In the autumn of 2008 Iceland went bankrupt. The crisis which started with the collapse of the real estate market in the USA finally affected the Icelandic lending establishments. The Icelandic banks which had attracted many foreign clients and pledged no less than ten times the country's GDP then found themselves with their backs to the wall, no longer able to fund their operations or reimburse neither their creditors nor their depositors. The Icelandic krona lost half of its value in just a few months, Icelandic companies and households whose loans were in foreign currency were ruined and could no longer pay back their debts. Bankruptcies followed suit and the number of unemployed rose sharply. On 29th September 2008 the bankrupt Glitnir Bank was nationalized together with the Kaupthing and Landsbanki banks (on 5th and 6th October). The three most important establishments on the island represented nearly 85% of the banking system.

The problems experienced by the Icelandic banks really started at the beginning of 2008. At that time they were struggling to find cash. The Landsbanki then decided to create the on-line bank, Icesave. Relying on (high) Icelandic interest rates the establishment promised plentiful remuneration to its depositors and succeeded in attracting cash from many Britons and Dutch. But when the system collapsed and after the banks were nationalized, Iceland, now ruined, found itself with a heavy debt towards the UK and the Netherlands. The country owed 3.8 billion € to over 320,000 British and Dutch citizens who witnessed the disappearance of their savings which they had handed over to Icesave, i.e. 40% of the national GDP. However around 85% of this sum could be recovered thanks to the bankrupt banks assets – but this will take time. The Icelanders will pay more interest and the final sum they will have to honour is due to total around 2 billion €.

The Icesave Affair

On 14th November 2008 the Icelandic government, constrained by the European Union, promised to pay back the 320,000 clients of Icesave to a limit of 20,887€ per person. The British and Dutch depositors have been reimbursed in part by their respective States who then turned to the Icelandic authorities for their reimbursement. If Iceland refuses it is threatened with a refusal to access International Monetary Fund loans whilst it desperately needs money to emerge from the economic crisis it is suffering. On 5th June 2009 an agreement was signed between Iceland, the UK and the Netherlands in which the Icelandic State promised to provide its guarantee to a loan representing 3.8 billion euros reimbursable over 15 years at an interest rate of 5.55% (the first instalments will not be paid until 7 years from now). This agreement in which Iceland admits its responsibility in that it guaranteed Icesave's assets was approved in the Althing, the only chamber in Parliament on 28th August 2009 after ten weeks of debate. The agreement is conditioned by the acceptance of the ceilings of the annual reimbursements so that they do not impede Iceland's economic recovery. The agreement stipulates that the State guarantee will not extend beyond 2024 (this will have to be renegotiated if payments continue after this date). This most recent amendment caused anger on the part of the UK and the Netherlands, likewise the International Monetary Fund which has now stopped paying funds to Iceland. This is why the law was put to Parliament again in December 2009 where it was ratified from 30th to 31st December by a narrow majority (33 votes in favour, 30 against). The new law abolished the deadline of 2024.

The Perilous Choice of Olafur Ragnar Grimsson

After being approved the law had to be ratified by the President of the Republic, Olafur Ragnar Grimsson if it was to enter force. On 2nd January 2010 the association Indefence (which originally started the petition, "Icelanders are not terrorists" obtained 85,000 signatures) delivered the Head of State a new petition launched at the end of November 2009 and which was signed by 56,089 people asking him not to ratify the new law in which the State guaranteed the reimbursement of the Icesave loan. Some days later the petition had been signed by over 60,000 i.e. a quarter of the electorate on the island

On 5th January 2010 President Grimsson announced that he would not sign the law on the Icesave Agreement. According to the Icelandic constitution if the Head of State refuses the text has to be submitted to referendum. The Head of State's decision is an exception for which there exists only one precedent. On 2nd June 2004 President Grimsson vetoed the law on the media approved on 25th May in the same year by a majority of the Althing members. With this law the then Prime Minister David Oddson (Independence Party) intended to counter monopolies in the media industry which in his opinion might restrict the consumer's freedom, not only on an economic level but also from a political point of view. The leader of the parliament at that time, Halldor Blondal qualified the President's decision as an attack against parliamentary democracy whilst the opposition parties believed that it enhanced democracy and Icelanders' rights. In 2004, the government finally gave up its draft law with regard to the press abolishing the law of 22nd July since it was said that a possible revision of the constitution would re-examine the issue of the Head of State using his right to veto at a later date. The revision has still not taken place and the government in office has planned that a Constituent Assembly will meet in 2011 to look into the matter (a first attempt took place between January and April 2009 on the initiative of the first government led by Johanna Sigurdardottir which failed in the face of the opposition on the part of the Independence Party). The former President (1980-1996) Vigdis Finnbogadottir tried several times to explain that she would always abstain from placing her veto on a law with which she disagreed to avoid dividing the country. National referendums are not part of the political/constitutional tradition in Iceland which has only used this procedure once in its history and that was in 1944 during the proclamation of the country's independence.

