To (Re)Pay or Not to (Re)Pay

A rather interesting article appeared a few days ago on the Bloomberg news wire. I for one did not realize that Iceland was having a referendum on whether or not they should repay the debt to the British and Dutch governments they incurred when their banking system had to be bailed out recently. The Icelandic citizens will be able to vote to either repay the debts of about $16,000 per citizen or to refuse to pay back their creditors. The issue here is two fold. First, what happens if the money is not paid back; and, secondly, should the money be paid back.

Obviously, there will be serious ramifications should the repayment measure be defeated. As the author pointed out, Iceland has an application to join the European Union. This would need to be approved by both of their main creditors, the UK and the Netherlands. It is fairly simple to assume that both of these nations would reject expanding the EU if their money is not repaid. Being unable to join the EU would be a blow to Iceland's attempts to expand its' economy and further integrate itself with the rest of Europe. Likely, this would result in slower growth or even economic stagnation. Additionally, Iceland will have an incredibly difficult time issuing new debt. Their credit ratings would crash and they would be forced to pay usurious interest rates on any debt they issued. Of course, this is assuming anyone would loan them money again. If unable to issue new debt, they might be forced to devalue their currency and open their people up to the threat of inflation.

The crucial part of this vote is should the money be paid back to creditors - is it in the interest of Icelandic citizens to allow their government to pay its debts? The article's author makes a three-fold case that the proper vote should be 'no'. His justification is that the debts were not the Icelandic peoples' fault. Instead, the blame lies with the bankers, the foreign governments and the depositors whose accounts needed to be repaid. The bankers took excess risk, the foreign governments wanted to bail out their own citizens (most of the failed deposits were held by UK and Dutch citizens) and the depositors also took risks by putting their money in non-guaranteed, high yield accounts. The problem with this justification is that it was still the Icelandic government who took out a loan to cover their banks' debts. The government did not have to do this, and when it did, it agreed to pay back the money.

Unfortunately for the Icelandic people, though it may be very expensive, the costs of not paying back their debt might be prohibitive. By voting 'no' they would, essentially, push their country away from European integration and borrowing money in the near future. Iceland would be forced to maintain a self sufficient and independent economy. Yet, by voting 'yes' the Icelandic people would force huge sums of their wealth abroad to creditors. This move would weaken the government and force it to take out additional debt as much of their revenue would be pushed to its creditors. However, a 'yes' vote would likely make joining the EU infinitely easier as they would have the support of the UK and the Netherlands.

I, for one, am grateful that I do not need to vote in such an election. The choices for Iceland and essentially lose-lose. There is no way for them to 'win' in this election. They are either forced to separate themselves from the EU and international credit markets or to impoverish themselves by paying huge sums to settle what is a questionable debt. If I was forced to vote, I would probably choose the 'yes' option. The debt was taken out by the Icelandic government, so it should be paid back by the government.