Icelanders Cast Ballots in Vote That May Reject Depositor Deal

Icelanders cast their ballots today in a referendum that polls indicate will result in the nation’s second rejection in as many years of a $5 billion depositor accord with the U.K. and Netherlands.

Three polls this week show opposition to the so-called Icesave agreement has grown to more than 50 percent. The bill, which sets the terms for covering British and Dutch depositor losses triggered by the 2008 failure of Landsbanki Islands hf was rejected by President Olafur R. Grimsson in February.

“Nowhere does it say that Iceland is legally obliged to pay for this ridiculous Landsbanki adventure,” said Stefan Gunnarsson, a shop assistant in downtown Reykjavik. “If a court finds that we are legally responsible, so be it. Until then: No thanks.”

Iceland needs to settle the dispute to restore relations with international investors and heal diplomatic ties with the British and the Dutch as it seeks European Union membership. The depositor accord will go to the European Free Trade Association Court should voters reject the agreement.

Grimsson said in a Feb. 23 interview he rejected the accord because Iceland’s legal obligation to pay is “unclear,” adding the matter shows that European banking laws haven’t been “thoroughly thought out.” The referendum allows the people to decide “whether private citizens, taxpayers, should be obliged to repay the losses created by a private bank,” he said then.

The referendum “will be a wakeup call for the citizens in other countries,” Gunnarsson said. “They’ll realize that there’s no fairness in pushing bank losses onto taxpayers when things go sour, but pocketing the gains when everything is going well. A big fat ‘no’ from Iceland will drive that point home.”

‘Muddy Waters’

The government had hoped an Icesave deal would end Iceland’s isolation after the collapse of its three largest lenders in 2008 sent the country into its worst economic slump since its independence in 1944. The failure of Landsbanki, which offered high-yielding internet accounts to attract foreign depositors, threatened to leave 350,000 British and Dutch depositors in the lurch.

“The Icesave referendum taking place this weekend could easily muddy the waters,” central bank Governor Mar Gudmundsson said in a speech on April 7. A no vote “would impede foreign borrowing and delay capital account liberalization, although it is not clear how strong or persistent these effects would be.”

The cost of insuring against an Icelandic default is little changed since Grimsson’s Feb. 20 veto. Credit default swaps on five-year debt traded at 235 basis points on April 7, compared with 240 basis points on Feb. 18, according to CMA data available on Bloomberg. That’s less than half the rate of insuring against defaults in Ireland and Portugal.

IMF Reliance

Iceland has relied on a $4.6 billion bailout led by the International Monetary Fund and on capital controls to prevent a sell-off of the krona. The caps, which the central bank estimates are stopping investors from selling about $3.6 billion in krona assets, have allowed the trade surplus to support the exchange rate and limit import price gains. The central bank has cut rates 15 times in two years as inflation eased to within the bank’s 2.5 percent target.

Not all Icelanders are opposed to the Icesave deal. Hulda Sigurdardottir, a shop manager who works in the capital, said she’ll vote yes because she wants Iceland to be able to move on.

“I’d like the uncertainty out of the way,” she said. “Iceland needs to put this behind it and move on. By agreeing to Icesave Icelanders will be taking a step in that direction.”