In These New Times

A new paradigm for a post-imperial world

Iceland may renege on Icesave payments

Posted by seumasach on July 14, 2009

Here is where the pressure from the streets plays such a crucial role in preventing the government from selling out and strengthening their hand in the renegotiation of the deal. The current terms of the deal appear to be exploitative and unrealistic. Iceland can and must stand firm and not commit itself to unpayable debt.

This is Money

14th July, 2009

The Icelandic Government could try to renegotiate the £2.3bn compensation it has committed to paying British savers over the collapse of Icesave and its parent bank Landsbanki.

Around 300,000 UK institutions and savers were bailed out by the UK Government when Icesave went down amid the collapse of the Icelandic banking system last year. The Treasury then forced Iceland to commit to paying that money back.

Now the agreement to pay the money back over 15 years is coming under question. Leading advisers to the Reykjavik government say members of the Icelandic parliament are prepared to challenge the deal.

Any move will not affect former savers with the bank’s online Icesave account in the UK, the vast majority of whom have already been reimbursed by the Treasury, but could leave a £2.3bn hole in the Government’s coffers.

Those with an Icesave Isa have until October 5 to reinvest into another Isa, but their money is safe and backed up with Government funds.

Savers with the other collapsed Icelandic bank that operated in the UK, Kaupthing, will not be affected by any refusal to pay as their funds were transferred to Dutch bank ING last year.

Under the deal hammered out with Iceland last year, the Iceland Compensation Scheme pledged to make payments over 15 years, with an initial 7-year grace period.

However, anger in Iceland over the promise has led to protests outside parliament and calls for the resignation of the country’s finance minister due to reportedly onerous conditions contained in the deal, which do not have the support of some members of the Icelandic Government.

There is also anger over a similar agreement with the Netherlands, though for half the sum. The issue will be voted on in parliament later this week.

Kristjan Guy Burgess, a political adviser to Iceland’s foreign minister, told Reuters: ‘This is the highest bill Iceland has ever seen. Parliament wants to be sure that it’s going to be possible for Iceland to shoulder this responsibility.’

The move could scupper the country’s chances of joining the European Union: its parliament votes on starting accession talks this week, with a formal application expected to follow later this month.

Analysts say the EU is not likely to entertain an application unless an Icesave deal is set in stone while Icelanders, just warming to the prospect of joining the 27-member bloc, are likely to oppose the deal regardless.

Magnus Magnusson, Director at the Social Science Research Institute at the University of Iceland, said: ‘The treaty with the UK and the Dutch governments is not going down very well here in Iceland. The question now is will Icesave get in the way?’

If the deal stays in place, the country could be ready to join the EU in 2013, following a referendum late in 2011 or early 2012.

The country’s economy was left in tatters after a series of banks, starting with Glitner and followed by Kaupthing and Landsbanki, went bust September last year. This resulted in huge liabilities to Governments in Europe, mainly the UK and Netherlands, as well as a drought of foreign investors after it was subsequently downgraded by ratings agencies.

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