ICELAND

What is one to make of the Icelandic people? In a referendum last March, they overwhelmingly (93% said no) rejected a deal agreed with the U.K. and the Netherlands to sort out the Icesave mess. Their Government went back and negotiated more favourable terms. It appears that they too have just been rejected in a new referendum.

Icesave, run by Landsbanki, one of Iceland's three major banks, offered savings accounts paying high rates of interest. When all three of those banks went bust within weeks of each other in October 2008, Iceland hit an economic black hole, and 400,000 British and Dutch Icesave savers lost around Euros4 billion. Since they were not covered by the normal deposit insurance rules, their respective Governments decided to stump up the money themselves, and get the Icelandic Government (which had nationalised Landsbanki) to refund them. The original deal was to pay the money back between 2016 and 2024, at an interest rate of 5.5%; the revised terms extended the payment period to 2046, and reduced the interest rate to 3.0% or 3.3%. That was a major improvement; Icelanders still said no (albeit not so fiercely, a little under 60%).

Why should we bail out the stupid decisions of private banks, they asked? A reasonable question. There are however some good answers. The first one is that although the Icelandic Government would have assumed a large debt, it has also taken over Landbanki's assets, which could have been realised and thereby provided most of the necessary wherewithal to service that debt. The consensus is that the net cost to the country would have been less than 10% of the gross debt.

The second answer is that Iceland has major economic problems, and needs the international community to manage, and eventually solve, them. In particular, it would like to join the E.U. in a hurry, a process over which both the U.K. and the Netherlands have a veto. That veto looks more likely today than it did a week ago; in the meantime, the two countries will make do with taking Iceland to court.

This story shows the depth of the ordinary voter's frustration and anger with the financial crisis of the past few years. Icelanders live in a small island community highly dependent on foreigners, are one of the most educated groups of people on the planet, and are well aware of the likely consequence of their decision, namely ostracism by the international financial community. Yet they still said no. What will poorer and less knowledgeable voters do elsewhere in the world?

Walter Blotscher