On 6 March Iceland’s voters resoundingly rejected, with 93.5% “no” and only 1.8% “yes” (the rest being null or void) – a veritable plebiscite – in a referendum with an overall turnout of 62.7%, the legislation that would have reimbursed about €3.9 billion to the UK and the Netherlands for the compensation of their depositors’ losses in Icesave, an on-line branch of the failed Icelandic bank Landsbanki. (See The Icelandic Saga). The repayment plan had been blocked by Iceland’s President, Olafur Ragnar Grimsson, whose decision last January triggered the referendum. Mr Grimsson, whose popularity has soared since January, commented: “[The referendum] demonstrates to the British and Dutch governments that there is a democratic limit to how far you can pressure ordinary people to shoulder through their taxes the financial failures of bankers.

The vote has been promptly and grossly misrepresented, as a case of debtors opportunistically mis-using democracy to reject their own outstanding liabilities, if not a straight case of sovereign default, which is how it was construed by the British and the Dutch. "Sympathisers would hail it [a "No" vote] as an admirable display of people power against economic injustice. To critics, it would be a shameful ­dereliction of international obligations" (FT 26 February).

First, this is not the failure to repay a foreign loan that had reached maturity. Nor is it the rejection, by Iceland, of other outstanding certified liabilities, but simply the refusal to sign a deal – not yet finalized – proposed/imposed by the British and the Dutch governments. That deal was particularly onerous both in terms of the amount claimed – total deposits rashly and unwisely and over-generously reimbursed by those governments to their depositors instead of the statutory maximum cover – and in terms of the interest charged (5.5%) in these days of near zero interest. That those terms were described as “extremely generous” by UK and Dutch negotiators must have made it worse. The amount actually owed will have to be either negotiated and agreed by all parties, or tested in a court of law. In its more enlightened approach, even the FT recognises that "The broader damage of the grotesque mishandling of this affair will be felt elsewhere. The political effects are both chronic and acute. The focus on Iceland’s responsibility deflects attention from the fact that European cross-border banking rules are powerless to deal with any large-scale bank collapse. The priority is to fix the system so that we can let banks fail without having to bail them out again" (26 February).

Second, there is the question of the considerable damage inflicted by Gordon Brown on Landsbanki and other Icelandic institutions, by freezing their assets held in the UK through the pretext, and the dishonest use, of anti-terrorist (sic!) UK legislation. Gordon Brown is notorious for bullying and ill-mannered behaviour. “It is not good enough to be a statesman on the global scene and be a bully to Iceland” Mr Grimsson firmly told him. But this is a case not so much of bullying but of outdated, colonial, gunship “diplomacy” over the top. The general attitude of the British press is typified by an uncharacteristically bullying and contemptous article in the FT-Lex (26 February), equating the Icesave dispute to a “game of chicken” between two cars on a collision course refusing to give way, except Iceland is portrayed not as a car but a bicycle.

Third, there has been the attempted blackmail, on the part of the British and the Dutch, that failure to accept the onerous terms imposed by them would unravel a support package by the IMF and Northern countries. The socialdemocratic/green Premier Ms Sigurdardóttir accused Britain and the Netherlands of holding Iceland to ransom by pressurising lenders to withhold funds. “This is something we find very unfair and unforgivable and cannot accept,” she said, although only after her government's acceptance of the onerous terms was so massively defeated by the people who she pretended to represent. Dominique Strauss-Kahn, managing director of the International Monetary Fund, stated that loans to Iceland were not conditional on the resolution of the Icesave dispute (Bloomberg). But "Moody’s, the credit ratings agency, gave warning on Friday that the collapse of talks had darkened Iceland’s credit outlook. It said a No vote in the referendum would deepen the political uncertainty facing Iceland and threaten its nascent economic recovery" (FT, 26 February). Steingrimur Sigfusson, Iceland’s finance minister, expressed a worry that the forthcoming British elections might complicate the issue but he should rest assured that any new British government, whether hung or Conservative, will behave better than Brown's “globalist progressive” socialdemocratic government so unwilling to release its grip on the UK one minute sooner than it absolutely must.

Fourth, “Maxime Verhagen, Dutch foreign minister, said Icesave would be “part of our considerations” of whether to back Reykjavik’s bid to join the EU”. In mid-February the European Commission gave the go-ahead to negotiations with Iceland on their socialdemocratic government's application to join (made on 17 June 2009; the EC opinion mentions Icesave only to say that in 2009 its liabilities had contributed one third of Iceland's 130% government debt/GDP ratio; the Analytical report attached to the opinion tells the whole story in great detail). Stefan Fuele, European commissioner for enlargement, declared that the Icesave issue was a purely bilateral matter for Britain and the Netherlands (FT 24 February). But one vote short of unanimity is sufficient to block a candidate member from accession and the current dispute has greatly undermined Icelandic enthusiasm for joining the European Union. Traditionally very much against joining, Iceland was softened up by the 2008-2009 crisis, and especially by the mirage of EMU membership; its Parliament voted narrowly in favour of the entry application. Brussels had placed it on a preferential path to joining even, perhaps in 2012, before earlier applicants. Iceland is a mature democracy and an advanced market economy that has already converged with EU rules and regulations as a senior member of the European Economic Area, despite the thorny issue of fisheries, where Iceland is probably unwilling to accept the EU common fisheries policy. But now opinion polls indicate that support for joining is back to below 50%, while the business community is 60% against. A referendum result in favour of entry cannot be taken for granted.

Two final reflections on this Icelandic saga. First, three years ago Iceland was still classed as the “happiest country on earth”, enjoying an economic boom, social homogeneity, gender equality, social justice, all on its own; isolation might allow the recovery of this Paradise lost. Second – come to think of it – it might not have been at all a bad idea to put to a referendum the amount of resources and the terms and conditions on which these resources have been made available, say, to bail-out Northern Rock and all the other bankrupt financial institutions in the recent crisis.