Iceland Citizens and Icelandic Private Banks Repudiate Debt Financial Bailout

Updated on December 5, 2017
john000 profile image

John has been interested in economics and politics since high school. He wants to vote more responsibly and watches candidates' positions.

Source

Should Iceland Refuse to Pay?

In March of 2010, something rather remarkable happened. Icelanders voted not to accept a proposal called "Icesave" which would have provided for repayment of funds which England and the Netherlands had paid to its citizens who had lost savings in Icelandic private banks.

When Icelandic banks went bankrupt in 2008 and 2009 due to the worldwide lack of liquidity, or put another way, money to carry on investment activities (the same reason the stock market crashed in the U.S.), the banks went belly up. To give you an idea of the severity of the problem, the Central Bank of Iceland had a total of 378.4 billion kronur while the Icelandic private bank debt totaled 356.8 billion kronur.The central bank could not finance such repayments without incurring catastrophic damage to the Icelandic economy, an economy it was required to support by law. Hence, there was the birth of an idea for a graduated payment schedule based on gross domestic product (GDP). Iceland's total debt to outsiders is 9.553 trillion kronur. This is equivalent to 50 billion Euros, or 65.91 billion USD at today's conversion.

Osvor Fishing Museum

Photographer: Herbert Ortner, Vienna, Austria July 11, 2003
Photographer: Herbert Ortner, Vienna, Austria July 11, 2003 | Source

A Proposal and What Happened

The proposal called for a kind of moratorium on debt payment. The government at the time felt it necessary to agree to the proposal for fear of being denied future loans, European Union membership, and a host of things viewed by politicians as intolerable. Negotiated with the participation of the Icelandic government, it required as much as 4% of Iceland's gross domestic product (GDP) to be paid to the United Kingdom (in British currency) from 2017 through 2023. The Netherlands would receive up to 2% of Icelandic GDP (calculated in Euros) over the same time frame. These loans were required to pay back the English and Dutch governments who had bailed out their country's citizens who had put their money in Icelandic banks. The private Icelandic banks had offered high interest rates which was a lure to savers. But as anyone knows from economics 101, with higher return comes higher risk.

As mentioned earlier, in 2010, Icelanders voted down (90%) the proposal (viewed by some as repudiating its debt) claiming that they were not responsible for liabilities of a private bank. Some estimates of the time to repay this debt are more like 30 years.

After a campaign to bring the population on board with the agreement, a second vote was taken. On 10 April 2010, Iceland voted again to reject the proposed government treaty by a margin of 60% to 40%. Spokespeople for the government have said that the people have spoken; no need for a third vote.

Glacier
Glacier

Capitalism and Lingering Questions

The interesting feature of this whole thing is that the response of this small island people brings into question some of the perceived principles of capitalism, and as a result, the way democratic capitalist governments around the world have been dealing with private debt bailouts.

What is one such question? The first one will come shortly.

Free market capitalists are fond of supporting a hands off approach to conducting business. Just about any interference by government is opposed. But in the case of Iceland, the people voted for a hands off approach, namely that the public had no responsibility to England or the Netherlands for risks taken by its citizens. In other words, no bailout of private banks. Iceland’s banks are now under government boards who are basically locating assets, determining how much creditors will receive through bankruptcy laws, and closing down business until such time as new private banks are chartered. And incidentally, Iceland banks paid for adequate deposit insurance under European law.

Rainbows Over Iceland
Rainbows Over Iceland

The Questions

Question 1: This issue is going to wind up in International Court, but if the Icelanders decide to continue to repudiate the “debt”, what will happen? They aren’t currently getting loans from anyone and limitations have been placed on investment overseas which results in keeping money at home in Iceland. So far so good compared to predictions.

Question 2: Will Britain or the Netherlands invade militarily and hold the people under marshal law while these two forcefully implement a skimming of Iceland’s gross domestic production? Invasion (explosives) will hardly do anything for gross domestic production, and occupation certainly will do nothing to help the GDP. British and Dutch governments would be directly overseeing private business in Iceland in order to exact payment of the lost depositors’ money. That’s a formula for failure.

