Bailout mutiny looms ahead in Iceland

A referendum in Iceland isn't the kind of event that would usually attract much world attention. This time will be different.

The country will vote this week on how to pay back the money it owes the UK and Dutch governments for bailing out the Icelandic banks that crashed during the credit crunch.

On March 6, Icelandic taxpayers should send a message to the rest of the world: Can't pay, won't pay, so go take a hike.

There is no reason why they should pay the money back. Ordinary people didn't run up the debts; the Dutch and British governments were guilty of regulatory incompetence; the overseas savers were stupid and greedy; and meeting the debt might well bankrupt the country for a generation.

If they refuse, they will make a point that taxpayers in many other countries will sympathise with: We won't always pick up the bill for losses made by bankers.

Facts

The facts at issue are simple. The failure of lender Landsbanki Islands more than a year ago left many savers in the UK and the Netherlands facing losses.

Those "Icesave" deposit holders have been compensated, but the British and Dutch governments expect Iceland to meet the cost of the bailout.

Iceland's government has agreed, but President Olafur R. Grimsson, who opposed the legislation, has insisted it go to a referendum. A "no" vote is enough to revoke the bill.

The British and Dutch governments have offered the Icelandic government a loan of $5.2 billion to meet the cost, but there is still a dispute over the rate of interest to be charged on that. If the terms can be improved, it might make a "yes" vote more likely. Right now, no deal has been struck.

The big problem isn't really the rate of interest. It is the bailout itself.

Three out of four polls show voters will reject the legislation. They should keep on voting against a deal to repay the money, and throw out any government that agrees to do so. They should simply renege on the debt.

Of course, there are some arguments for paying. It is always a good principle to honour your debts. If you owe money, you should pay it back.

And there may well be a heavy price to pay for refusing. Iceland's credit rating would be shot to pieces. A loan from the International Monetary Fund may be placed at risk.

Any application to join the European Union — suddenly an attractive option now that Iceland's economy has collapsed — might well be in jeopardy, though few Icelanders seem to want it.

It will be hard for the British or Dutch governments to approve EU membership for a country they believe owes them billions.

Those are all weighty, practical considerations.

Four reasons

And yet, there are four reasons why Icelanders should still vote "no" this week.

First, the debts weren't incurred by the Icelandic people. They were run up by a few wild bankers who took crazy and irresponsible risks. Nobody got a chance to vote on whether Icelandic banks should expand around the world.

Why should a tiny financial elite expect a lot of hard-working people to clean up a mess they created? No one can claim that ordinary Icelanders ever promised to support their banks.

Second, isn't this just as much the fault of the British and Dutch governments? They allowed the Icelandic banks to operate in their countries. Regulators there could have been a lot tougher in controlling the way Icelandic banks were marketing the interest rates on offer, and reminding savers of the risks involved.

And it was a UK and Dutch decision to bail out depositors. If those governments were partly responsible, there is no reason they shouldn't shoulder part of the cost.

Third, the depositors were just as much at fault as anyone. They put money into Icelandic banks, which paid higher rates of interests than almost all their competitors. And yet you need an IQ of only about 10 to know that higher rewards involve higher risks.

Also, let's bear in mind that the depositors were probably a lot wealthier than the ordinary Icelanders who will end up paying the bill. Why should prudent poor people pick up the tab for greedy rich ones?

Finally, it imposes too great a burden. The bailout is going to cost more than $16,000 (Dh57,750) for each of Iceland's 317,000 people, a huge sum of money for a country already suffering from a deep recession.

It could be crippled for a generation. Iceland already needs to rebuild its economy after the collapse of its financial-services industry. It needs all its spare cash to do that.