Icelanders Reject Depositors Bill, Forcing Year-Long Fight

Icelanders rejected a depositor claims accord with the U.K. and Netherlands, forcing an international court battle that the island’s government said will probably last a year.

A final count showed 59.7 percent of voters said no to the so-called Icesave agreement, while 40.1 percent said yes, with voter turnout estimated at 75 percent, the Reykjavik-based National Electorate Commission said yesterday.

“I fear a court case very much,” Prime Minister Johanna Sigurdardottir said in an interview with broadcaster RUV after the first results were published. “We will, of course, defend Iceland’s interests vigorously in this matter.”

The government had hoped a deal would restore investor and diplomatic relations and end the financial isolation that has stalled Iceland’s revival from its 2008 banking collapse. The failure of Landsbanki Islands hf, which offered the high-yielding Icesave accounts, threatened to leave 350,000 British and Dutch depositors in the lurch. They were repaid by their governments, which have turned to Iceland for compensation.

Ratings Downgrade?

Britain is lending Iceland 2.35 billion pounds ($3.85 billion) to help it repay the depositor losses, while the Netherlands is lending 1.3 billion euros ($1.9 billion).

The latest bill, which set the terms for covering the depositor losses, was rejected by President Olafur R. Grimsson in February after being passed by a two-thirds majority in parliament. The government had reached an agreement with the U.K. and Netherlands in December.

Iceland, which has been rated junk by Fitch Ratings since Grimsson’s previous Icesave rejection in January 2010, also faces a rating cut to non-investment grade from Moody’s Investors Service, the company said Feb. 23.

“What is clear is that there will be a downgrade from Moody’s and perhaps Standard & Poor’s,” said Asgeir Jonsson, an economist at Reykjavik-based asset manager Gamma. “This will force the government to postpone its plans to enter the international bond markets.”

The European Free Trade Association’s Surveillance Authority in May last year started infringement proceedings against Iceland under its obligation to cover all depositor claims. Those proceedings had been shelved during Iceland’s parliamentary handling of Icesave.

“The Authority has taken note of the outcome of the Icelandic referendum concerning the Icesave issue,” EFTA said in a statement on its website today. “We now expect a swift answer from the Icelandic government to our Letter of Formal Notice of May last year. We will assess the government’s reply before we take further steps in the case.”

‘Democratic Self-Confidence’

Grimsson said in a speech that the referendum “enabled the nation to regain its democratic self-confidence and to express sovereign authority.” Three days after his veto, he said 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 result shows most voters agree.

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

Landsbanki Liquidation

Iceland’s negotiating committee in December estimated the latest Icesave accord would cost the state about 47 billion kronur ($419 million), while the remainder will be covered by Landsbanki’s assets. On March 2, it estimated the cost to the state at 32 billion kronur, less than a third of the Icesave accord rejected by 93 percent of voters a year ago.

The latest estimates of Landsbanki’s assets “indicate that the estate will be able to pay over 90 percent of claims for deposits,” the government said in a statement. Some estimates even put the coverage ratio at 100 percent, it said.

“The Netherlands and the U.K. will receive a refund of the funds spent to compensate depositors, regardless of the judicial process which will now be launched,” said Rosa Bjork Brynjolfsdottir, a spokeswoman at the Iceland Finance Ministry.

‘Absolutely Certain’

Grimsson said in an interview with Bloomberg television today that the U.K. and the Netherlands will likely be repaid more from the estate than necessary to cover the deposits.

“Now it is absolutely certain, despite this referendum, that out of the estate Britain and the Netherlands will get up to $9 billion,” he said.

Iceland has to meet its international obligations and the Netherlands will ultimately be repaid, Dutch Finance Minister Jan Kees de Jager said yesterday. The “time for negotiation is over” and “now the court will decide on this,” he said.

His comments were echoed by the U.K.’s Chief Secretary to the Treasury Danny Alexander.

“It looks like this process will now end up in the courts,” Alexander told BBC1’s Andrew Marr Show. “There is a legal process going on and we will carry on through these processes to try and make sure we do get back the money that the British government paid out in past years.”

Bond Sale?

Iceland had hoped to tap international bond markets this year as 713 million euros in bonds come due, Sigfusson said in January. The government will review its plans to proceed with debt sales after the Icesave rejection, he said yesterday. He is adopting a “wait-and-see” stance on the threat of a downgrade from Moody’s, he said. Iceland has enough foreign reserves to cover debt obligations in the “years to come,” he said.

The failure of the Icesave bill to win voter backing won’t prompt the government to resign, Sigurdardottir told RUV. Even so, “this outcome will call on us to rethink many things.”

Natasha Butler, a spokeswoman for the European Commission, said today that the executive “intends to continue membership talks with Iceland, which won’t be affected by the weekend vote,” adding that the island “would have to resolve its obligations on the deposit guarantee program before it wraps up membership talks.”

Iceland has also 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 government will discuss its IMF program with the fund and other contributors to the loan, including the Nordic countries, Sigfusson said.

“The Government remains committed to the economic program supported by the IMF,” it said in a statement. The rejection is unlikely to “jeopardize economical or financial stability,” Franek Rozwadowski, the International Monetary Fund’s resident representative told newspaper Frettabladid.

Efforts to ease currency restrictions, which the central bank estimates are stopping investors from selling about $3.6 billion in krona assets, probably won’t be delayed “much,” Sigfusson said.