Leading article: Icelanders deserve our empathy, not bullying

We need a fair settlement that reflects the country's ability to repay

Related Topics

The Icelandic people have spoken and the message could not be clearer. Despite the threat of their country becoming a pariah in international credit markets, the weekend's referendum result shows that Iceland's population is simply not prepared to repay the £3.4bn owed to British and Dutch taxpayers on the terms agreed by their own government last year.

The history is well established. When Iceland's banks collapsed in the credit meltdown of 2008, the Icelandic authorities lacked sufficient funds to compensate the UK and Dutch citizens who had invested their savings in the online lender Icesave. British and Dutch taxpayers therefore stepped in with £3.4bn to compensate these savers. Icelanders unquestionably owe Britain and the Netherlands a debt for that intervention.

Yet the objection of most Icelanders is not to repayment, but the terms. What they resent is the agreement by their government last year to pay 5.5 per cent annual interest on that £3.4bn. Their resentment is justified. It is important to remember that £3.4bn represents 50 per cent of Iceland's GDP. Iceland, with its 320,000 population, is simply too small to bear such costs without severe economic pain for years to come.

There is no issue of moral hazard here. The Icelandic economy contracted by 6.5 per cent in 2009 and will shrink further this year. Unemployment has hit 9 per cent. The value of the krona has fallen by 50 per cent against the euro, sending the cost of imports soaring. Icelanders have learnt their lesson of what happens when banks are allowed to rampage.

Of course, sympathy should not be overdone. Icelanders did very well in the years of the banking boom, when living standards soared. And there was a gross political failure of regulation, too. The former Icelandic government gave free rein to its banks to snap up vast assets abroad financed by irresponsible levels of borrowing. It is galling to see Iceland's right-wing opposition – which was responsible for presiding over that boom and bust when in office – now leading a populist revolt against the terms of repayment.

But some empathy is in order. Iceland's bankers, not its population, were to blame for the financial meltdown. How would we react if some of Britain's large international banks collapsed, leaving ordinary savers in, for example, the Far East out of pocket, and taxpayers here forced to pay back the money at a punitive rate of interest?

The £3.4bn does need to be repaid. But we should be flexible and moderate in the terms and timing. One option that should be explored is writing off the debt in return for claims on the assets of the stricken Icelandic banks.

But despite the result of the weekend's referendum, the mood among Iceland's creditors still seems to be punitive. The Dutch government has suggested that Iceland's bid to enter the European Union could be jeopardised by its resistance. Our own government is playing hard ball too, blocking Iceland's International Monetary Fund loans until a deal is reached.

Such crass bullying should end. Policymakers need to arrive at a fair settlement that takes into consideration Iceland's already painful economic circumstances and its practical ability to repay. They also urgently need to turn their attention to the underlying causes of this debacle: an insufficiently regulated and inadequately insured cross-border banking system.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Ashdown Group: Senior Accounts Assistant - Accounts Payable - St. Albans

£26000 - £28000 per annum + benefits : Ashdown Group: Senior Accounts Assistan...

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Recruitment Genius: Installation and Service / Security Engineer

£22000 - £40000 per annum: Recruitment Genius: This company is part of a Group...

Recruitment Genius: Service Charge Accounts Assistant

£16000 - £18000 per annum: Recruitment Genius: Are you a a young, dynamic pers...

Day In a Page

Read Next
A Gold Ferrari sits outside Chanel on Sloane Street  

Sunday Times Rich List: We are no longer in thrall to very rich people

Terence Blacker
David Cameron was openly emotional at the prospect of Scotland leaving the union before the referendum  

Remember when David Cameron almost cried over Scotland because he loved it so much?

Matthew Norman
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions