Debtor’s Island

The British and Dutch governments take the view that the taxpayers of Iceland have a duty to refund the amount promised by Iceland’s collapsed deposit insurance fund. The total claimed by the UK is £2.35bn and by both countries together €3.9bn. The latter is now some 50 per cent of Iceland’s shrunken GDP. In the UK context, this would be equivalent to a demand for £700bn. It is not hard to imagine how far Mr Brown would get with a suggestion that the UK should accept such a debt to refund depositors in foreign branches of bankrupt UK banks.
This, then, is the background to the decision by Olafur Ragnar Grimsson, Iceland’s president, to put the latest version of an agreement negotiated under duress to a referendum. Lord Myners, the UK’s City minister, has stated that if the Icelandic people were to reject the deal, they would “effectively be saying that Iceland does not want to be part of the international financial system”. After their recent painful experiences, Icelanders may wonder why that is so worthwhile. But without agreement to repay, a $10bn rescue plan funded by the International Monetary Fund and Nordic countries is now in doubt.

[I]n every civilised country it has long been accepted that there is a limit to the pursuit of any debts. That is why we have introduced limited liability and abolished debtors’ prisons. Asking a people to transfer as much as 50 per cent of GDP, plus interest, via a sustained current account surplus is extraordinarily onerous.