Fortune remains on Iceland's side despite prophesies of doom

Iceland could end up repaying its debts more quickly and at a higher rate of interest.

In the story of Chicken Licken, an acorn falls on a chicken's head and the fowl runs off to warn the king that the sky is falling, telling all the other animals he meets on the way.

Unfortunately for the chicken, the last creature he meets is Foxy-Woxy, who lures all the animals into his den and eats them. The tale is a warning not to believe everything you are told.

Now apply the fable to Iceland, where the people have voted down a deal that would have repaid almost €4 billion (Dh21.2bn) to the UK and the Netherlands. The two countries provided compensation to Icesave depositors when Landsbanki collapsed in October 2008.

Days after the vote and the sky has certainly not fallen. The debt rating agencies have said they are considering marking down Iceland's rating to near-junk but have not yet moved decisively.

The EU has said negotiations over Iceland's accession to the euro zone will not be affected. Nordic countries that have extended loans to Iceland have said they will continue to do so. The Icelandic government faces a no-confidence vote in its parliament, but the chances of it losing this are remote.

A long court case at the European Free Trade Association Surveillance Authority now beckons. After at least a year's uncertainty, which could dampen Iceland's economic recovery, the country could end up repaying its debts more quickly and at a higher rate of interest.

Yet many in the UK are thinking the cool, smart Icelanders have got away with it. And there is surprisingly little anger at this. If anything, the Icelanders have done what Britons would love to have done but will never get the opportunity. They have said no to spending public money to bail out reckless private banks.

Back in Iceland, the government has revised its "sky is falling" message. The prime minister Johanna Sigurdardottir said: "The Icelandic electorate was presented with two evils last Saturday - to assume a responsibility they believe is not theirs, or to risk a verdict that may be heavy to carry."

Iceland called its politicians' bluff for the second time in just over a year. Now its president, Olafur Grimsson, has said the dispute need not go to court, as the UK and the Netherlands are likely to be repaid up to 90 per cent of what they paid out, over the next two years, from sales of assets of Landsbanki Islands, Icesave's operator.

The two countries are starting to look like a loan shark's heavies, sent in as much to scare the neighbours into maintaining repayments as to extract any money. Ann Pettifor, an economist and campaigner in the UK who led the Jubilee 2000 campaign to forgive Third World debt, says the UK and the Netherlands should not use economic force majeure on a tiny country and accept their own responsibility for the crisis.

Iceland complied with the EC's requirement to have a guarantee scheme for savings banks, but under its own laws its required assets were no more than 1 per cent of total guaranteed banks savings.

Clearly this was hopelessly inadequate to cover a systemic failure yet there were no warnings from the UK's regulators to savers or local councils, who have lost millions since Icesave's collapse.

Landsbanki set up Icesave in the UK in 2006 and in Holland in 2008.

"By this time it was plain to all with eyes to see that the Icelandic banking system faced a high risk of disaster," Ms Pettifor says.

"All three states closed their eyes to the patent inadequacy of Iceland's guarantee scheme - and all should share the pain now."

Perhaps the fairest solution to this dispute is to expedite the Landsbanki asset sale, at least then it will be clear what can be repaid to the UK and the Netherlands and the extent of the shortfall.

If, as Mr Grimsson claims, Landsbanki's assets turn out to be more valuable than people supposed, there could yet be a happy ending to this tale of Chicken Licken - the one where Henny Penny, Cocky Locky et al tell Chicken Licken to go back to the coop.