Should Norway bail out Iceland?

March 2, 2010

icesaveWhile not exactly pocket change, Iceland’s $5.5 billion Icesave debt to Britain and the Netherlands amounts to just 1.2 percent of the value of Norway’s offshore wealth fund. For Iceland, it’s more than $15,000 per citizen.

Given the two countries’ close historic links — Norwegian Vikings discovered the Atlantic island where people still speak a version of “old Norwegian” — speculation about Oslo coming to the rescue has Reykjavik licking its lips.

It would take some coaxing of the Norwegian electorate, but why shouldn’t Oslo help out its crisis-hit cousin, Icelandic newspapers are asking.

On muted idea has Norway buying Icesave debts and allowing Reykjavik to repay the loans on better terms than it has gained from the Dutch and British governments.

The standing terms, a 5.55 percent fixed annual rate for the next 15 years with no payments for the next seven years, are deemed unfairly high by most Icelanders and set to be overwhelmingly rejected in a referendum on the Icesave bill this Saturday.

Unlike Germany, which fears it will have to bail out fellow euro-member Greece by taking cash from its own people or issuing more debt, Oslo would simply tap into savings and ensure the loan gets repaid before its oil runs out in a few decades.

But finding bailout advocates in Oslo is proving tough.

Finance Minister Sigbjoern Johnsen has said that he would not reject outright any proposal for additional aid from Reykjavik, if such a request was made, but quickly added that Norwegian aid hinges on continued support by the IMF, which is overseeing Iceland’s economic reforms.

Norway is not in the business of rescuing countries back from the brink of economic collapse. Nor does it want to become Iceland’s main creditor because it could be forced into a de-facto policeman role, monitoring Reykjavik progress with tough reforms so that it will get its money back.

There are also concerns that unilateral help from affluent Norway, which already provides part of a $2.5 billion IMF-supervised loan with other Nordic countries, may trigger requests from other hard-up debtors seeking relief.

“If we bail out Iceland, who is to say that Greece won’t come knocking next and telling us that we really owe much in terms of our democracy and culture to the ancient Greeks?” asked one Oslo-based economist. “Lots of Norwegian pensioners live in Spain, so we have interests there too.”

What do you think, should Norway share its oil savings with Iceland?


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This is the same nonsense as the AIG bailout: IKceland shouldn’t have bailed out its banks, now equallyit itself shouldn’t be bailed out. Can anyone pray tell what is won if a state bails out its insolvent banks only to the suffer the same fate? And then the next state repeating the foolish act?

Posted by CrisisMaven | Report as abusive

Perhaps Norway should consider a mortgage-style bailout with hidden rate hikes and fees. After the inevitable default, Iceland has to foreclose the country. Hey, it works for U.S. banks.

Posted by DaveBurke | Report as abusive

In Germany we talk alot about the mess that Greece has put the EU (and thus Germany!) into.

But I think it is wrong to compare the Greek situation to the situation of the Icelandics. In Iceland, they have always had their finances in order, they have not lied about anything and before the international financial crises, the state of Iceland didn’t have any debts (which is a remarkable success).

After reading John Kay’s opinion in the Financial Times ( -11df-9775-00144feab49a.html) I can’t see why Iceland how the Icelandic population is to blame. The Dutch and the British governments are to blame. There is no debt for Iceland to pay, because this internet banking fiasco was never theirs to pay.
So as tho the question above, then my answer is no, Norway should not pay the Dutch and the British Government the money for Iceland, because it would be shameful to let the Dutch and the British get away with this bullying of a small country.

Posted by Gerhard1961 | Report as abusive

Have to agree that John Kay laid the fault very clearly with the lax regulatory oversight, probably in sync in fact with greedy bankers, and what you’ve suggested of the possibility for other debtors to then seek Norway’s assistance, if that happened would have set yet another precedent of creating another ‘moral hazard’ in the financial system, wouldn’t it? And, as you refer to, in the big picture Iceland’s situation isn’t posing anywhere near as serious a threat of contagion say, as might the situation of others? Again, going by Kay’s opinion, it would seem better for everyone for the bankers and bullying countries to take the hit here, since it appears to be due for them.
Then, might just admit that as soon as seeing this story developing, the thought of the Scandinavian countries and especially Norway having the means to assist Iceland did immediately come to mind. Culturally it makes sense doesn’t it? You can note how the Scandinavian countries + Finland often share their diplomatic resources as well.
Frank, really personal opinion, is that I’de like to see them “stiff” the IMF at this point as well, I’de like to see a made in Scandinavia solution come through Iceland’s travails, because country by country and as a bloc they are good at this kind of thing aren’t they, they appear in many respects to be among the most prudently as well as seriously progressively run societies and possibly may be able to demonstrate a first solid solution to this mess, for others to be considering?

Posted by Reuty | Report as abusive

I am confused! How has Iceland got a debt to Holland or the UK? Individuals and in the UK’s case Local Authority gambled on high returns and no tax at home for their money by investing in Icelandic banks. These went through because they had bought worthless sub-prime exposure sold by US banks.
GovUK then had the usual knee jerk reaction, look good for the sound bite, promise them their money back. Why? They did not invest in UK to pay UK taxes. Therefore if any one needed to bail them out, and why should they be bailed out (as they took the higher risk for higher gain)? It should be Iceland direct. The lamentable thing is the govUK was too dumb to charge them the avoided tax first.

Posted by Confusus | Report as abusive

[…] about the future of Iceland; whether they would join the European Union, be ‘bought up’ by Norway or collapse altogether. We see now that none of this happened. Instead, Iceland is emerging from […]

Posted by Why Do I Love Iceland? | Breki Tomasson | Report as abusive