Yesterday the, largely ceremonial, president of Iceland stood up for what is right. He decided that it was not democratic for the Icelandic government to insist that the Icelandic people pay foreign depositors who deposited money in Icelandic banks that subsequently went bust.

The president refused to sign the parliament’s bill, which would have penalised the Icelandic people for the mistakes of the executives of the Icelandic banks. He concluded that this was not reasonable as the banking mess was not the fault of the average Icelander. Iceland will have a referendum on the issue now.

This move implies that Iceland might jeopardise its access to IMF funds as well as definitely knock back its aspirations to join the EU.

The official line peddled by the international bureaucrats is that standing up for the small guy undermines Iceland’s credibility. However, the president decided that if credibility in the eyes of the foreign investors comes via hoodwinking the average Icelandic citizen into footing the bill for a mistake the financial markets facilitated, then it was better to be not credible.

This type of credibility undermines democracy and the basic idea that the government represents the people. In so doing he has stood up for something which is now, sadly, profound and unusual in modern politics — he is championing the interests of the small man in a small democracy.

At the press conference, President Olafur Grimsson referred to a petition which raised signatures from thousands of ordinary citizens who were set against bailing out the banks at the people’s expense. The petitioners went on to argue that foreign depositors (mainly Dutch and British) took out deposits in Icelandic banks because the banks were offering interest rates that were much higher than in the UK or Holland. In economics the iron rule is, the higher the return offered, the higher the risk offered.

The Icelanders are simply saying that your investments have nothing to do with us and, therefore, the solution to the depositors’ dilemma is not the immediate concern of the average cod fisherman from the Westman Island or any other part of Iceland for that matter.

In a country where the president occupies a similar position to our own, this was only the second time a president has ever declined to sign a parliamentary bill.

The Icelandic story is a mirror image of Ireland’s. However, unlike the Irish case where the average person is being asked to pay the bondholders of the banks — the creditors who speculated on such gems as Anglo Irish Bank — the Icelanders are taking a different tack.

They have decided that the people — not the elites or the “insiders” — must decide. This country clearly is a proper democracy; not one run by politicians who are part of an insider group up to their teeth in property and who can’t see that they represent the people, not the elite.

In its most simple terms, Iceland is a country with a banking system attached. In contrast, Ireland is a banking system with a country attached to it.

In the past five years, the Icelandic banks behaved precisely like our own. They lent to anyone and anything but, in the main, they lent to their mates. When they ran out of Icelandic deposits, they borrowed abroad to finance their expansion. They issued debts and when they could no longer issue enough debt, they took in deposits.

When the system crashed, the foreign depositors and the bondholders got caught. You can rightly ask what in God’s name were English depositors doing putting their life savings into Icelandic banks that they had never heard of?

Now let us move to the ramifications of the Icelanders’ democratic stance. Officials are aghast. According to the men who run the Department of Finance here, if we were to do something similar and negotiate a deal with our foreign bank creditors, Ireland would be declared a pariah. They claim interest rates would rocket and the world would shun us.

If their view is right, interest rates in Iceland should have jumped yesterday on the news of a referendum. But they didn’t — Icelandic interest rates hardly budged from their present 7pc.

By the way, when I was in Reykjavik last May interest rates stood at 15pc. Yes, they are high, but interest rates in Iceland are coming down in line with inflation, as any basic economic textbook would predict.

More significantly, long-term interest rates, which gauge the long-term risk in a country, have also fallen to 7pc in Iceland.

This means investors believe there is no real extra risk in Iceland in the future. My guess is that Iceland’s credit rating will rise on this news, not fall.

The reason for this counterintuitive stance is the same reason John Maynard Keynes argued against reparations being imposed on Germany after the First World War. Keynes argued that if you impose the debts of a past regime on a new regime, the economy and politics will suffer.

In a similar vein, the Icelandic president has decided that it is unfair to lumber the average citizen with the sins of Iceland’s financial generals. The specific case in Iceland involves one bust bank, but has ramifications for the whole country. Foreign depositors are owed €3.8bn by Icebank.

The EU stipulated that the average Icelandic citizen should pay €12,000 each to cover this. The EU and the IMF said further aid to Iceland is dependent on this deal. This president has stated that if the price of this EU and IMF help is penalising the citizen, then it is a price so high that it must be passed by referendum. In short, the outsiders (the citizens) should not be forced to bail out the insiders (the banks).

In their president, the outsiders in Iceland have a champion. Who champions the outsiders in Ireland? Who in our political class shouts stop, enough is enough? Who is prepared to say there is a difference between right and wrong?

Finally, who has the courage to point out that, in financial terms, far from being penalised, Iceland is being rewarded by gradually falling interest rates.

In Ireland we can’t tell the difference between right and wrong, and worse still, we are not even getting the supposed financial bonanza for being “good boys” and siding with the international bankers. We are still paying nearly twice as much as Germany to borrow money.

Iceland is showing our politicians another way. These are not easy decisions — and it would have been much better if the country had never got into this mess — but at least they are dealing with it. Similarly, it would have been better if we never got into this mess too, but here we are.

Iceland proves that there is an alternative — are any of our politicians, from the President down, prepared to listen?

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