Iceland Referendum--New Risks, Old Story

Officials have been trying to come up with some way to avoid the weekend referendum in Iceland but it looks likely those efforts have been in vain. Polls show that nearly three-quarters of the Iceland voters will reject the deal that parliament had approved that would pay the UK and the Netherlands 3.9 bln euros (~$5.3 bln) to reimburse the third of a million savers that lost money when Icesave bank failed.

Iceland's GDP is about $17 bln. The payment turns out to be 30% of Iceland's annual GDP. The population of Iceland is only around 320k. The payment is equivalent to roughly $16.5k per person. Originally proposed, the money would be paid over the a 14-year period and would be about $100 per month per person until 2025.

A rejection of the plan risk isolating Iceland further. The UK and the Netherlands are effectively blocking the IMF's $2.1 bln aid package. The political has become personal as Iceland appears particularly perturbed by the UK decision to invoke anti-terrorist laws to freeze UK savings in a large Iceland bank that failed.

Perhaps in an attempt to underscore what is at stake, Iceland's Economic Minister warns that the lack of IMF aid could mean that economy contracts 5% this year rather than the 2% currently estimated.

The likely rejection could also pose an obstacle to Iceland joining the EU.

The dispute and the failure to come to a mutually acceptable resolution underscores the fragmented state of Europe. This of course this is taking place amid the brinkmanship between Greece and Europe as well. Three rounds of budget cut in Greece in three months and it still does not seem sufficient to a single euro or guarantee from Europe. Greece's PM made it clear yesterday that he reserves the right to go to the IMF, which would further illustrate the institutional weakness of Europe. Germany's Fin Min Schaeuble was quick to say that Merkel's meeting with Papandreou tomorrow will not result in aid commitments. Then over the weekend Papandreou will meet with France's Sarkozy, who seems slightly more sympathetic, but can do little but play good cop to Merkel's bad cop (a no cost strategy).

At the same time France's decision to sell four amphibious assault ships to Russia, announced this week, has been broadly denounced by the Baltics. It is largely unprecedented for a NATO member to sell significant weapons to Russia. The recent collapse of the Dutch government over its commitment to troops in Afghanistan is yet another example of fissures within Europe and the seemingly disconnect between the political elite and the general public. Some reports suggest the Iceland government may be vulnerable in the aftermath of the referendum.

This provides a soft foundation for the euro. Even with what appears to have been a successful placement of Greek bonds today, the euro has failed to sustain upward momentum. ECB Trichet's press conference poses immediate event risk and then tomorrow's weather skewed US employment report.
Iceland Referendum--New Risks, Old Story Iceland Referendum--New Risks, Old Story Reviewed by Marc Chandler on March 04, 2010 Rating: 5
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