I've seen way too many comments like these on Daily Kos, spinning a false narrative of what happened in Iceland. This narrative states that Iceland owed a lot of money to other banks, the Icelandic government wanted to bail out the banks, the people protested and kicked them out, the new reformist government didn't put a dime into the banks, Iceland recovered, and the problem is solved. Examples:
They behave recklessly with state/provincial or national pension funds, lose billions (to each other; its how they keep score) and then expect to be rewarded by bailouts. They tell the government of Iceland, Greece, Ireland or Portugal "Either carry out our agenda of goodies, or we will bust you and leave you to the flies, and the voters will carve up your bodies. We of course will be sipping champagne in Monaco while you face street riots."
Iceland (which repudiated its banker's debt and is doing fairly well)
I understand why people would like a narrative like this. They see "greedy bankers" + "banking crisis" + "annoyed voters" and they fill in the gaps. But there's only one problem: the above narrative is just not true. Iceland pumped nearly a year's worth of GDP into their banks in the receivership proceedings in order to reimburse their citizens who had assets with the banks, and is in the middle of a protracted legal battle with other nations (not banks) -- a battle which their new, reformist government sought to avoid with a financial settlement, a battle whose outcome is still far from certain and whose consequences could be quite significant.
First off, some background. Iceland is an island nation formed by the unique combination of a mid-oceanic ridge and a mantle plume. (Ostensibly) founded by political exiles in 874AD fleeing the rule of king Harald Fairhair of Norway, the country has arguably the world's oldest national parliament.
Iceland is a small country, about the size of Kentucky. In its entire area, it has under 320,000 people -- less than the city of Santa Ana, California. 2/3rds of those people are in the Reykjavík area, and nearly all of the remainder on other parts of the coastline, with the interior a sparsely populated moonscape (indeed, so moon-like that the Apollo astronauts trained there). While it is a modern (and even trendy) first-world nation, Iceland is highly dependent on international trade. The country is self-sufficient on meat, fish, dairy, and (clean) electricity, but has to import most other goods.
This weakness has led to a history of Iceland being pushed around -- first, being ruled by a series of other Scandinavian nations up until World War II, and then afterwards, being bullied independently by its neighbors. A notable example of this were the three Cod Wars with the UK. The British, having trawled their own waters to near desertion, employed factory trawlers in Icelandic waters, as close as 4km to their shore, devastating their local fish populations. Iceland had to repeatedly fight them over the next two decades, several times with the conflict nearly turning into a shooting war, to reclaim their territorial waters. Only by threatening to close the NATO base in Keflavík during the height of the Cold War were they able to resolve the conflict in their favor for good and regain full control of their own territorial waters.
Iceland has witnessed a remarkable transformation from being one of the poorest nations in Europe to one of the wealthiest. First, the reclaiming of their fishing industry from the British gave them a sizeable fish and fish products export. This, however, has been of declining importance in recent years to two other industries: the use of their abundant clean electricity for the refining of imported aluminum ore (and other energy-intensive products), and the banking industry. It is the latter that is of interest here.
The start of the saga fits the narrative and will sound familiar to readers here. In 2001, the Icelandic banking industry was significantly deregulated. Just as happens anywhere else in the world, the industry started using its newfound freedoms to take risks in order to become exceedingly wealthy. In Iceland, they were quite successful. Icelandic banks -- most notably, Landsbanki -- significantly over-leveraged themselves. How over-leveraged? To the point that their foreign debt was six times greater than the GDP of the entire Icelandic economy.
The biggest financier of their expansion was a savings/investment program called Icesave. Icesave had depositors in Iceland, the UK, and the Netherlands -- a lot of small-dollar, personal savings/retirement fund style investments. The program was inherently risky. With the banking industry dealing in amounts so much larger than the national economy, the Icelandic banks could not rely on the government as a source of emergency loans, but being so integrally tied into Iceland's banking system, they could not rely on outside lenders, such as the UK, as a source of emergency credit. When the international banking crisis unfolded in 2008, it was inevitable that they would collapse in a major way.
