Iceland has reached a tentative agreement with the United Kingdom and the Netherlands to recover the losses the two nations incurred as a result of the collapse of Iceland’s banking sector in 2008. Iceland’s three largest banks were nationalized by the Icelandic government as a result of their deteriorating liquidity caused by the global capital market freeze in 2008. Iceland was unable to cover the losses of foreign investors, but the United Kingdom and the Netherlands reimbursed their own citizens. The three nations have been attempting to reach a repayment agreement ever since. A previous agreement, with a proposed interest rate of 5.5%, was overwhelmingly rejected by 93% of Icelandic voters in March of 2010. The current proposal includes lower interest rates of 3.3% and 3% on the payments to the United Kingdom and the Netherlands, respectively. The repayments would also be limited to 5% of Icelandic government revenues. Iceland’s emergency aid package from the International Monetary Fund (IMF) is contingent on finalizing a repayment plan and Iceland has no realistic chance of joining the European Union (EU) without a repayment plan. The new agreement must be approved by the Icelandic parliament and by President Olafur Ragnar Grimsson. If President Grimsson once again vetoes the proposed agreement as he did in January of 2010, the issue would be subject to another public referendum.

QUESTIONS FOR DISCUSSION:

1. One of the reasons why the first proposed repayment plan was rejected by the Icelandic voters in March 2010 is that many Icelanders believe that they should not be forced to carry the financial burden caused by the greed and the mistakes of the bankers who ran Iceland’s banks. Under the terms of the original repayment plan, the estimated repayment would cost nearly $20,000 for each Icelander. What are the advantages and disadvantages of Icelanders once again rejecting the revised repayment terms? Consider both the short-term and long term implications.
2. Iceland applied to join the EU in July of 2009 as a result of the hardships caused by the current economic crisis. Iceland wants to join the EU to be able to adopt the common currency, the euro, but to join it would have to cede control over aspects of its fishing industry. Is joining the EU and adopting the euro the best alternative for Iceland?
3. The countries of Iceland and Ireland presently provide an intriguing contrast in how a government should respond when its nation’s overheated financial industry is in trouble. Ireland’s government guaranteed its financial sector in 2008 while Iceland let its banks fail. Ireland’s taxpayers now have to pay a heavy burden for this government guarantee and Ireland’s budget deficit is expected to surge to 32% of the nation’s gross domestic product. Considering both the short-term and long term implications, was letting its banks fail in 2008 the best alternative for Iceland?

SOURCE: cnn.com. (Retrievable online at: http://edition.cnn.com/2010/BUSINESS/12/09/iceland.bank.deal.ft/index.html?hpt=Sbin)

RELATED ARTICLE: Iceland Depositor Agreement Still Faces Hurdles, Sigfusson Says. (Retrievable online at: http://www.bloomberg.com/news/2010-12-10/iceland-foreign-depositor-deal-still-faces-hurdles-finance-minister-says.html)

Related video clip from November 26, 2010 available at: http://www.bloomberg.com/video/64807970/