Iceland President Olafur GrimssonSTR
Iceland, the tiny island nation that briefly became a high-flying banking centre before imploding in the global financial crisis, now faces renewed turmoil that could kill hopes for quick EU membership and undermine its already feeble economic recovery.
The country is already a symbol of the worldwide economic crash for the boom-time excesses of its banks and their subsequent collapse. But now its critics warn Iceland could cement its status as an international financial pariah, after its president rejected a $5-billion (U.S.) deal to pay back Britain and the the Netherlands for losses suffered by depositors in one of Iceland's banks.
The move, which immediately prompted the Fitch ratings agency in London to downgrade Iceland to junk bond status, triggers a referendum on the proposed deal, a vote observers believe that Icelanders - angry at the heavy burden of bailing out their country's banks - will use to deliver a resounding "No." Some polls show 70 per cent of the country's 320,000 people reject the settlement.
Such a vote could imperil an International Monetary Fund bailout, delay a much-needed $2.6-billion in loans from its Nordic neighbours, and harm talks to bring Iceland into the European Union. It would also leave Iceland as an economic, not just a geographic, island, Britain warned.
"The Icelandic people ... would effectively be saying that Iceland does not want to be part of the international financial system," British Financial Services Minister Paul Myners said, adding the country would lose access to international funding and end up shunned as business partner.
Iceland's President Olafur Grimsson said he rejected the deal in order to allow Icelanders to have their say. The move is only the second time the largely ceremonial president, akin to Canada's Governor-General, has rejected legislation passed by Iceland's parliament. It came after Mr. Grimsson received a petition signed by 60,000 Icelanders - 20 per cent of the population - opposing the deal.
Sveinn Agnarsson, director of the Institute of Economic Studies at the University of Iceland, told The Globe and Mail in a phone interview from Reykjavik that if talks with Britain and the Netherlands drag on, the country's hopes for fast-track EU membership would be harmed.
"It could derail it," Mr. Agnarsson said. "... I have no idea how long this can drag on, really."
He added that there was a danger that the terms of any new deal could end up worse for Iceland than the current arrangement agreed to with Britain and the Netherlands.
But public emotions in Iceland are running high, he said.
"I think very many people in Iceland regard it as unfair that the nation as a whole should have to pay for the recklessness of Icelandic banks."
The size of the repayment scheme would see every Icelander owe the equivalent of an estimated $17,300 (U.S.).
One stumbling block in the rejected deal was the lifting of a condition that Iceland would not have to repay any more of its debt after 2024, he said, if it had not paid it off by then.