This is when Iceland's troubles began.
Landsbanki, Glitnir, and Kaupþing went into receivership -- that is, they went into bankruptcy and were taken over by the courts for restructuring. Contrary to the narrative usually spun on this site, the Icelandic government did, to some extent, bail out the banks -- at least during the restructuring process. 30% of the equity for the newly restructured banks came from the Icelandic government, with the banks owing the government an amount nearly equal to the country's GDP. This was done in order to split the banks into "old" (international obligations) and "new" (domestic obligations) banks to allow for the reimbursement of Icelandic citizens who held investment accounts with them. Foreign investors recouped less of their assets as Icelanders as a consequence. This immediately created what was not a domestic squabble with the banks, as our crisis largely was to us, but an international conflict between governments.
The conflict with the Netherlands was generally handled more smoothly than with Iceland's old Cod War rivals, the UK. In October, the UK invoked an anti-terrorism law to seize Landsbanki assets in the UK, leading to an uproar within Iceland. The conflict has escalated and deescalated, but in general has revolved around its overseas account holders wanting to collect as much of their accounts as possible and the Icelandic government trying to pay as little as possible.
This came to a head twice in referendums in Iceland. The first referendum was on the Icelandic government accepting foreign loans so that it could afford to pay out the bank obligations to the citizens of foreign countries who had invested in Icesave and other failed programs. This would have involved 4% of Iceland's GDP being paid to the UK until 2023, and 2% to the Netherlands. Nearly a fifth of the Icelandic population petitioned the government not to agree to such a deal, and in the referendum, 93% voted against it.
This led to an increasing realization among the UK and the Netherlands that a reduced settlement would likely be required, and negotiations resumed. The new, reduced settlement likewise ended up in referendum. While initial polls were supportive, ultimately, it was defeated 60% to 40%.
(Above: A flare-wielding mob protests outside the president's residence)
It's quite true that Iceland's previous government had at best been asleep at the wheel, if not complicit in leading the country down the road to economic collapse. Iceland's former prime minister, Geir Haarde, first faced a huge wave of protests, resigned, and more recently, has been brought up on charges of negligence. But it should be noted that even the current populist reformer prime minister, Jóhana Sigurðardóttir, described the outcome of the most recent vote as "the worst option had been chosen". At least from the perspective of the UK and the Netherlands, Iceland still remains on the hook for their full obligations -- not a reduced settlement. The ESA concurs. With the issue of reduced settlements twice rejected by referendum, all sides seem to agree that the issue is now going to have to be battled out in the European courts. And it will be a tough battle. The main arguments used against Iceland will be that the government behaved in a discriminatory manner in violation of their treaties by giving preferential treatment to Icelandic citizens. An imposed settlement on Iceland would be very painful indeed, as Iceland is so reliant on international commerce to maintain their standard of living.
The key points to take away in all of this?
1) This was primarily an international conflict, not a domestic one, although it was brought about by domestic decisions.
2) Iceland did bail out their banks during the receivership process, contributing large amounts of money in order to soften the collapse for their citizens. They allowed the banks to fail, but only partly.
3) By and large, people weren't protesting the bailing out of the banks during the receivership process. They were protesting (at various times) government complicity in the crisis, insufficient punishment to those who caused the crisis, and the giving in to foreign demands on the country's debt obligations.
4) Iceland did not necessarily "win" by rejecting the referendum; they've simply kicked the ball down the road. We can all hope that it ends well, and that the right decision was made in rejecting it, but this crisis is not finished. The battle is now being waged in the EFTA court instead of at the negotiation table.
Ironically, the solution to the problem may be much simpler. Recently, it has begun to appear that the assets from the estates of the failed banks may be greater than previously thought. It now looks like these estates will be able to pay most if not all of the debt obligations on their own. One may hope that this works out to be the case and everyone can move along toward a resolution to this crisis.