Sigrún Davíðsdóttir's Icelog

In Iceland, Icesave III is hotly debated, splitting families and work places. Most Icelanders have a story to tell of a family party where tempers flared debating Icesave and the party came to an acrimonious end. The polls indicate a very close run, with an earlier majority for a yes shrinking.

Compared to last year, there is much less attention abroad on the Icesave referendum this time around. A foreign journalist who has covered Icelandic affairs for the last few years said to me recently that it was hard to make his editor interested in Icesave third time around. If Iceland was really going to pay and got much better terms third time round why didn’t they accept the agreement?

As regular Icelog readers will know it isn’t quite that simple. Yes, the Icelandic negotiation team, this time led by Lee Buchheit an American lawyer experienced in sovereign debt, negotiated a much better deal (explained here by Buchheit). Yes, there was a strong majority in Althingi for the deal, also among the opposition. Still, the Icelandic president chose to ignore the parliamentary rule and sent the bill to a referendum. The referendum is on this coming Saturday, April 9.

Icesave was never a major issue in Britain and the Netherlands as the respective governments chose to bail out the deposit holders. It is not correct that the two governments did this without asking Iceland. The Icelandic government, at that time a coalition with the social democrats, led by the Independence Party (conservative) accepted that the two governments would pay the deposit holders the €20.000 minimum guaranteed on Iceland’s behalf.

As Iceland’s three major banks collapsed in October 2008 the country became the first victim of the credit crunch (though it’s becoming more and more clear that fraud played a substantial part in the banks’ demise). Since then, much greater financial calamities have hit first Greece and then Ireland, two countries bailed out by the IMF and the EU. Portugal and Spain are still facing severe funding problems. In an international context the Icelandic events of October 2008 have turned into an introduction to what went wrong in the Western financial systems. That is i.a. how the events of the last few years are presented in brilliant documentary, Inside Job, by Charles Ferguson.

In spite of a general disinterest in Icesave everywhere except in Iceland many experts follow the course of events. Financial analysts and other debt nerds notice that while the Greeks and the Irish have to pay around and above 6% in interest on their loans the interests on Icesave III are around the half of that figure. The reason is that the interest rates for the two countries on one hand and Iceland on the other reflect two very different things. The interests on the loans to Greece and Ireland reflect the risk involved in lending to these two countries. The low Icesave III interests reflect the fact that though Icelandic regulators bore the main responsibility for regulating Icesave the Dutch and the British regulators shared some of the responsibility.

Last year, the referendum was widely interpreted by the international media as a story of a little country defying the Goliaths of the financial markets. Icesave III tells a whole different story. Iceland is getting far better interest rates than both Greece and Ireland. Enda Kenny and his party, Fine Gael came to power in Ireland by promising to renegotiate the interest rates of the loans to Ireland.

Now it might soon be Greece and Ireland’s turn to defy the big bands by refusing to pay the bondholders every cent back and insist on haircuts. Shouldn’t the banks shoulder part of the responsibility for having sunk far too much money into the Greek and Irish economy? Icesave isn’t about paying bondholders but about honouring a deposit guarantee on deposits owned by ordinary people who sought out the high interest rates that Landsbanki offered (and every Money section in the UK papers recommended), as they were being told that the bank was regulated in Iceland, as well as by the respective financial services authorities in the two countries (because it was never the meaning that cross-border branches should be less well regulated than home banks or subsidiaries of foreign banks). And as said earlier, the joint responsibility is reflected in the radically lower interest rates in Icesave III.

The Icesave debate in Iceland doesn’t have any recent foreign parallel in terms of the subject of the debate. But there are striking similarities between the Icesave debate and the debates in Denmark, Finland, Norway and Sweden on a EU membership.

The question that Icelanders are being asked in this referendum is if they want to ratify the law regarding Icesave that Althingi voted for but the president refused to sign. However, judging from the debate one might conclude that Icesave threatened Iceland’s independence and sovereignty. In the four Nordic countries and now in Iceland forces farthest to the left and the right in the political spectrum have unified in their crusade against Icesave. New alliances are created but after the referendum left and right tend retreat to former positions.

A general characteristic of referenda is that some of the voters don’t necessarily form an objective opinion of the question asked but vote, no matter what, for or against the government in power. The Icelandic government is unpopular and has been wise enough not the advocate a yes vote too strongly for fear of driving its opponents into the arms of the no side.

In the Nordic EU debates there was a strong tendency by the no side to exaggerate the uncertainty as to the course of event within the EU. Consequently, by saying yes, according to the no side, people are courting uncertainty. The no side was striving to keep things as they were and close the door to the outer world while the tendency on the yes side was just the opposite. The same tendency is prevalent in Iceland in spite of the fact that there is much greater uncertainty as to what will happen if the outcome is a victory to the no vote. The no side hasn’t tried to address the fact that a no vote will give rise to unchartered waters. Nor does it acknowledge the various difficulties that an unfinished Icesave agreement inflicts on Iceland.

In addition to unavoidable costs Icesave has hijacked the interest and attention from other important things, such as attracting foreign investment, dealing with unemployment and other issues of vital importance. It’s safe to say that Icesave has deflected important issues from the attention they need and deserve. For some, that might exactly have been their hidden benefit of saying no.

In Iceland, a public debate of hotly contested issues differs on one important point from the debate in the neighbouring countries. In Iceland there is a strong tendency to focus less on the opponent’s arguments and more on personal issues such as who he sides with and why. Political muck-racking isn’t a uniquely Icelandic sport but muck-racking is more noticeable in the public debate in Iceland, not just behind closed doors. That makes the Icelandic debate particularly ferocious.

That is also the case now. The no side is run most viciously by David Oddsson editor of Morgunbladid, governor of the Central Bank during the crash and a leader of the conservatives in the 90s and the first part of last decade. His motive falls in a familiar category, he’s trying to bring down the government. But he also seems to be using the opportunity to make the situation intolerable for the present leader of the party, Bjarni Benediktsson who advocates for a yes in the referendum.

Benediktsson might have to resign as a leader if the no vote win. However crazy it sounds, there are speculations that Oddsson might run again in a leadership contest. Be that as it may: if Icesave III falls Oddsson will be much stronger than before and that will strengthen his position in two major debates coming up soon. One is on the future of the transferable fishing quota system, where Oddsson defends the present system. The other is the EU membership. Because of Oddsson’s vocal stance on Icesave, a yes vote is also a vote against his continued influence in Icelandic politics.

Another leader, who might face a challenge to his leadership, depending on the outcome, is Sigmundur David Gunnlaugsson leader of the Progressive party, in opposition like the conservatives. He is advocating a no and that has forged strong relationship between him and his party to the Oddsson wing of no vote.

A no vote will have widespread ramifications, both politically and financially. Politically, a yes vote will most likely not cause any major changes.

But the greatest change brought out by a yes vote would be that Icelanders could stop talking about Icesave and concentrate on the far more pressing issues that Icesave has over shadowed.

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