Iceland's president forces vote on bank depositors' payback
Iceland will hold a referendum on a depositor accord with the UK and Netherlands after president Olafur R Grimsson blocked the bill in a move that threatens to undermine the island's efforts to repair international relations.
"The constitution is very clear about the need for a referendum in this situation," Prime Minister Johanna Sigurdardottir told reporters in Reykjavik yesterday.
Mr Grimsson vetoed the so-called Icesave accord after more than 60,000 of Iceland's 320,000 inhabitants signed a petition urging him to reject the legislation.
The bill, which polls show about 70pc of the population opposes, had obliged Iceland to use $5.5bn (e3.8bn) in borrowed funds from the UK and Netherlands to cover depositor claims from the two countries after the failure of Landsbanki in October 2008.
The absence of clear cross-border regulatory rules on depositor insurance has allowed settlement of the claims to drag on and left Icelandic taxpayers disgruntled over having to pay for the failure of a private bank.
"The cornerstone of Iceland's constitution is that the nation is the highest judge for the validity of law," Mr Grimsson told reporters at his residence outside the capital yesterday. "Now the nation has the power and the responsibility in its hands."
The decision jeopardises the continued flow of loan payments from the International Monetary Fund, Danske Bank chief analyst Lars Christensen said in an email.
If Iceland doesn't cover the depositor claims, "the most likely outcome would be a postponement of the payout of money from the IMF, which could potentially push the Icelandic government to the brink of default," he said.
"Iceland's return to international capital markets now seems very distant."
Fitch Ratings lowered the sovereign's rating to BB+, one level below investment grade, after the announcement by Mr Grimsson. The rating carries a negative outlook.
"The decision by Iceland's president to refer the Icesave agreement to a referendum creates a renewed wave of domestic political, economic and financial uncertainty," Fitch senior director Paul Rawkins said.
"It also represents a significant setback to Iceland's efforts to restore normal financial relations with the rest of the world."
"The UK government does expect Iceland to meet its obligations," UK Chancellor of the Exchequer Alistair Darling told reporters in London. The president's failure to stick to the Icesave accord will "make things a lot more difficult," he said.
The government of the Netherlands is "very disappointed" by the decision, Dutch finance ministry spokesman Ruud Slotboom said.
"We expect an explanation by the Icelandic government on the situation," he said.
"The Netherlands sticks to its stance that Iceland has the obligation to repay the depositors." (Bloomberg)