Iceland’s Financial Crisis Still May Have A Sting In The Tail

One of the most spectacular casualties of the global economic was the state of Iceland. When the Icelandic banks failed, the government was forced to step in and the credit rating of the nation was reduced to “Junk” status by Fitch Ratings, meaning that the country had to pay higher interest rates to investors to attract finances and that the investors could not be certain that their funds were safe.

Overseas investors in the UK and the Netherlands in Icesave, the Icelandic bank which failed, were promised by their governments that they would receive some compensation. In the end, this money was paid by the UK and Netherlands governments on the understanding that Iceland would repay the debt. After protracted negotiations, a deal was agreed and passed into law in Iceland to honour the debt. The legislation, which is unpopular with Icelandic citizens, has been blocked by the Icelandic President who is insisting that the matter be decided by referendum. The bill for compensation works out at something like 12000€ per citizen. Estimates suggest that the bill would be rejected by about 70% of the populace if it was put to a referendum. Of course, nations can’t just walk away from their responsibilities without consequences. If the bill was defeated and the government’s pledge to honour the debt could not be met (and this is far from being the case), other Nordic countries and the IMF may refuse to offer further assistance – the IMF has already bailed Iceland out with billions of Dollars of loans and insisted that the Icesave compensation issue be properly addressed. The nation is also hoping to join the European Union as soon as possible and this desire could be derailed if the country should fail to honour its obligations.

The Euro is worth approximately 180 Icelandic Krona currently; before the banking crisis hit, the exchange rate was around the 120 mark – at the height of the crisis, before ECB stopped providing reference rates for the currency, it had slumped to 305 to the Euro.