Ice scream

To no-one's surprise, the voters of Iceland have again roundly rejected a deal to repay the governments of the UK and the Netherlands for losses suffered by their depositors when the entire Icelandic "banking" system collapsed at the height of the financial crisis. (BBC story here). It now seems certain that the dispute will end up in court.

The main reason given by Icelandic voters for turning down the deal, which would have seen repayment stretch all the way to 2046, is that they saw no reason why they should be on the hook for losses incurred by private bankers. At one level this is a fair point: by the time of the crisis, Iceland was little more than a flag of convenience for Kaupthing, Landsbanki et al. Almost all of their assets and most of their deposit gathering were located outside the country. However, the very fact that these banks and their activities were notionally based in Reykjavik provides a clue to one of the primary causes of their eventual demise. Iceland's banking regulation was notoriously lax, giving the banks free rein to undertake activities they would never have contemplated in better-regulated jurisdictions. Even if Icelandic voters balk at paying for the sins of the banks, it's not as easy for them to gainsay responsibility for the failings of their government-appointed regulators.

So to court, then, where things may not prove entirely simple for the UK and Netherlands governments, both of whom, no doubt responding to the frenzied atmosphere of the time, reimbursed depositors who were never protected by any official deposit guarantee scheme. One would think a good lawyer could make a reasonable argument that Iceland cannot be expected to pay for decisions consciously taken after the event by other governments. While this drags on, though, Iceland's economy will remain under serious pressure, and any hopes of EU membership will have to be put on hold indefinitely. And at the end of it all, the court may well impose terms that are much more onerous than those the voters have just rejected. The deal on the table may come to look very good, with the benefit of hindsight.