"On the basis of article 26 of the Constitution I decided to submit the new law on the Icesave Agreement to the nation," declared Olafur Ragnar Grimsson on 5th January, who was then quick to say that his country would honour its financial promises with regard to the UK and the Netherlands. "The idea that we are not going to honour our promises is totally false. The only thing I decided to do was to grant the final word to the Icelandic people via a referendum which is in line with our fundamental democratic principles," he stressed, adding "involving the entire nation in the final decision is a vital condition for a successful solution, for reconciliation and recovery. Between financial interests and democracy the President of the Republic has to choose democracy."

On 30th December 2009 before the vote on the Icesave Agreement law MPs in the Althing voted against a draft law asking for the organisation of a referendum on the issue. Opposition MPs voted in favour of the draft law, those in the present majority led by Prime Minister Joanna Sigurdardottir voted against it including the Left Movement-Greens who in spite of this had been against the Icesave Agreement. On 19th January Justice Minister Ragna Arnadottir announced that the referendum on the draft law would take place on 6th March next.

What really is at stake?

The President of the Republic believes that the announcement of the referendum is a means to win back some popularity points and to restore his slightly tainted image. After his decision Olafur Ragnar Grimsson gained 64.5% in terms of positive opinions. The opposition parties can also hope to wipe the slate clean by opposing this law. Strangely enough the Independence Party and the Progress Party in office in 2008 when the financial crisis started and during the years prior to this defend a similar stance to that taken by the party on the left of the left, the Left Movement-Greens, a partner within the Social Democratic Alliance Party government. The latter led by Prime Minister Johanna Sigurdardottir who used all of her influence to clinch the approval of the law in Parliament at the end of December 2009, even threatened to resign, fears that the decision taken by the Head of State will be bad for the country and will create additional tension in the negotiations which Iceland is undertaking with regard to its possible accession to the European Union. The Head of Government thinks that if the law on the Icesave Agreement is rejected by the Icelanders the country will find itself in a difficult position in terms of negotiating its entry into the EU which is not to the taste of the opponents to the Icesave Agreement law.

Finally Olafur Ragnar Grimsson's refusal to sign the law enables the Icelanders, many of whom believe that the responsibility for the bankruptcy of the Icesave bank together with that of the country comes down to the bankers and the bank regulation authorities, to recover a better image of themselves. Many citizens believe that the law approved by the parliament is ruinous for the country and fear that the financial commitment it represents (until 2024) will prevent the Icelandic economy from recovering. But not all Icelanders think like this. "Refusal on the part of the President is not good. He is the vehicle of uncertainty when we need stability. In this matter we have no allies even amongst the other Nordic countries," says Arni Finnsson. "Those who put us in a mess now do not want us to pay our debts," he continued.

In 2009, the Icelandic GDP contracted by 8%. The unemployment rate has reached nearly 9% of the working population and the Icelandic currency has lost nearly half of its value since the summer of 2008. According to analysts the economy is not due to recover growth before 2011.

President Grimsson's decision has been the source of criticism abroad. The Head of State is running the risk of starting a crisis with the UK and the Netherlands as well as with the IMF which might question the aid that it is providing the country. The IMF granted 2.1 billion $ to Iceland in November 2008 – 1 billion still has to be paid. "If one or several members think that we should wait, we shall have to wait," declared Dominique Strauss-Kahn, Managing Director of the IMF mid-January. If the law on the Icesave Agreement is rejected in the referendum Iceland might earn the image of an unreliable country with whom it is difficult to trade. "The opinion that we have to give (with regard to Iceland's request to join the EU) will take into account all considerations that are pertinent to assessment including economic criteria. And in this context issues such as the Icesave affair will be analysed closely," stressed Amadeu Altafaj, the European Commission's spokesperson.

The financial ratings agency Standard & Poor's reacted to Olafur Ragnar Grimsson's decision and immediately placed Iceland's sovereign mark under negative surveillance; the agency Fitch Ratings reduced the country's score BBB to BB+. In the opinion of Fitch Ratings the law on the Icesave Agreement is a vital element in Iceland's financial restructuring.

According to a poll by Gallup at the end of January 61% of Icelanders think that their President was right in not promulgating the law on the Icesave Agreement. A similar number say they are prepared to vote "no" to the referendum on 6th March in which they will have to answer the following question: "Do you approve the law on the Icesave Agreement?" Three Icelanders in ten (30%) say they will vote in support of the law. Those close to the opposition comprise the majority amongst the text's opponents whilst supporters of the parties in office at present say they are mainly is in support of the "yes".