Iceland's European friends

This is an extraordinary tale.

Iceland's president yesterday scrambled to contain the fall-out from his decision to block legislation to repay Britain and the Netherlands more than €3.9bn lost in a failed bank... Olafur Ragnar Grimsson told the Financial Times he was living up to Iceland's traditions as one of the world's oldest democracies by referring the repayment plan to a national vote, amid warnings that his decision could plunge the country into international isolation... Mr Grimsson's refusal to approve the deal to reimburse Britain and the Netherlands for money lost in Icesave online savings accounts has reignited a diplomatic dispute with the two countries and plunged Iceland into a fresh round of political and economic turmoil.

Before the financial crisis, British and Dutch savers put a lot of money on deposit in the Icelandic bank. When the bank failed, Iceland's deposit insurance scheme could not pay. The British and Dutch governments stepped in and repaid the depositors, and have since been strongarming the Icelandic government to reimburse their treasuries. Iceland, a country of  300,000 people, is being asked to assume a debt of $6bn (that's $20,000 apiece). It is an outrageous imposition. Iceland's president is right to repudiate the deal.

Britain and the Netherlands were wrong in the first place to reimburse depositors beyond the capacity of the Icelandic insurance fund. Since they did, British and Dutch taxpayers should be on the hook for this, not Icelandic taxpayers. And regardless of that, the means by which pressure has been applied to Iceland--including, believe it or not, the UK's briefly designating it a terrorist state--are an outrage. If Iceland is wondering whether it still wants to be a member of European Union after this, who can blame it?

See Michael Hudson's article, "Iceland has the right to refuse debt servitude", and this piece by Hannes Gissurarson, a former board member of Iceland's central bank, "Why Iceland does not want to pay".