Sigrún Davíðsdóttir's Icelog

Now that the president of Iceland has sent the Icesave bill for a referendum, Icesave is again being debated in Iceland though I sense that it’s not the same burning issue as earlier. Here are some of the aspects that attract the greatest attention.

First of all, was the president within his legal rights to send the bill off to a referendum instead of signing it? Seventy percent of MPs, from all parties, voted for the bill, meaning that here, according to some, president Olafur Ragnar Grimsson is going against the lawful rule of parliament. However, Grimsson points at another vote in Althingi, alongside the bill: the Althingi also voted on a referendum.

Here the vote was narrower. I.a. the Independence Party, in opposition, voted for a referendum. But in an interview following Grimsson’s decision the IP leader Bjarni Benediktsson said that although he had been for a referendum he thought that it had been up to Althingi to decide on a referendum, not the president. He accepted that Althingi vote went against his wish but wasn’t happy with the president’s decision.

When the president presented his decision he spoke of two legislators, Althingi and the people. Legal experts contest this definition: Althingi is the legislator, voted in by the people. The president also pointed out that it’s the same Althingi that voted for the bill now as a year ago, as if that weakened the vote. But this is just his feeling, not supported by the constitution.

The general feeling among Icelandic legal experts is that by his decision the president has redefined his power. The president has, according the constitution, the right to send bills to a referendum. No president had done it until Grimsson, in 2004, sent a hotly debated bill on media ownership (that many saw as The Independence Party going against Baugur’s grip of the Icelandic media) to a referendum. The media bill was then consequently withdrawn. Then it was the Icesave bill last year – and now again. The move now is widely questioned since this time the Icesave bill had a wide support in Althingi.

It’s clear that the EFTA Surveillance Authority keeps an eye on the situation. The EFTA court will not rule on the Icesave agreement itself, that’s beyond its remit. Its focus of interest is the decision by the Icelandic government from Oct. 2008 to differentiate between depositors in Iceland and abroad (this decision is often referred to as being part of the Emergency Act, passed on Oct. 6 2008 but this differentiation is actually not part of the Act).

Icesave keeps on attracting attention abroad. Yesterday, WSJ wrote on the ‘Icelandic Freeze-Out’, pointing out that this time polls indicate, as pointed out earlier on Icelog, that Icelanders might vote for the agreement. WSJ then goes on:

“A yes vote in a referendum likely to be held in early April would leave Iceland in hock to London and The Hague for as long as 35 years—and this because the British and Dutch governments decided, of their own volition, to bail out their own citizens. (My underlining.)”

It’s highly questionable how long the payments will stretch out, 35 years is the maximum but it seems that the Landsbanki assets will go a long way to cover the Icesave debt though there is some exchange risk involved. It’s however completely wrong that the British and Dutch governments decided, on their own, to pay their respective Icesave depositors.

The Icelandic government kept saying that the deposits were completely save and guaranteed by the state, as did the governor of the Central Bank David Oddsson, earlier PM and now editor of Morgunbladid, an Icelandic newspaper, in early February 2008. After the collapse of the banks, Icelandic ministers met with their opposite numbers in Brussels early November 2008 and reiterated their intentions to pay. At the time, the IP and the social democrats were in government. The IT changed tone only when they landed in opposition in March 2009. The present government is led by the social democrats, with the Left Green at their side.

Many Icelanders feel that the president’s decision is highly motivated by his past: he was an energetic cheerleader for the Icelandic banking ‘Wunder,’ travelled to open bank branches and mixed with the bankers and businessmen now tainted by alleged fraud. By putting himself so firmly against the big nations who are squeezing the little one he might well be positioning himself to run for his fifth term next year, an unprecedented length of time. There is no legal limit to an Icelandic president’s time in office.

The president has pointed at the benefits that his decision had last time: a much more favourable agreement. However, it’s come at a cost to businesses but it’s a cost that’s not easy to calculate. Right now, the CDS has again shot up. There might be some Icelanders who shrug their shoulders, refusing to pay. Others might be worried about the consequences of an international isolation and the cost of being seen as a people who flip flop and doesn’t honour its words.

As to the political consequences, it’s difficult to say. If the referendum rejects the bill the government really has run out of options since the UK and the Dutch government will not try negotiating a fourth time. Could the government resign? Though nothing is impossible, it’s not terribly likely since the opposition wouldn’t be keen to wade into the Icesave mess.

For the time being, the most exciting part of the political scene is the Independence Party. Some feel that Benediktsson showed great courage to support the agreement (though admittedly the party had a hand in it, having supported Lee Buchheit to lead the negotiations). Die-hard followers of David Oddsson (now fewer than earlier from his own party but with some unexpected support from the far-left Icesave-opposition) will support his attempts to drive Benediktsson, who has stood up to Oddsson, out of office though there is no apparent leader-in-waiting. Oddsson, earlier no fan of Grimsson, is now writing laudatory editorials about him, underlined by the messianic photo of Grimsson on Morgunbladid’s front page on Monday.

The intense, and incredible, attention on Icesave has detracted attention from other issues that should have been discussed more, such as the state aid to the banks and later to other financial institutions. If lucky, the Icelandic state might have to fork out ISK50bn, to foreign Icesave deposit holders (but more if less lucky and the exchange rate falls). So far, the government has put ca ISK26bn, €162m, into VBS, a bank that survived Landsbanki by 8 months because Landsbanki had financed it far too lavishly (another story). Eight months later, VBS was bust. ISK12bn went into the insurance company Sjova (any national harm that an insurance company would go bust?) and now enough billions into collapsed building societies, bringing these numbers close to a possible Icesave payment. I leave it to the readers to contemplate whether paying foreign deposit holders is more of an issue than saving Icelandic financial fiefdoms.

Icesave isn’t formally linked to Iceland’s EU application but EU can’t disregard the issue. Most people I’ve spoken to do think that EU will want to see an end to the dispute before the application is processed further. At a press conference yesterday morning, Denmark’s foreign minister Lene Espersen aired her concern if the referendum would put an end to an agreement. Iceland would have to settle the dispute with the Dutch and the UK.

The IMF seems to be indicating that the currency restrictions can’t stay in place forever and should be lifted as soon as possible. With Icesave in limbo it won’t happen. It can be argued that the Icelandic currency (or the non-currency as a friend of mine says) is now artificially high, making the Icelandic business environment a Wonderland, cut off from reality. The currency restrictions were seen as a temporary necessity for Iceland to adjust after the crash. At some point, Iceland will need to adjust to the real world.

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