Iceland's president rejects repaying foreign depositors

ICELAND’S PRESIDENT Olafur Grimsson refused to sign a $5 billion (€3.64 billion) accord struck in December with the UK and the Netherlands to repay foreign depositor losses and said the bill must instead be put to a referendum.

Mr Grimsson, whose announcement comes after 44 of parliament’s 63 law-makers passed the Bill, said he was responding to popular demand for a plebiscite after more than 42,000 of Iceland’s 318,000 inhabitants signed a petition asking him to block it.

“There is support for the view that the people should once again, as before, act together with the parliament as the legislator in this matter,” Mr Grimsson said.

The announcement is the second time Mr Grimsson rejected an agreement to compensate the UK and the Netherlands for depositor losses stemming from the October 2008 failure of Landsbanki.

Mr Grimsson’s refusal to sign an earlier accord prompted Fitch to cut Iceland’s credit grade to junk. Moody’s and Standard Poor’s give Iceland’s debt the lowest investment grade.

Mr Grimsson’s decision threatens to sour relations with the UK and the Netherlands after the government persuaded the two countries to negotiate a new deal following last year’s rejection of the previous accord.

“We have taken note of the decision, negotiations are over and an initialled agreement is on the table,” Niels Redeker, a spokesman at the Dutch finance ministry, said yesterday. “We expect the Icelandic government to consider the new situation and to contact us about what will follow.”

The UK treasury said it also “noted” Mr Grimsson’s decision to block the latest agreement and that it looked forward to “clarification of the Icelandic position in the coming days”.

The latest so-called Icesave accord, named after the high- yielding accounts offered by Landsbanki, would cost the state about 47 billion kronur (€292 million), while the remaining debt would be covered using the proceeds of Landsbanki assets, the negotiating committee representing Iceland said in December.

Though the accord is “significantly improved,” it still carries “significant risk,” according to Valdimar Armann, an economist for Reykjavik-based asset manager GAMMA. A slide in the krona, currently shielded by capital controls, may triple the final cost, he said.

The central bank has said it plans to start easing capital restrictions, in place since the end of 2008, sometime after March. – (Bloomberg)