Iceland's Government on Verge of Collapse, Again

Today, Iceland announced it will start its referendum on January 28th to determine whether or not it will pay back its lenders, the UK and The Netherlands. The vote will be finalized on March 6th. Iceland’s already been considering how to potentially ditch its British and Dutch debts for some time. As we described earlier this month:

“In 2008, when the Icelandic economy imploded and Landsbanki’s Icesave division went under, the UK and the Netherlands rode to the rescue of their own citizens caught up in the collapse by reimbursing their lost deposits. The Icelandic deposit insurance fund had promised to make EU account holders whole in the event of a bank failure… but it didn’t. Hence the British and Dutch insistence that Iceland now pay up.”

The current referendum plan is nearly certain to block the repayment, and the consequences could be catastrophic for the government of the island nation. According to Bloomberg:

“‘The risk is there that the program will fall apart and with that, the downside risks would increase very considerably,’ Moritz Kraemer, S&P’s managing director for Europe, the Middle East and Africa, said in a Jan. 15 telephone interview. If the outlook for the bailout program doesn’t improve, ‘it’s quite possible’ the government will collapse.

“President Olafur R. Grimsson’s Jan. 5 decision to block a U.K. and Dutch depositor accord called into question the continued disbursement of a $4.6 billion loan from the International Monetary Fund and the Nordic countries that Iceland needs to avert default. Fitch Ratings cut the island’s credit grade to junk the same day and S&P said it may lower its BBB- rating to non-investment grade within a month if the rejection halts bailout flows.”

With about 60 percent of Icelanders opposed to the deal terms it’s unlikely the bailout program will be able to get back on track any time soon… if it can at all. Read the complete coverage at Bloomberg of how Iceland is one more industrialized nation with considerably rising credit risk.