Iceland expected to turn down repaying Holland and UK for internet bank failure

Iceland expected to turn down bank failure repay

REYKJAVIK, Iceland — Still smarting from the crippling aftermath of the global financial crisis, grudging Icelanders were expected Saturday to vote down a $5.3 billion plan to pay off Britain and the Netherlands for debts spawned by the collapse of an Icelandic Internet bank.

The resounding “no” vote expected at the referendum is indicative of how angry many Icelanders are as the tiny island nation struggles to recover from a deep recession. The global financial crisis wreaked political and economic havoc on Iceland, as its banks collapsed within the space of a week in October 2008 and its currency, the krona, plummeted. The Icelandic government was the first to fall as a result of the meltdown.

The debt owed to Britain and the Netherlands is a small sum compared to the amounts spent to rescue other victims of the global meltdown — $182.5 billion was paid out to keep U.S. insurance giant American International Group Inc. alive — but many taxpayers in the country of just 320,000 say they can’t afford to pay it.

The deal would require each person to pay around $135 a month for eight years — the equivalent of a quarter of an average four-member family’s salary.

Voters were considering whether to back a payment of $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid to around 340,000 of their citizens who had accounts with the collapsed bank Icesave, an Icelandic Internet bank that offered high interest rates before it failed along with its parent, Landsbanki.

Many voters object to the terms of the deal, not the idea of payment itself.

“I said no,” said Palmar Olason, 71, at a polling station. “We should get a better deal,” he said.

If most voters agreed with him, Iceland’s credit ratings could be jeopardized, making it harder to access much-needed funding to fuel an economic recovery. Unemployment has surged since the crisis began, to about 9 percent in January, and inflation is running at about 7 percent annually, while the island’s economy continues to shrink.

Britain and the Netherlands have been pushing hard for repayment and there have been fears that they will take a hard-line stance on Iceland’s application to join the EU and refuse to approve the start of accession talks until an Icesave deal is signed into law.

About 1,000 Icelanders gathered to protest in downtown Reykjavik Saturday, demanding a better say in the issue.

Many ordinary Icelanders resent forking out the money to compensate for losses incurred by potentially wealthier foreign investors who chased the high interest rates offered by Icesave.

There’s also residual anger that Britain invoked anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since the Cod Wars of the 1970s over fishing rights in the North Atlantic.

President Olafur R. Grimsson tapped into the public anger and used a rarely invoked power to refuse to sign the so-called Icesave bill after it was passed by parliament in December.

Since then, opinion polls have indicated that a strong majority intend to reject the plan. The Social Democrat-Left Green coalition government and the center-right opposition say the country could get better terms in negotiations with Britain and the Netherlands.

Last-minute talks between Iceland, Britain and the Netherlands broke down this week, despite the debtor countries saying they offered better terms — including a significant cut on the 5.5 percent interest rate in the original deal hammered out at the end of last year.

The British say their “best and final offer has been turned down.”

But Iceland continues to hold out for more, aware that any new deal must win substantial political and public support.

“I voted no,” said Rognvaldur Hoskuldsson, a 36-year-old machine technologist, after casting his vote Saturday morning. “We have to send a message that these countries are not going to profit from this situation.”

Although the International Monetary Fund has never explicitly linked delivery of a $4.6 billion loan to the reaching of an Icesave deal, it is committed to Iceland repaying its international debt — the months taken to reach the original Icesave deal were responsible for holding up the first tranche of IMF funds last year.

First results of the referendum are expected around 2200GMT Saturday.

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Sylvia Hui reported from London.