What’s at stake with the Icesave bill?

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There’s been a lot of reporting from the British and the international press on Iceland’s rejection of the Icesave bill.  The bill outlined  basic compensation scheme from the Icelandic to the British and Dutch governments that repays the money lost from the collapsed Icesave.

Most of the discussion so far has focused on Iceland’s increasing isolation from the international community, dimmed prospects on its EU membership as a result of not playing ball, the potential for further debt downgrades by credit agencies, etc.

But questions linger.  Questions like, why did the Icelandic reject the bill, knowing fully the long-term implications of such action – i.e. no loans from the IMF, no loans from neighbours Norway or Denmark, certain further currency devaluation and sovereign debt default?

And even if the government’s handling of the situation reflects the popular will of the constituents, does it truly represent the best interest for its people, in the long run?  So why are the Icelandic is effectively playing Chicken with its debtors?

As expected, there’s talks of little else on this island of 300,000.  At last no longer fretting about being forgotten – at least not when it still owes others money, its people are nevertheless jittery over a future that looks increasingly uncertain, insignificant, and more irrelevant by the day.

There’s looking to countries like Argentina, which defaulted on its debt back in 2001, and seems to have recovered without foreign credit. And there’s the legal argument that a government is under no obligation to assume debts racked up by the offshore division of a private bank.

I’ve been following an excellent Icelandic blogger on this issue, and comments on her posts are usually the most interesting.

Going from the measured pessimist envisioning a Eastern German existence:

I’m pessimistic about the future of Iceland, but I think the government could forestall disaster by a variety of heavy-handed, interventionist measures. Curiously, the country could end up as control-economy like the old East Germany, where everyone had jobs and housing and all the beets and potatoes they could eat, but no foreign goods.

To an anti-imperialist that prefers default to “economic occupation”:

Fear-mongering is going to come to a fevered pitch as we get closer to the vote. Don’t believe it! Things are going to be bad regardless of the decision. If you reject Iceseave, then you will at least have a country to call your own at the end of the day. The social unrest that is sure to come will be Icelandic business, not UN or EU business, i.e., no foreign troops to protect foreign property as is on display in Haiti right now.

To the true pessimist, whom seems Iceland losing either way:

The Icelandic people need to think long and hard about the aftermath. Paying Icesave, and their other debts, saddles them with a heavy tax burden and the possibility of losing social benefits for decades. Not paying Icesave may lead to massive inflation, limited access to foreign goods (including oil), and limit their ability to expand their economy again. Which would you choose?

But not before the negotiator chimes in:

This is a negotiation, it is only a question of terms. Of course these other players do not want to renegotiate, but surely will if forced to. Chances are these loans will not be withdrawn in the interim. It is a chance taken now with courage, or the consequences of a bad deal long years hence.

Especially when taking into account UK’s hard stance as something deeply political:

Be seen to be willing to pay something back- the capital, yes, and it seems that in time, most of this will be covered by the Landisbanks assets. But it is the interest that is unfair and crippling, and if the UK and Dutch Governments refuse to act fairly on this, I assume the result will be future defaulting of the debt. The problem in the UK is that there is going to be a General Election in May and I suspect, given the debt the UK now has, no politician is going to want to be seen as acting ’soft’.

And on a slightly more sinister tone, perhaps what’s underneath the island has something to do with it all:

From this angle it would appear that Icelanders are being blackmailed into paying Icesave just for the principle of it all. Or maybe forcing a natural resource-rich country further into debt has an alternate motive.  British politician Denis MacShane suggested Iceland sell its energy resources to settle Icesave debt. Oil is awfully expensive and increasingly sparse – wouldn’t it be nice for those Brits and Dutch to have a geothermal island under their thumb?

Below is a presentation that explains the disputed division of claims between Iceland and UK.  The Icesave referendum happens March 6, more to come.

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