Political scientist loses the plot

Olafur Grimsson, the president of Iceland

In 1976 I was attending the conference of the International Political Science Association in Edinburgh and a tall man bounded up and introduced himself to me as 'political science in Iceland'. Indeed, Olafur Grimsson had been the first person in Iceland to obtain a PhD in political science from the University of Manchester's Department of Government then under the tutelage of the formidable Professor W J M Mackenzie.

Olafur Grimsson has for many years been the president of Iceland. In many ways it is a figurehead position but now he has used his reserve powers to overturn a 33-30 decision by the country's parliament (located in a singularly undistinguished building) to agree a plan to pay back money owed to Britain and the Netherlands as a consequence of the collapse of the country's banks.

The continuation of the left-of-centre government is now endangered, but of broader significance is the fact that the decision will now have to be put to a national referendum. Many Icelanders feel that they are not personally to blame for the mistakes made by their over ambitious bankers and that as a country of 300,000, they are being bullied by Britain in particular. As we saw during the Cod Wars, they are very good at mobilising sympathy.

Lord Myners, City minister, said that Iceland would 'effectively be saying that it did not want to be part of the international political system.' What would that mean in practice? Britain could veto Iceland's bid to join the EU, but it is far from clear that the country's citizens want to join anyway.

More seriously, it could block some of the IMF loans which are to be made available as some of them have conditions attached which require arrangements to be made for debts to be settled.

One can feel some sympathy for this beautiful country. Its citizens have a quiet pride in its unique identity, but can also be roused like the streams of lava which break through its surface from time to time.

One could look at the terms of the repayment, but these are quite favourable as Iceland has been seven years' grace with no interest accruing before the first payment is due. Then it will have to pay back £2.35bn over 15 years to the UK and £1.3bn to the Netherlands at 5.5 per cent interest. Possibly the interest rate could be reviewed.

In the meantime, Fitch, the rating agency, has downgraded the country's main soveregn credit rating to junk status. An OECD member country is becoming one of the casualties of the global financial crisis.