You're not getting your £2.3bn, Iceland tells UK

Published on Tuesday 5 January 2010 21:42

A DEAL for Iceland to repay up to £2.3 billion lost by British savers when the country's banking system collapsed was thrown into doubt yesterday when its president refused to sign it off.

Days after a bill was finally agreed by Iceland's parliament, Olafur Ragnar Grimsson announced the decision must be put to a referendum, unless the government subsequently decides to drop the bill altogether.

About a quarter of Icelandic voters had signed a petition urging the president to veto the bill and allow a public vote, amid fears that the country could not afford repayments.

Under the proposed law, the UK Treasury would recoup up to 2.3bn from Iceland after Westminster stepped in to compensate British depositors with the Icesave scheme.

Gordon Brown's spokesman said yesterday: "The government expects the loan to be repaid. We are obviously very disappointed by the decision by the Icelandic president, but we do expect Iceland to live up to its legal obligations and repay the money."

The Treasury is in contact with officials in Iceland, the Netherlands and the EU to find a way forward, said the spokesman.

The Liberal Democrat Treasury spokesman, Vince Cable, said: "The fact that Iceland is now seriously contemplating defaulting on its obligations is a warning about economies becoming too reliant on big banks backed by government guarantees.

"If a bank is too big to fail, as the Icelandic banks clearly were, then they are just too big."

A Treasury spokesman said: "The Treasury will consult with colleagues in Iceland to understand why this bill has not been passed, and we will work with them, the Netherlands and within the EU to resolve this issue."

It is only the second time since Iceland's republic was founded in 1944 that the president has not signed into law a bill approved by parliament. This automatically triggers a national referendum on the issue, if the government does not drop the bill.

The political stand-off may bring about a change to the constitution to strip the largely figurehead president of his power to reject bills and force a referendum by refusing to sign them.

Mr Grimsson is adamant. He said: "It is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law. It is… the responsibility of the president of the republic to ensure that the nation can exercise this right."

He said the referendum would take place as soon as possible.

Yesterday's development could dent Iceland's chances of being given a fast-track entry to the European Union, but it does not affect UK savings with Icesave, the majority of whom have already received their money back in full.

About 298,000 British savers collectively had 4.56bn deposited with Icesave. Their accounts in the bank were frozen in October 2008 following the collapse of its parent company, Landsbanki.

The UK government pledged that no-one would lose money through the failure of the group, and said it would step in to cover any money lost above the sums covered by deposit guarantee schemes.

Iceland agreed to pay back the first 20,887 (18,600 at yesterday's exchange rate) people had lost, with the UK's Financial Services Compensation Scheme topping this up to 50,000 and the government covering sums above this amount.

More aid for Iceland unlikely until Britain and Netherlands are repaid

Why did Britain loan such a huge sum of money to Iceland?

The cash was part of an 8.5 million rescue package brokered by the International Monetary Fund in the wake of the collapse of Iceland's banking system. Various governments agreed to help so they could effectively bail out savers who held accounts with failed internet bank Icesave. Some 298,000 UK savers had their accounts suddenly frozen.

Are they still out of pocket?

The Treasury stepped in with a 100 per cent guarantee to reimburse individual savers. The IMF's rescue deal was only agreed after the British and German governments were assured they would be repaid for losses suffered by their own citizens.

Has Britain recouped any of its money?

No. This was dependant on Iceland's president backing a repayment deal already agreed by its parliament. The cash was to be repaid to the two countries over the next 14 years.

Why has Iceland's president intervened?

The previous government collapsed in the wake of the banking collapse. The deal to repay Britain and the Netherlands was sanctioned in principle by the new government last June, but has proved unpopular in Iceland. A poll of Iceland's 320,000 citizens showed 70 per cent were opposed to the deal and a petition asking the president to veto the measure amassed nearly 40,000 signatures.

Iceland's repayments represent 40 per cent of the country's gross domestic product. Each of its citizens would have been saddled with the equivalent of 11,000 of debt each.

What happens now?

The Icelandic government has to decide on whether to order a referendum or reopen negotiations with Britain and the Netherlands.

What are the implications of the apparent impasse?

More aid for Iceland from the IMF is unlikely to be forthcoming until Britain and the Netherlands are satisfied. Most of the aid previously secured has been earmarked to help restore faith in the island's battered currency, a key step in rejoining the global financial community and accessing foreign capital to support economic recovery.