In the autumn 2008 Iceland found itself in a state of economic bankruptcy. The country's banks which had committed no less than ten times the Icelandic GDP were no longer able to finance their operations reimburse their creditors nor their depositors. On 29th September 2008 the Glitnir Bank was nationalized; on 5th and 6th October it was the turn of their counterparts Kaupthing and Landsbanki. These three establishments, the island's biggest, represented around 85% of the banking system. But matters did not stop there. Iceland which was ruined found itself owing a heavy debt to the UK and the Netherlands. The country has to pay back 3.8 billion € (i.e. 40% of the national GDP and around 12,000 € per inhabitant) to over 320,000 British and Dutch citizens who in 2008 saw all of their savings that they had placed with the on-line bank created by Landsbanki, Icesave, disappear.

Forced by the EU on 14th November 2008 the Icelandic government promised to pay back the 320,000 Icesave clients to a limit of 20,887 € per person. The British and Dutch savers have already been paid back in part by their respective State, and these have now turned to the Icelandic authorities for reimbursement themselves. On 5th June 2009 an agreement was signed between Iceland and the UK and the Netherlands in which the Icelandic State promised to provide its guarantee to a loan representing 3.8 billion €, repayable over 15 years at a rate of 5.55% (the first installments had not been planned to start until 7 years time). This agreement, in which Iceland acknowledges its responsibility recalling that it had guaranteed Icesave's assets, was approved by the Althing, the only chamber in Parliament on 28th August 2009 after 10 weeks of debate. The agreement was conditioned by the acceptance of the limits of the annual reimbursements so that the latter would not prevent Iceland's economic recovery. The agreement stipulates that the State's guarantee could not extend beyond 2024 (it will have to be renegotiated if payments continue after this date). The latter amendment caused anger on the part of the UK and the Netherlands likewise the IMF which then ceased all payments to Iceland. This was why the law was submitted to Parliament again in December 2009 when it was ratified from 30th over to 31st December 2009 by a narrow majority (33 votes in favour, 30 against). The new law which allows the Finance Minister to issue a State guarantee on behalf of the State on the loans of 3.8 billion € granted by the UK and the Netherlands to the Icelandic Savings and Investment Guarantee Fund abolished the 2024 limit.

But on 5th January the President of the Republic Olafur Ragnar Grimsson announced that he would not sign the law on the Icesave agreement. As stipulated in the Icelandic Constitution this meant that the text had to be submitted to referendum. On 19th January last Justice Minister Ragna Arnadottir announced that Icelanders would vote on the matter on 6th March next.

According to the polls the Icelanders are about to vote "no" to this referendum. This is why the Netherlands and the UK who fear that the agreement will be rejected, accepted new negotiations over the last few weeks.

Former director of the Dutch Central Bank (DNB) and former chair of the International Auditing and Insurance Standards Board, Arnold Schilder, interviewed by the parliamentary inquiry said that the Icelandic Central Bank had lied to its Dutch counterpart on the situation of the Landsbanki bank. "On several occasions we asked about the Landsbanki's situation. The answer was "everything is well"," he declared. "I shall see what the Icelanders have to say but the money borrowed will have to be paid back," indicated Wouter Bos (Labour Party, PvdA), Dutch Finance Minister before 20th February the day the PvDA quit the government coalition.

In agreement with the opposition forces the Icelandic government made a new proposal to the UK and the Netherlands: early repayment of the 3.8 billion € thanks to the sale of the Landsbanki assets, an operation that would allow the payment of 90% of the sums due on the one hand and which on the other would enable Iceland to make savings of over 200 billion krona (1.14 billion €) because quicker payment did not include the interest. American lawyer and former Secretary General of the Organisation for Economic Cooperation and Development (OECD) Lee Buchheit and Canadian Don Johnston were appointed by the Icelandic authorities to lead discussions. The latter also made contact with several governments to secure a mediator in the negotiations. For their part the British and the Dutch had sent Iceland a counter proposal offering a variable rate capped at 2.75%, a proposal that was rejected by Reykjavik. On 25th February negotiations ended in failure. "The last series of talks with the Netherlands and the UK concerning the Icesave issue have been adjourned without any final settlement being made. The Icelandic voters will go to ballot on 6th March to vote on whether the terms of the Icesave agreement negotiated last summer with the British and Dutch governments should be accepted."

On 24th February the European Commission gave the green light to the launch of negotiations with Iceland in view of the country joining the EU. Brussels said that Iceland, a member of the European Economic Area and of the Schengen Area was at an advanced stage in terms of preparation in the areas of policy. After this opinion on the part of the Commission the Member States now have to approve unanimously the opening of negotiations with Reykjavik which hopes that the Heads of State and government will give their opinion at the European Council on 25th and 26th March next. Any country that wants to join the EU has to submit its request to the Presidency of the EU which transmits this to the Council of Ministers which then invites the Commission to assess the country's degree of preparation to benefit from the status as candidate country and then give its opinion. The Council, after having taken note of this decides unanimously to accept the candidature.

Icelandic Prime Minister Johanna Sigurdardottir (Social Democratic Alliance Party) asked the Member States not to associate Iceland's accession to the EU with the Icesave affair. "There is no link between Icesave and our membership of the EU and it would be illogical to establish one," she declared saying that Iceland was ready to become an EU member. She insisted on saying that many Icelanders saw themselves as the "victims of an imperfect European legislation," saying that the burden had been unjustly spread across the three countries involved. "It is very important to explain to our European partners the situation in which the Icelanders find themselves and to explore all possible means that may lead to a settlement."

The Indefence association which started the petition entitled "The Icelanders are not terrorists" which rallied 85,000 signatures accuses the UK and the Netherlands of being committed to an economic war against Iceland. "We are not against paying a certain sum, we acknowledge a moral obligation (skydla) but not a debt (skulda). We refuse to leave a burden like this to our children," says the association. "Our healthcare system can be run on the equivalent of one year of interest at 5.5%" argues Arni Skulason, an economist and co-founder of Indefence who adds, "this economic blackmail is pushing Iceland towards bankruptcy whilst the responsibility should be shared between the Netherlands, UK and the European Union." Likewise the President Olafur Ragnar Grimsson said at the end of January in an interview on American TV channel CNN that the Icelanders were being persecuted, saying that the British had treated the Icelanders like terrorists. "They have put my country on an internet site alongside Al Qaeda and the Taliban," indicated the Head of State (the UK did in effect use anti-terrorist legislation to freeze the assets of the Icelandic banks).

If as announced by all the polls the "no" wins in the referendum on 6th March this will complicate relations between Iceland and the IMF (it granted a loan of 2.1 billion $ to Reykjavik at the end of 2008 which only 1.1 billion of which has been released for the time being) and will make the possibility of aid on the part of Nordic countries uncertain. The economic consequences of the "no" vote frighten the analysts. "It may compromise Iceland's economic recovery for the next ten to twenty years," says economist Thorolfur Matthiasson from the University of Iceland. If the law on the Icesave Agreement is rejected in a week's time a return will be made to the text approved on 28th August 2009 by the Althing but which was rejected by the UK and the Netherlands because it did not guarantee payments beyond 2024.

According to the most recent poll by the daily, Frettabladid nearly 2/3 of the Icelanders (65%) are about to vote "no" on 6th March, 38% say they will vote "yes".