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(Phatforums Blog/ BBC News) – The UK and Dutch governments are preparing court action against Iceland to recover 4bn euros (£3.5bn) lost when the country’s bank system collapsed.

It follows a referendum in Iceland which rejected a repayment plan.

The UK said it was “disappointed” by the “no” vote, while the Dutch finance minister said the time for negotiations was “over”.

Iceland’s Finance Minister Steingrimur Sigfusson said that resolving the row in court would take at least a year.

The UK and the Netherlands say they are owed the money following the collapse of Icelandic savings bank Icesave. British and Dutch depositors were bailed out by their governments, which are now demanding their money back.

Iceland held a referendum at the weekend on a repayment plan, but with about 90% of the vote counted, 59.1% were against and 40.9% in favour.

Johanna Sigurdardottir, Iceland’s Prime Minister, said the rejection meant “the worst option was chosen” and had split the country in two.

The UK’s Chief Secretary to the Treasury, Danny Alexander, called the decision “disappointing” and said the matter would go to an international court.

Speaking on the Andrew Marr programme, he said: “It’s obviously disappointing… We tried to get a negotiated settlement.

“We have an obligation to get that money back, and we will continue to pursue that until we do… We have a difficult financial position as a country and this money would help,” he said.

Dutch Finance Minister Jan Kees de Jager said he would be consulting Britain about taking further steps against Iceland, but added that the matter would likely end up in court.

“I am very disappointed that the Icesave agreement did not get through. This is not good for Iceland, nor for the Netherlands.

“The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide,” Mr de Jager said in a statement.

The issue will now be referred to an international court, the European Free Trade Association Surveillance Authority.

Analysis
Joe Lynam BBC News

The Icelandic people were damned if they did and damned if they didn’t. It looks as if they still couldn’t stomach the idea of paying off the debts of privately owned banks – even if the revised deal was considerably more generous.

The consequences of this referendum vote is that Iceland’s years in the financial wilderness could be extended much further.

Moody’s and other ratings agencies look set to downgrade the country even further, making it prohibitively more expensive to borrow on the open markets.

Iceland’s bid to join the EU will be paused or even vetoed by Britain and the Netherlands. And the tiny Atlantic economy is facing legal action in the EFTA court which might force it to pay up sooner than planned and at a punitive interest rate.

Democracy doesn’t pay if you’re an Icelander.

Iceland’s Finance Minister Steingrimur Sigfusson told a news conference that the dispute with Britain and the Netherlands would take at least a year to resolve in court.

“My estimate is that the process will take a year, a year and a half at least,” he said. However, some analysts believe the legal process would take considerably longer.

He added that the outcome of the vote was clear. “I think it’s very hard to interpret this in any other way than the fact that the Icelandic people are not prepared to accept payments or shoulder the burden unless there is a clear legal obligation to do so.”

Iceland’s Landsbanki bank ran savings accounts in the UK and Netherlands under the name Icesave and investors there lost 4bn euros (£3.5bn; $5.8bn).

When it collapsed in 2008, the British and Dutch governments had to reimburse 400,000 citizens – and Iceland had to decide how to repay that money.

‘Such a revulsion’

Iceland’s parliament had backed the deal, but President Olafur Ragnar Grimsson refused to sign it, triggering the referendum.

A previous deal, imposing a tougher repayment regime, was rejected in a March 2010 referendum by 93% of voters.

Finance Minister Steingrimur Sigfusson appeared to rule out a third attempt to persuade voters to accept a repayment deal.

“I think we’re getting a very clear sign from this referendum, that further negotiations are ruled out. No use in trying that again.”

Backers of a “yes” vote had argued the repayment deal was the best way to resolve the issue in terms of cost and risk to Iceland.

The “no” camp said the Icelandic taxpayer was under no legal obligation to pay for a private bank’s losses and that the deal would put a heavy burden on the nation.

Longer period, lower interest

Under the terms of the rejected deal, Iceland would have paid the money back with 3.3% interest to the UK, and 3% to the Netherlands, over 30 years between 2016 and 2046.

Under the previous proposal, the money was to be paid back with 5.5% interest between 2016 and 2024.
Prime Minister Johanna Sigurdardottir Prime Minister Johanna Sigurdardottir: “Disappointing numbers”

The actual cost to the state was expected to be much less than the 4bn euros owed, as the government said most of the repayment would come from selling the assets of Landsbanki.

The government has said it did not expect the cost to exceed 50bn kronur (£168m).

Analysts say a resolution of the issue is vital to Iceland’s prospects for recovery because it would allow the country to return to the financial markets to fund itself.

Solving the dispute is also seen as key to Iceland’s chances of joining the EU.

Iceland’s three main banks collapsed within days of each other in October 2008.

The government compensated Icelandic savers, but overseas customers faced losing all of their money.

The issue sparked a diplomatic row between Iceland and the UK, and created uncertainty over Iceland’s economic recovery.

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