American economist Michael Hudson predicted in his article “Iceland’s debt repayment limits will spread” published in The Financial Times yesterday that other nations will follow Iceland’s lead on Icesave and limit the repayment of their states’ debts in accordance with their payment ability.

Copyright: Icelandic Photo Agency.

“Can Iceland and Latvia pay the foreign debts run up by a fairly narrow layer of their population?” Hudson asks. “The European Union and International Monetary Fund have told them to replace private debts with public obligations, and to pay by raising taxes, slashing public spending and obliging citizens to deplete their savings.”

“Resentment is growing not only towards those who ran up the debts—Iceland’s bankrupt Kaupthing and Landsbanki, with its Icesave accounts […]—but also towards the foreign advisers and creditors who put pressure on these governments to sell off the banks and public companies to insiders.”

“This political pressure came to a head over the weekend in Reykjavik’s parliament. The Althing agreed a deal, expected to be formalised on Monday, which would severely restrict payments to the UK and Netherlands in compensation for the cost of bailing out their Icesave depositors.”

“This agreement is, so far as I am aware, the first since the 1920s to subordinate foreign debt to the country’s ability to pay. Iceland’s payments will be limited to 6 per cent of growth above 2008’s gross domestic product. If creditors thrust austerity on the Icelandic economy there will be no growth and they will not get paid,” Hudson writes.

“There is a limit to how much foreign payment an economy can make. […] In taking this stand, Iceland promises to lead the pendulum swing away from the ideology that debt repayments are sacred,” Hudson concludes.

Click here to read more about Icesave and here to read Hudson’s article in full.

Click here to read a comment Hudson wrote in response to an article published on this website.