Iceland Suffers Democracy

Iceland's referendum decision provokes angry UK and Dutch response

Iceland's EU membership bid was seen as at stake on Tuesday after a shock decision by the country's president to block legislation on paying billions of euros to Britain and the Netherlands to compensate investors in the collapsed Icelandic bank Icesave.

In a televised speech, President Olafur Ragnar Grimsson acknowledged the strength of popular opposition to the deal among ordinary Icelanders, many of whom are questioning why they have to pay for the actions of their country's banks. His move means the issue will now be put to a referendum.

Last June, Iceland made an agreement with London and the Hague to pay them back €3.8 billion they used to compensate British and Dutch savers who lost money in October 2008 when their accounts with the online savings account Icesave were frozen, following the collapse of the parent company Landsbanki.

The president said an "overwhelming majority" wanted a direct say over the issue after a petition objecting to the terms of paying back the loan gathered the support of one fifth of the population.

Under the terms of the agreement the loan will be paid back over 15 years with interest, with estimates suggesting every household will have to contribute around 45,000 euros.

Feelings in Iceland have been running high, particularly after the heavy handed tactics at the height of the crisis used by Britain which invoked an anti-terrorism law to freeze the country's assets in the UK.

"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," said Mr Grimsson.

The president's decision, which comes just a week after the parliament narrowly approved legislation to pay back the loan following months of wrangling, has prompted an immediate and angry response.

Fitch, the international rating agency, downgraded Iceland's longterm foreign currency credit rating to junk status on the back of the move and called it "a significant setback to Iceland's efforts to restore normal financial relations with the rest of the world."

The Times newspaper reported that Britain's financial services minister Lord Myners said that if the referendum decision was allowed to stand then Iceland would be frozen out of the international financial system and would not be able to join the European Union.

"The UK Government stepped in to ensure that all retail depositors with Icesave were fully paid out, and now we expect the Icelandic Government to ensure that we are repaid that amount which Iceland owes us," he said.

The Netherlands has also reacted with anger.

"We are very disappointed about the decision," said a Dutch finance ministry spokesman, according to the Wall Street Journal. "Iceland has the obligation to pay back the money."

With recent polls showing that Icelanders would likely reject the terms of the repayment in any referendum, the country's EU path is also set to be affected.

Each member state may veto an attempt by another country to join the European Union. Iceland submitted a formal application for membership in July 2009. Once hailed as a probable EU member shoo-in, the banking situation as well as Icelanders more ambivalent feelings about joining the 27-nation bloc is likely to complicate the negotiation process.

Good.