Europe Furious over Icelandic Bank Veto

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"It is surprising, but the President was right to do it without a doubt," said Eirikur Svavarsson, a member of the nine-person InDefence group behind the petition that forced the issue.

While Iceland is still nominally committed to paying back the money – which equates to some 40 per cent of GDP – no concrete means of doing so is in place. The now vetoed bill – which passed parliament after considerable pressure from the British Government – featured severe consequences for Iceland if it failed to make repayments that would cover the first £19,000 in each British Icesave account. Under the only agreement that now applies, however, any money not paid back by 2024 will be written off.

Despite public satisfaction at the veto, the outlook for the tiny Icelandic economy looks no cheerier today than it did before. The credit agency Fitch yesterday downgraded Iceland's credit rating to junk status, saying the President's decision "creates a renewed wave of domestic political, economic and financial uncertainty" and represents "a significant setback to Iceland's efforts to restore normal financial relations with the rest of the world". As well as the damage to Reykjavik's hopes of joining the EU, fears remain that a second tranche of loans from the International Monetary Fund will be delayed, despite the organisation's reassurances last night that the Icesave situation would not affect the deal.

The British City minister Lord Myners warned that Iceland would be excluded from the global financial system if it refused to "comply with its international obligations". A "no" vote in the referendum, he said, would be tantamount to saying Iceland does not want to be "regarded as a safe counter-party with whom to do business". He added: "I don't think the Icelandic people would be sensible if they reached that conclusion."

Most Icelanders, though, were hard-pressed to come to any firm conclusions. With the unprecedented referendum process cloudy, and no date set, the next few months remain unclear, as do the President's motives for his stunning decision. "I think he sensed an opportunity to become the hero who saved the nation from the crisis," said one political public relations consultant. "But most people are still very, very afraid of what is in the future. We haven't the faintest idea what will happen."

Icelandic saga Q&A

Why has the Icelandic President vetoed the repayment plan?

Politics. A quarter of the population signed a petition calling for the bill not to be passed. Icelandic taxpayers don't see why they should suffer for the actions of their bankers. The compensation package amounts to nearly £11,000 each for the 320,000 citizens.

Will this affect people who saved with Icesave?

No. The UK Government stepped in to bail out savers when Icesave's owner, Landsbanki, collapsed in 2008. But yesterday's veto means London will not be reimbursed – at least for now.

Do the Icelanders have a point?

It might look like they have, but here's the problem: under the current international banking system, if a bank fails, it is its home country that takes responsibility for dealing with the mess. When Royal Bank of Scotland was bailed out, the US, for example, wasn't required to put up a penny despite RBS's sizeable US business.

What are the consequences?

The move is not risk-free for Iceland, whose battered economy needs the help of the IMF, help which is contingent on it meeting its obligations to the UK and the Dutch. The IMF could act to block a second tranche of loans to Iceland. The move could also complicate the country's hopes of joining the European Union, although the Icelandic people are less keen on this than they once were.

James Moore

Provided by The Independent—from London, for Independent minds

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