ICELAND will have to rethink its economic policy and budget, according to its prime minister, after the country's electorate shot down a proposed agreement with the UK and the Netherlands that would have forced taxpayers to cover losses incurred by depositors in one of its failed banks.
It was the second time in two years that voters rejected a scheme to provide funds to the UK and Dutch governments, which provided compensation to 350,000 of their citizens who saw their deposits with Iceland's Landsbanki all but evaporate when the institution collapsed in 2008. They had invested in high-yield Icesave accounts.
"This matter will now be settled in the European Free Trade Association's court," Prime Minister Johanna Sigurdardottir said. "We will, of course, defend Iceland's interests vigorously in this matter. I fear a court case very much."
The government had hoped an Icesave deal would restore investor and diplomatic relations, and end the financial isolation that has stalled Iceland's resurrection from its 2008 banking collapse.
The bill, which set the terms for covering the depositor losses, was rejected by President Olafur Grimsson in February after being passed by a two-thirds majority in parliament.
Britain is lending Iceland £2.35bn (€2.65bn) to help it repay the depositor losses, while the Netherlands is lending €1.3bn.
Iceland's negotiating committee estimated last December that the latest Icesave accord would cost the state about 47bn kronur (€289m), while the remaining debt will be covered using the proceeds of Landsbanki assets.
On March 2, it published an estimate setting the cost to the state at 32bn kronur (€196m). That's less than a third of the cost of the Icesave accord rejected by 93pc of voters a year ago.
This time around, the proposed accord was rejected by nearly 60pc of the electorate.
Iceland has to meet its international obligations, and the Netherlands will ultimately get back the money it is owed, Dutch Finance Minister Jan Kees de Jager said yesterday. He described the Iceland vote as "disappointing".
Iceland has relied on a $4.6bn (€3.17bn) bailout led by the International Monetary Fund and on capital controls to prevent a sell-off of the krona.
Failure to resolve Icesave through a referendum "could easily muddy the waters", Iceland's central bank governor Mar Gudmundsson said.
A 'no' vote "would impede foreign borrowing and delay capital account liberalisation, although it is not clear how strong or persistent these effects would be".
Iceland had hoped to tap international bond markets this year as €713m in bonds come due, Finance Minister Steingrimur Sigfusson said in January. He is adopting a "wait-and-see" stance on the threat of a sovereign downgrade by ratings agency Moody's, he added. (Bloomberg)