, the Internet subsidiary of failed Icelandic bank Landsbanki. Icesave collapsed in 2008 and took its parent down as well, leaving some 400,000 Dutch and British depositors with $5.3 billion in claims high and dry. The British and Dutch governments sailed to the rescue, comforted by a handshake agreement with the government in Reykjavík that they would be repaid over time. The Icelandic parliament dutifully approved the deal. Then it all started to go wrong.

Just recall that the fantastic entry of Iceland as a global banking center began in 2003 when the two government banks were privatized in transactions that some now say were structured to benefit cronies of the ruling party. Landesbanki went to two brothers who had almost no banking experience, but great party connections. Once in command they began raising money, offering market-beating interest rates on deposits. Together the banks grew to €125 billion in assets — more than eight times the size of the economy of the host country.

By 2006, total debt to GDP reached 516 percent with 95 percent in the banking system. The banks had loan-to-deposit ratios of 300 percent, and when the crisis hit they could not roll over these positions. They both collapsed in a heap in 2008. In the intervening years, they were busy making investments in ... well, it is not clear where all the money went. When asked about it, the 41 percent holder of Landesbanki, Björgólfur Thor Björgólfsson famously said, "A lot of money just goes to money-heaven."

After the Parliament voted for repayment, Iceland’s president Olafur Grimsson rejected the settlement, which meant putting the arrangement to a vote of the populace. The crushing electoral defeat has many recalling the bitter Cod Wars between Britain and Iceland over North Atlantic fishing rights in the 1950s and 1970s. That long-simmering animosity is thought to have colored the outcome in some way. We think that is unlikely.

Just to put the question in perspective, the $5.3 billion repayment commitment amounted to $16,562 for every man, woman and child in the country. It totals almost one-third of GDP. It would have required additional monthly tax payments of $489 for eight years for a family of four. Meanwhile, the citizenry continue to suffer with a GDP of only $17 billion that declined 6.5 percent last year. Unemployment is at 6.7 percent (versus 1 percent in 2008) and inflation is running at 7.3 percent. It’s hard to imagine why these hardworking people should accept the liabilities of bankers who got them into this mess in the first place. Pundits were outraged at stories that one of the key executives in the fiasco ate flakes of pure gold sprinkled on his risotto.

The vote does have consequences. The IMF is withholding financial support until the payback problem is resolved. Watching the IMF squeeze a population to bail out a disaster created by corrupt politicians is nothing new. We just haven’t seen it happen to a country with per capita income above $40,000 per year.

Now that the people have spoken, the government plans to restart negotiations with their creditors. We can’t help but wonder what purpose that would serve. After a 93-to-7 drubbing, do they really think they can craft something that will win a majority?

The public indignation in Iceland may be just the tip of the iceberg (so to speak) for political action directed at the government debt crisis. The riots in Greece and the “Taxed Enough Already” movement in the U.S. may be of a piece. The proletariat is rising up and rejecting the burdens created for them by the political class. If austerity is required they want to be sure that it is shared equally with the ruling elite and their acolytes. 


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