The People of Iceland will decide by referendum whether they would like to bail out the British and the Dutch

I have been following the Icelandic story since the beginning and share with my loyal readers the various steps and also my personal opinion about the whole story (see here).

Well, I am happy to report today that it seems like democracy sometimes work. They, the People Of Iceland, have managed to get their president to block the agreement to bail out the Brits and Dutch and to vote via a referendum as to whether or not each of Icelanders should pay $42,000 to this end. In my opinion, the outcome is obvious: they have no business and no interest bailing these people, and nor should have their government agree to do so in the first place.

Note that the UK and Netherlands are getting sour, and that diplomatic relations might get tense, but if you really think about it, it means that these governments are not happy with the fact there is a working democracy in Iceland. Indeed, the UK government bailed out all their banks (that was the headline news) but in the process, it is actually the lenders to these banks who have been bailed out, while the UK has burdened their citizens with hundreds of billions of pounds worth of debt (that's the real fact that mainstream media won't tell you).

Feb. 21 (Bloomberg) -- Iceland’s President Olafur R. Grimsson will give his country’s voters the final say on repaying about $5 billion in debts owed to the U.K. and the Netherlands to cover depositor claims.

Grimsson’s announcement yesterday that he won’t sign a depositor accord struck between the three countries’ governments in December follows lawmaker approval of the bill. He told reporters he was responding to popular demand for a referendum after more than 42,000 of Iceland’s 318,000 inhabitants signed a petition asking him to block the accord. Forty-four of the Reykjavik-based parliament’s 63 lawmakers voted for the bill on Feb. 16.

“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,” Grimsson said.

Yesterday’s announcement marks the second time Grimsson has rejected an agreement designed to compensate the U.K. and Netherlands for depositor losses stemming from the October 2008 failure of Landsbanki Islands hf. His Jan. 5, 2010, refusal to sign a prior accord prompted Fitch Ratings to cut Iceland’s credit grade to junk. Moody’s Investors Service and Standard & Poor’s give Iceland’s debt the lowest investment grade.

Grimsson’s decision threatens to sour relations with the U.K. and Netherlands after Iceland’s 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 by phone yesterday. “We expect the Icelandic government to consider the new situation and to contact us about what will follow.”

The U.K. Treasury said it also has “noted” Grimsson’s decision to block the latest agreement and that it looks forward to “clarification of the Icelandic position in the coming days,” in an e-mailed statement.

The latest so-called Icesave accord, named after the high- yielding accounts offered by Landsbanki, would cost the state about 47 billion kronur ($404 million), while the remaining debt will be covered using the proceeds of Landsbanki assets, the negotiating committee representing Iceland said in December. The British and Dutch governments bore the initial cost of backing the depositor claims.

Though the December Icesave accord is “significantly improved,” it still carries “significant risk,” according to Valdimar Armann, an economist at Reykjavik-based asset manager GAMMA. A slide in the krona, currently shielded by capital controls, could as much as triple the final cost, he estimates.
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More than 350,000 British and Dutch Icesave account holders risked losing their savings when Landsbanki collapsed along with the rest of Iceland’s over-leveraged banking system in 2008. Moody’s, Standard & Poor’s and Fitch indicated last month they would consider raising their ratings on the island’s debt should Icesave be approved.

The 2008 failure of Landsbanki, Glitnir Bank hf and Kaupthing Bank hf led to the collapse of the currency and forced Iceland to go to the IMF to get a $2.1 billion loan, with a further $2.5 billion pledged by Nordic nations.