In Iceland’s Rejection Of Debt, A Sovereign Paper Warning

Iceland’s government created a plan to repay 3 billion euros due to the UK and the Netherlands because of the collapse of its banking system three years ago. Iceland’s citizens voted the repayment plan down, and the nation’s premier, Jóhanna Sigurðardóttir, warned of financial chaos in the island country.

The country’s decision to reject debt repayment may foreshadow what could happen in Ireland, Portugal and Greece. Each is in a different stage of financial rescue. The plan to help Portugal is not even in place. But, the pressure in each nation to reject austerity and the terms of rescues continues to grow.  The three larger nations may follow in Iceland’s footsteps.

The new government in Ireland argues  its bailout was done on unfavorable terms which included userous interest rates.  Some Irish politicians want bondholders to take haircuts on the value of their ownership in Ireland’s banks. Portugal’s government was forced out of power because of new national budget plans. The caretaker cabinet may negotiate a deal with the EU and IMF for money, but it is unclear whether the country’s electorate will accept it for long.

Iceland’s voters did the worst thing that the EU, IMF, and global capital market investors can imagine. They simply said the country will walk away from its obligations. If that triggers default, they must believe, that UK and the Netherlands will suffer the consequences and the local populace will not.

Iceland’s voters must not have looked into the future. If they had, the would have seen that the nation may not be able to raise a dime ever again. They have decided to risk that, and may well find the risk was worthwhile. The future of nations which could default on sovereign obligations might be brighter than supposed. A collapse of the financial fortunes of several European countries is still unthinkable which means financial support for them could continue indefinitely. Iceland’s voters may believe that the UK and the Netherlands will blink as the stand-off about what they are owed worsens. Those voters may well be right.

Douglas A. McIntyre