What will happen if Iceland refuse to bail out their banks?

The president of Iceland has refused to sign a bill bailing out Icesave, an Icelandic bank that owes $5bn to the UK and Netherlands, instead putting it to a referendum.

The referendum takes place this Saturday.

http://news.bbc.co.uk/2/hi/8441312.stm
What will the consequences be if the public, as expected, refuse to bail out the bank?

I say that Iceland should become Dutch property then.

The bank might fail, mostly. Anything beyond that is diplomacy, but we won’t see British naval Vessels steaming threateningly up towards iceland over the matter. Really, Britain can’t do much in response, although failure to pay up by Iceland might lead to it being walled off from British banking.

What about Iceland’s EU application?

Iceland won’t join the EU as NL and UK veto the decision. Other European countries refuse to lend Iceland money.

If the bill were rejected, I expect that Iceland probably would have more difficulty for some time in borrowing money on international markets or might be able to do so only at significantly higher interest rates. In addition, a rejection would seem to be problematic for the recovery of the country’s economy because the International Monetary Fund made loans to Iceland conditional on resolving the dispute, AIUI.

Having said that, my sympathies are completely with the Icelanders here. The debts in question were contracted by a private company, not Iceland’s government or any public agency, and I think it’s grotesquely unfair that Icelandic citizens should be saddled with the bill. IMV, U.K. and Dutch regulators should take much of the blame here for allowing Icesave to take deposits in their countries in the first place. In addition, Icesave was offering higher interest rates than competitors to attract deposits, and in finance, higher rewards = higher risk.

Yeah, but I wonder if Iceland’s deposit insurance regime kept pace with the amount of deposits coming in. Wikipedia seems to indicate that Iceland guarantees the lowest amount of deposits when compared to other EU nations.

I’d also be worried about Spanish and Greek bonds. Spanish banks are considered to have high levels of bad debt.
Since Iceland has its own currency, can’t they just inflate the kronur to wipe out their debts?
Or maybe, the Dutch and UK debtholders will take payment if the form of codfish?

My understanding is that one of the international banking treaties to which Iceland was a part required Iceland to back deposits made in its banks up to some minimum amount. Presumably UK and Dutch investors were aware of this treaty when they made their deposits.

How could the UK government have stopped Icesave from operating? On what grounds?

meanwhile, far away from fantasyland, the Icelandic people were getting piss rich off of this.

Seems to me that we will have an excellent case study to compare the effects of bank bailouts (US) vs no bailouts (Iceland).

Iceland already nationalized their banks (or put them into receivership, anyways). The measure being put to voters is to repay the UK gov’t for the money it lost covering the losses of Brits who deposited money in Icelandic banks. Its not really related to the US bank bailouts.

In other words, RTFA.

The Uk and Dutch taxpayers get another few billion pounds and euros stuck on the tab. BY this stage that’s little more than a rounding error in the UK’s national debt (Not so sure about the Netherlands situation).

New regulations are passed in the UK and the Netherlands limiting the ability of foreign banks to take domestic deposits.

Iceland’s financial services industry declines to a sensible size and many of the Icelandic bond-traders and bankers go back to fishing.

It has happened before.

Well, the results are in; 93% of Icelanders voted to reject the bill.

Do you mean a few Icelanders, or the country as a whole?

Basically, it’s going to financially cripple Iceland for the foreseeable future.

Icesave (et al.) was established as the product of a branch of the Icelandic banks, and therefore not under UK/Dutch/etc. control. Everything then went mammaries-skyward.

Iceland had agreements in place that it would have a prudential fund that would repay the first 20,000 Euro to every depositor. The fund hadn’t been properly established/regulated and therefore wasn’t in a position to follow through on its obligation. The UK/ND governments took the position that as this was a governmental obligation, the Icelandic government should make good. Iceland disagreed.

Excrement went down. The UK essentially declared this to be a piece of financial terrorism and, therefore, that Icelandic assets could be seized to compensate UK citizens.

As part of a negotiated settlement, Iceland agreed that the UK and Dutch governments would pay part of the guarantees and that the Icelandic government would pay them back at a certain point in the future. Everything cool?

Cool.

Now the Icelandic people have voted against this. No-one’s quite sure what this means, as the government’s already made commitments. Norway’s hanging off on making a desperately-needed loan until they know whether the Icelandic government’s going to pay them back. There’s a good chance that the IMF will feel that Iceland’s in default of commitments, too.

If it’s not sorted out pretty quickly, the Icelandic government will be effectively considered to be in sovereign default, which isn’t the sort of thing that you do lightly.

I suspect the end effect will be pretty small actually. The UK and Netherlands have already come back with a slightly better deal for Iceland, the gov’t will try and sell that to the Icelandic people as a victory and sign the agreement.

I’d expect so - Iceland will have to play ball - they’re too small to risk the problems that come along with defaulting to two EU governments that have shown a willingness to take the hard line. There’ll be a bit of (fairly meaningless) face-saving and Iceland will come to the party claiming to have slain the giants.