Another European country is about to be cut to junk by the rating agencies, after a whopping 93% of Iceland voters turned down the ironically named Icesave bill in a historic referendum, which would have saddled citizens with an additional $16k in debt to compensate the UK and Holland with a $5.3 billion note for the failure of Landsbanki. The vote failure, which has already prompted Fitch to downgrade the country to junk, and is now sure to see Moody's and S&P follow suit, has left many to believe that a government crisis is now imminent. Another implication is that an IMF-led loan is now in limbo, demonstrating that the international bailout watchdog is truly powerless when the people of the bailout recipient nation want to have nothing to do with the international rescue circuit.
What is amusing is that the disconnect between what governments think their people want and what people actually want has become unprecedented:
The Icesave deal passed through parliament with a 33 to 30 vote majority. Grimsson blocked it after receiving a petition from a quarter of the population urging him to do so. The government has said it’s determined any new deal must have broader political backing to avoid meeting a similar fate.
Icelanders used the referendum to express their outrage at being asked to take on the obligations of bankers who allowed the island’s financial system to create a debt burden more than 10 times the size of the economy.
The nation’s three biggest banks, which were placed under state control in October 2008, had enjoyed a decade of market freedoms following the government’s privatizations through the end of the 1990s and the beginning of this decade.
“This referendum is very peculiar and without any parallel in Iceland’s history,” said Gunnar Helgi Kristinsson, a professor of political science at the University of Iceland, in an interview.
And in Iceland, the people not only don't care about what the IMF or the UK think, but they are certainly making their opnioins against the executives of the failed bank felt, in a way that Americans only wish they could.
“Ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers,” said President Olafur R. Grimsson, whose rejection of the bill resulted in the plebiscite, in a Bloomberg Television interview on March 5.
Protesters have gathered every week, with regular numbers swelling to about 2,000, according to police estimates. The last time the island saw demonstrations on a similar scale was before the government of former Prime Minister Geir Haarde was toppled.
Icelanders have thrown red paint over house facades and cars of key employees at the failed banks, Kaupthing Bank hf, Landsbanki and Glitnir Bank hf, to vent their anger. The government has appointed a special commission to investigate financial malpractice and has identified more than 20 cases that will result in prosecution.
In the meantime, Iceland, which as recently as 2007 used to be one of the richest countries on a per capita basis, is seeing the net wealth of its citizens sublimate.
The island’s economy shrank an annual 9.1 percent in the fourth quarter of last year, the statistics office said on March 5, and contracted 6.5 percent in 2009 as a whole.
Household debt with major credit institutions has doubled in the past five years and reached about 1.8 trillion kronur ($14 billion) in 2009, compared with the island’s $12 billion gross domestic product, according to the central bank. Icelanders, the world’s fifth-richest per capita as recently as 2007, ended 2009 18 percent poorer and will see their disposable incomes decline a further 10 percent this year, the central bank estimates.
Grimsson, who has described his decision to put the depositor bill to a referendum as the “pinnacle of democracy,” says he’s not concerned about the economic fallout of his decision.
At this point we will take the opportunity to remind readers once again that the biggest fan of the Iceland experiment was none other than the worst and most full of methane Fed board member in the history of the US Central Bank, Fred "Iceman Napoleon" Mishkin, who not surprisingly has made cheerleader-central CNBC his newest media forum, as he conducts yet another monetary calamity lemming cascade off the cliffs, this time not of Reikjavic, but first of Dover, and then of D.C. (the analogy would be more appropriate if D.C. actually had any cliffs as opposed to 50% underwater housing, and an administration full of hyperinflated hot air).