Iceland Tells Brits and Dutch "NO"

Iceland's voters went to the polls yesterday, not to pick a prime minister, nor to amend its constitution, but rather to tell the British and Dutch governments that they will not accept extortion. Failed Icelandic banks had opened up branches in the UK and the Netherlands, and those governments paid the depositors off. Then, they turned around and demanded repayment. Iceland's people were allowed a referendum on the reimbursement of the British and Dutch governments. 93% voted "get stuffed." While the Icelandic government says the debt will get paid off eventually, maybe it shouldn't.

While the debt bubble grew, Iceland's banks set up operations in the UK and the Netherlands. These Internet banking accounts paid hefty interest on deposits, and these "Icesavings" accounts became quite popular. However, when the credit bubble burst, Icelandic banks folded. It was unpleasant for those in Reykjavik, but they were insured to the fullest extent of Icelandic law. Their deposits were safe.

The problem is that the UK and Dutch depositors were technically not covered by Iceland's deposit insurance, although there are treaty's in place that require the government in Iceland to back the deposits of the external branches of its banks. The upshot is that the people of Iceland are on the hook for $5.3 billion to foreign depositors. Sadly, there are but 300,000 residents of Iceland, meaning each and every one of them is in debt to the tune of $18,000 or so.

To its credit, Iceland doesn't deny the debt is owed. Rather, the terms of repayment are at issue. According to the Washington Post the repayment plan under discussion meant "Paying back in full the sum owned to foreign depositors would have amounted to more than $100 per person per month in Iceland for up to eight years." As Lord Keynes observed, when one owes that bank $100, one is in trouble. When one owes the bank $100 million, the bank is in trouble,

The fact is that the UK and Netherlands can eat this loss. Their depositors were made whole by the UK and Dutch governments, and therefore, there is little political pressure to collect on the debt right away. They can force Iceland to pony up the billions, but the fact is that Iceland should hold out for the best possible terms. $5.3 billion is a ridiculous amount given that the British and Dutch authorities didn't do much to insure the safety of the deposits. Paying off half in the next 20 years is feasible. However, one must note that Argentina's default of a few years ago hasn't done it much harm. London and Amsterdam should take note.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

Kensington Review Home