Daniel W. Drezner

Oh, Iceland… you had me at “referendum”

Oh, Iceland… you had me at “referendum”

Since your humble blogger reviewed Why Iceland?, he has received e-mails from approximately 0.3% of Iceland’s entire population.  That’s not much in raw terms, but I find it impressive.  The Icelandic chapter of the Friends of Drezner’s Blog (IFDB) is strong and robust, and rumor has it that their happy hours are a must-attend in the summer months.

In the continuing tradition of trying to wrangle an invitation to Rejkyavik making sure that FP readers are fully informed about any developments regarding the emerging geothermal superpower, I hereby relay the latest bizarre step in Icelandic financial history, courtesy of the FT’s Andrew Ward, Alex Barker and Michael Steen:   

Iceland was warned on Tuesday that it risked international isolation after the country’s president blocked a deal to repay Britain and the Netherlands almost €4bn ($5.7bn, £3.6bn) lost in a failed Icelandic bank.

The British and Dutch governments condemned the decision by president Ólafur Ragnar Grímsson and hinted at repercussions for Iceland’s bid to join the European Union and for its $10bn international economic rescue programme.

Fitch, the credit rating agency, warned of “a renewed wave of domestic political, economic and financial uncertainty” for Iceland and downgraded the country’s main sovereign rating to junk status….

Mr Grímsson said he would not sign legislation narrowly passed in parliament last week to reimburse the British and Dutch governments for money they paid out to savers in the Icesave arm of Landsbanki when it collapsed in 2008. Instead, he said the bill should be put to a national referendum, amid overwhelming public opposition to the terms of the proposed repayments.

His decision marked only the second time since Iceland gained independence in 1944 that the president, a largely ceremonial figure, had blocked legislation and represented an act of defiance against Jóhanna Sigurðardóttir, prime minister, whose ruling coalition backed the bill.

Both Britain and the Netherlands insisted they would continue to press for Iceland to fulfil its obligations under an agreement between the three countries in October.

Paul Myners, the UK financial services secretary, claimed that, if the deal were abandoned, Iceland would “effectively be saying that it did not want to be part of the international political system”. ”I don’t think the Icelandic people will be sensible if they reached that conclusion,” he added.

This will be a fascinating political experiment if the Icesave bailout actually goes to a referendum.  On the one hand, there is a ton of resentment by ordinary Icelanders about the fact that they have to help bail out Duch and English savers.  On the other hand, total isolation from the global financial system is not a fun experience, Great Recession or not. 

So here’s the question:  will Icelandic outrage at the Icesave agreement dissipate once Icelandic voters are forced to recognize the repercussions of noncooperation?  Icelanders, I want to hear from you!!