♠ Posted by Emmanuel in Credit Crisis,Europe
at 4/11/2011 12:08:00 AM
The Eurofighter (Typhoon) is as sleek fighting machine as you can imagine; the very epitome of European aerospace know-how. Today, though, we won't be talking about the Eurofighter but about Eurofighting. What is Eurofighting, you ask? It is a rather sloppy quarrel involving two of the most subprime economies in Western Europe: those of Iceland and the UK, with the more competent Netherlands thrown in for good measure. I once described the UK v Iceland fight as the clash of the pygmies by two countries laid low by the financial crisis; it's now time we returned to the hostilities.Most memorably, the British used anti-terror rules to freeze Icelandic assets in the UK insofar as the bust Icesave online bank was unable to insure British depositors. Having reimbursed them, the British authorities are now expecting payment from Iceland for their troubles. This didn't go down too well with Iceland's then-government and people, to say the least. Insofar as the Icelanders were now being made to pay for Icesave's offences to the tune of $5 billion, this tiny country has had mighty woes thrust upon it.
Now, Europeans--those of the EU variety at least--have a trick of asking for re-votes from wayward countries until they get their way. Think of subjecting the Irish to referenda until they voted for the Lisbon Treaty. The Irish voted it down once, but were not brave enough to do so again as it found itself in the teeth of a banking crisis. But here's the odd thing about the prickly Icelanders. Not only did they vote down paying the UK and Dutch once, but they have now done so again. Considering how much bigger their own opponents are, let's say the Icelandic folks are brave if perhaps foolhardy as the full force of the European heavyweights will soon be upon them:
Iceland faces more economic uncertainty and a drawn-out European court case after its voters rejected for a second time a plan to repay $5 billion to Britain and the Netherlands from a bank crash. The British and Dutch governments voiced disappointment with the result of Saturday's referendum, in which almost 60 percent of voters opposed the repayment deal.This behaviour hasn't gone down well with those trying to steady Iceland's situation, as you can imagine:
"We must do all we can to prevent political and economic chaos as a result of this outcome," Prime Minister Johanna Sigurdardottir told state television. The issue will now be settled by the court of the EFTA Surveillance Authority (ESA), the European trade body overseeing Iceland's cooperation with the European Union. [Iceland is a member of the lesser-known and ever-shrinking EFTA and not the EU.] "My estimate is that the process will take a year, a year and a half at least, Finance Minister Steingrimur Sigfusson told a news conference.
The debt was incurred when Britain and the Netherlands compensated their nationals who lost savings in online "Icesave" accounts owned by Landsbanki, one of three overextended Icelandic banks that collapsed in late 2008, triggering an economic meltdown in the country of 320,000 people. Economists have said failure to resolve the issue means Iceland faces delays ending currency controls, boosting investment and returning to financial markets for funding.
But the centre-left coalition government said it would not resign despite the defeat. "The government will emphasize maintaining economic and financial stability in Iceland and continuing along the path of reconstruction which it began following the economic collapse of 2008," it said in a statement.
It said a fresh round of talks on further funding from the International Monetary Fund, which led a bailout for the island, would be delayed several weeks, but that it had enough foreign exchange reserves to cover debts maturing this year and next. The proposed deal at issue in Saturday's vote set a clear timetable for repaying the Dutch and the British, including interest. But voters rejected the idea that taxpayers should foot the bill for what they see as bankers' irresponsibility. "I know this will probably hurt us internationally, but it is worth taking a stance," Thorgerdun Asgeirsdottir, a 28-year-old barista, said after casting a "no" vote.Obviously this is a very unsavoury matter for the Icelanders to accept, but they've now set themselves on a harder path in the name of righteousness. Consider:
Dutch Finance Minister Jan Kees de Jager said: "This is not good for Iceland, nor for the Netherlands. The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide." Economists have said the court route could be much costlier. The government still hopes most of the debt will eventually be paid back from the estate of the bankrupt Landsbanki. Ratings agencies were following the vote closely. Moody's had said it might lower Iceland's rating in case of a 'no'. Standard & Poor's analyst Eileen Zhang said a 'no' vote "might possibly result in a lengthy legal process and further uncertainties regarding the ultimate fiscal cost".
1. Their exit from IMF lending may be prolonged with all the stigmas attached to it;
2. Their credit rating may be downgraded further;
3. In light of (1) and (2), their return to international debt markets will likely be harmed;
4. They now have incurred the wrath of the lawyer-heavy UK and EU bigwigs the Dutch;
5. Their bid for joining the Eurozone to avoid currency-related issues in the future is probably mortally wounded as a consequence.
I understand that accepting a $5 billion liability would have been equivalent to its 320,000 population taking on $15,625 each in debt. Given the above, however, I wouldn't be surprised if the Europeans exact more than that much in grief. Sometimes you just have to give in--especially when you have no good bargaining chips like Iceland. The Icelandic leadership's inability to get that message across is regrettable. Some folks are just asking for it.
