Icelandic voters have overwhelmingly rejected proposals to pay back debts to the UK and the Netherlands following the collapse of Icesave bank leaving Chancellor Alistair Darling only able to say that it will take years to recover the money. 

 

In January Icelandic president Olafur Ragnar Grimsson refused to ratify a bill passed by the country’s parliament to authorise the repayment of money to Britain and the Netherlands following the collapse of the Landsbanki subsidiary in 2008.

 

But he also called for a referendum on the bill following national protests opposing the payouts. Over the weekend 93% of Icelandic voters said no to a £3.5 billion deal to reimburse overseas depositors, some £2.3 billion was due to the UK for losses suffered by around 300,000 clients of Icesave.

 

The resounding rejection left the UK and the Netherlands in a helpless position with Darling admitting it is likely to be “many, many years” before the repayment is made. “You couldn’t just go to a small country like Iceland with a population the size of Wolverhampton and say, ‘Look, repay all that money immediately'” he said. “So we’ve tried to be reasonable, the fundamental point for us is that we get our money back — but on the terms and conditions and so on, we’re prepared to be flexible.”

 

Iceland has said that it will meet its obligations but objects to paying what it says are punitive interest rates. The UK and Dutch governments have offered to waive interest for the first two years, amounting to around €450 million, followed by a rate of Libor – the benchmark London interbank lending rate – plus 275 basis points.  But even this was rejected by the Icelandic electorate.  

 

"The proposition that Iceland is advancing is that this is a situation in which no one should be thinking that they are going to make a profit," said. Lee Buchheit, Iceland's chief negotiator "What Iceland believes should happen is that the British and the Dutch recover the principal amount that they invested, and they recover their own cost of funds, so no one makes money, but they can say no one lost money. “

 

However Iceland also needs to secure the next tranche of an IMF loan and wants to begin EU membership talks so defaulting on repayments risks playing badly on the international stage.  International Monetary Fund Managing Director Dominique Strauss Kahn said the lender is “committed to help Iceland” and its dispute with the UK and the Netherlands is a “private” matter.

 

But the reality is that Denmark, Norway, Sweden and Finland have refused to pay out their part of the funds until the dispute is resolved. “I’m sure that the Nordic countries will fulfill their commitments,” claimed Strauss-Kahn. “The fund has said since the beginning that a solution to this private question of Icesave was not a condition for the fund to go forward. I hope that Icelandic authorities and the European authorities which are involved in this will find a solution as soon as possible.”