Iceland’s PM refuses to sign bill to repay $5bn

According to the BBC, Iceland’s president has vetoed a bank repayments bill. According to the article a quarter of the population of Iceland signed a petition to not sign the bill because they perceive the repayment to be a bailout of the failed Icelandic banks by taxpayers.

If the $5bn debt is made, the compensation owing from each Icelander would be around €12,000.00. The populist sentiment that the debts should not be repaid could come with significant consequences – politically and economically. On the other hand, Ecuador’s recent default has not caused systemic calamity (the greater risk) nor catastrophic loss of financial activity (the localized risk). In Ecuador’s case, however, the decision to default on their debt was a calculated move by their president, and I understand Ecuador had a plethora of private creditors. In contrast, Iceland is reneging on what have become characterized as obligations to two governments – the Dutch and UK.

Nevertheless, the Icelandic people are well educated, and now highly incentivized to overcome the ongoing fiscal challenges ahead of them. Regardless of the outcome of the repayment decision, I suspect Iceland will recover over the next 10 years or so (the typical delay in economic growth from a sovereign default being around 10 years), and the effect of this insolvency will likely stay rooted in Icelandic culture for some generations – Once they’ve recovered, I would not expect a repeat of the Icelandic default.

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