Has the Icesave money been flushed down the waterfall?

Iceland is apparently a startling beautiful place. And up until quite recently, it was an attractive place to deposit money if you were a local authority. Indeed, the treasury included it on a list of, ahem, approved destinations for local authorities to save, such was the benefit of the interest rates on offer at places like Landsbanki.

Unsurprisingly, many local authorities did so – although not Woking – and when the whole thing went under in 2008, the price of local authorities’ silence on the Treasury’s advice was the government not blaming the councils themselves for incompetence. Many councils, in fact, sussed that there was something wrong in Iceland many months ahead of time but couldn’t get their money – tied in for periods of a year or more – out in time.

As well as councils, around 300,000 depositors in the UK, Netherlands and Germany had Icesave accounts that were guaranteed by the government – it is compensation for this bailout that is being questioned by Icelandic president Olafur Ragnar Grimsson. His government led by prime minister Johanna Sigurdardottir wants to do the right thing by paying back the British and Dutch governments nearly £3.1bn but he has decided the Icelandic people should have a say in a referendum instead.

They are likely to vote against because they believe that the country shouldn’t pay back the money to foreigners that its incompetent and dubiously run banks – the foreign debt of the biggest three was more than five times Iceland’s GDP – took from them in full understanding of their precarious position. The reducing value of the Icelandic currency was also to blame – somewhat more the fault of the people of Iceland than the people of Britain.

What this issue has to do with the people of Iceland is unclear. This is nothing less than nationalism being the last resort of a bankrupt nation and a president keen to gain some political capital out of his government’s stupid actions. Iceland has never been a centre of world finance and was scarcely able to sustain such highly leveraged financial devices – at least the City of London has that excuse.

If Iceland refuses to pay back what it owes to the people who lost out in Icesave, it will actually lose out further in the long term. It is difficult to see how it could ever enter the EU and investment in that country would be very, very hesitant in the future. Icelandic banks would remain a byword for loss and injustice along with the likes of BCCI and Barings.

Let us hope that the President and his people drop the patriotic ardour and start to understand the unfortunate consequences of neighbourly disputes.