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Payback time

February 16, 2011

More than two years after the near collapse of Iceland's financial system, lawmakers have finally agreed to settle outstanding debt with the Dutch and British governments over the failed bank Icesave.

Icecube with eurobill
Icesave offered high returns to Dutch and British depositorsImage: Fotolia/Okea

The Icelandic parliament on Wednesday voted to approve a deal to repay the United Kingdom and the Netherlands for the failed bank Icesave, clearing one of the final hurdles to settling the dispute that has lasted more than two years.

The 44-16 vote, with three lawmakers abstaining, sends the bill to President Olafur Ragnar Grimsson, who has not yet said whether he plans to sign it.

In March 2010, Grimsson vetoed a previous deal with the Dutch and British governments that was narrowly passed by parliament. The bill went to a public referendum, with 93.2 percent of Icelanders voting "no."

Icelander reads referendum pamphlet
The last proposal was put to a referendum, failing by 93.2 percentImage: dpa

However recent polls suggest slightly more than half of Icelanders support the current settlement. It also won votes from the center-right opposition Independence Party, which vehemently opposed the previous bill.

"Even though people here aren't particularly happy with the result, this is an agreement that most people seem that they will be able to live with," Eirikur Bergmann, political science professor and director of the Center for European Studies at Bifröst University in Iceland told Deutsche Welle. "It seems to be a necessary part of the resurrection of the Icelandic economy."

An online petition urging the president to veto the bill was introduced last week, gaining more than 32,000 signatures - or one in ten Icelanders - by the time parliament held its vote. But the broad support in parliament and questions surrounding the authenticity of the petition make a veto unlikely.

More favorable terms

Icesave was an Icelandic online bank that operated in the Netherlands and Britain, offering depositors high returns for savings accounts. It collapsed along with its parent bank Landesbanki in October 2008 amid Iceland's financial crisis.

icesave logo
Icesave collapsed with its parent bank Landsbanki

The Dutch and British governments paid their citizens back for insured deposits in Icesave accounts, and later demanded that Iceland reimburse them.

Negotiations produced two earlier proposals voted on by Iceland's parliament, but the most recent is by far the most favorable.

The agreement keeps the amount for Iceland to repay at 3.9 billion euros ($5.3 billion) but gives a more gradual timeline and lower interest rates. Iceland is to repay 1.3 billion euros to the Netherlands at 3.0-percent interest between 2016 and 2046, and the remainder to the UK at 3.3-percent interest.

Breaking even

Jon Danielsson, an Icelander and reader in finance at the London School of Economics, said the slowly reviving Icelandic economy contributed to the better repayment terms. A sell-off of Icesave's assets also generated more revenue than previously expected.

But he said the most important reason for the change in conditions was a softened stance by the British and Dutch governments, and an acceptance that they would ultimately break even with their money.

"The last deal would mean that the governments of the UK and Netherlands would make significant profits out of the settlement with Iceland," Danielsson said. "However that settlement would have cost up to six percent of GDP of Iceland. It would have imposed significant costs on the country."

EU and Icelandic flags
Icelandic support for EU membership has wavered amid the Icesave disputeImage: dpa / DW-Fotomontage

EU accession

In July 2010, Iceland started negotiations to join the European Union. The country is progressing at a relatively fast pace, but up until now the Icesave dispute has been an effective roadblock to accession.

"The Union itself says the Icesave settlement does not affect membership; the UK has said the same," said Danielsson. "But the Netherlands has repeatedly said they would veto membership unless this is settled. So from that point of view, this would mean that the Netherlands is no longer vetoing Icelandic membership."

Bergmann added that the pressure from the European Union on settling the Icesave repayments lowered support among Icelanders for joining the bloc.

"For a long while the Icesave dispute really put Icelanders off from wanting to join the EU," he said. "[But] the general sentiment is that it will be resolved... Gradually the support has been rising again, and now there is a majority in favor of continuing the process."

Author: Andrew Bowen
Editor: Andreas Illmer

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