Most capitalists love to quote Adam Smith, usually accepted as the father of modern economics. Smith was of the opinion that by dividing labor, stuff could be manufactured more cheaply. Through greater and greater divisions of labor, more and more products could be made. This would result in more and more money being earned, which would result in satisfying the needs of labor (including owners), with profit being turned back into industry for improvements in production. He saw this as a moral process and a pattern that was cyclical; a pattern that should provide the best life for the masses.

Question 3: How does accepting the terms of the proposed agreement help the cycle of production in Iceland for children and grandchildren? It puts a burden on those generations that Iceland feels, under law, they should not place on them.

Question 4: Even though the Brits and Dutch feel they “loaned” their people money that Iceland should repay, this all brings into question whether a sovereign nation has an obligation to repudiate debt when it becomes a tool to subjugate its people for generations? The two largest industries in Iceland are fishing and geothermal heat. Iceland is already in recession and has been since 2008.

Question 5: If there is a point at which it is the obligation of a people to reject a proposal to pay off a “debt”, does this apply to less wealthy nations who have revolving loans, loans to pay off prior loans with ever increasing interest rates and conditions? In Europe, for instance, Portugal, Greece, Spain, and Italy are at the point where any further loans will probably be conditioned on public property being used as collateral. So there would be the prospect of public lands being divided among banks, buildings being sold, lottery proceeds being promised to banks, access fees being promised to banks, etc. In essence, the banks would become the government. One could say that the people did not enter into the agreements, but the government did (I know, the people are the government because they vote, but we know how that goes). Under the current situation, a lot of economists think no matter what these countries do, they will never be able to pay off the debt. Is their a point when a debt becomes impossible to repay, and therefore whether or not a government should or shouldn’t have acted more prudently, the debt should be repudiated? Would these nations be better off to repudiate than to continue what has been going on with growing debt service and huge loans? Can what has been going on even continue before the loaner nations and/or debtor nations break?

Land of Ice and Steam
Land of Ice and Steam

No Conclusions

I don’t have answers to these questions, but Iceland’s refusal to pay for loans to English and Dutch depositors charges the imagination. The commonly held thinking about the consequences of repudiation come into question.

How Are the Icelanders Doing in 2012

Have You Any Interest in Visiting Iceland?

See results

Questions & Answers

    © 2011 John R Wilsdon

    Comments

      0 of 8192 characters used
      Post Comment

      • john000 profile imageAUTHOR

        John R Wilsdon 

        6 years ago from Superior, Arizona

        Thank you for the read. These are strange times. We shall see if the mouse that growled has any effect in the near future on global thinking.

      • James A Watkins profile image

        James A Watkins 

        6 years ago from Chicago

        Thank you for this fascinating article. I agree with the Icelanders. Methinks they did an honourable thing indeed. Bully for them! And bully for you!

      working

      This website uses cookies

      As a user in the EEA, your approval is needed on a few things. To provide a better website experience, soapboxie.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

      For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://soapboxie.com/privacy-policy#gdpr

      Show Details
      Necessary
      HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
      LoginThis is necessary to sign in to the HubPages Service.
      Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
      AkismetThis is used to detect comment spam. (Privacy Policy)
      HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
      HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
      Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
      CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
      Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
      Features
      Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
      Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
      Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
      Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
      Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
      VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
      PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
      Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
      MavenThis supports the Maven widget and search functionality. (Privacy Policy)
      Marketing
      Google AdSenseThis is an ad network. (Privacy Policy)
      Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
      Index ExchangeThis is an ad network. (Privacy Policy)
      SovrnThis is an ad network. (Privacy Policy)
      Facebook AdsThis is an ad network. (Privacy Policy)
      Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
      AppNexusThis is an ad network. (Privacy Policy)
      OpenxThis is an ad network. (Privacy Policy)
      Rubicon ProjectThis is an ad network. (Privacy Policy)
      TripleLiftThis is an ad network. (Privacy Policy)
      Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
      Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
      Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
      Statistics
      Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
      ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
      Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)