Iceland president under pressure to stop Icesave payments

Monday, 04 January 2010 09:10

By Matthew West

The Icelandic president is under pressure from protest groups in his country to stop payouts to the British and Dutch governments in compensation for the collapse of the Icelandic banking system.

Yesterday Iceland's parliament narrowly approved a bill that paves the way for Britain and the Netherlands to recoup the £3.4 billion lost by customers of the online savings bank Icesave, which collapsed under a mountain of debt in 2008.

However, the deal is deeply unpopular with Icelanders and they want the president to veto the bill. Ólafur Ragnar Grímsson refused to sign off legislation passed by the Icelandic parliament for the first time in decades after around 60,000 (a quarter of Iceland's voters) signed a petition urging him not to approve the bill.

He is now expected to decide whether to pass the bill or veto it by Saturday. If he does veto the bill it opens the door to a very lengthy and expensive legal process in the European court. Britain could also oppose Iceland's membership of the European Union.

Under the bill passed yesterday the British and Dutch governments will receive payments over 14 years from the Icelandic government to reimburse them for the compensation they paid out to more than 320,000 of Landsbanki customers.

In the UK, deposits of up to £50,000 were guaranteed by the government under the Financial Services Compensation Scheme, though many savers loss far more.

Savers were initially attracted to high interest rates offered by online Icelandic banks in the run-up to the credit crisis in 2008. Landsbanki operated Icesave, Kaupthing and Glitnir which all collapsed after the wholesale banking markets - where the banks funded themselves on cheap debt - imploded after the failure of Lehman Brothers.

Kaupthing's savings arm, Kaupthing Edge, was later rescued by ING Direct after the Financial Services Authority closed its London operations.

Yesterday's vote was backed by just 33 Icelandic MPs, with 30 voting against the measure. The £3.4 billion represents 40% of Iceland's total gross domestic product, while a poll in August showed that 70% of Iceland's 320,000 citizens were against the Bill.

As well as a number of savers initially losing vast amounts money, the row with the UK and the Netherlands held up International Monetary Fund (IMF) payments to assist Iceland's battered economy. Iceland has now signed up to a $10 billion IMF-sponsored aid package.

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