Iceland rejects debt deal to repay UK, Dutch

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Posted: Apr 10, 2011 11:54 AM
Iceland rejects debt deal to repay UK, Dutch

Voters in Iceland rejected a government-backed deal to repay Britain and the Netherlands for their citizens' $5 billion worth of deposits in a failed online bank, referendum results showed Sunday _ sending the dispute to an international court and plunging the economically fragile country into new uncertainty.

Final results showed the "no" side had just under 60 percent of the votes and the "yes" side about 40 percent.

The result reflects Icelanders' anger at having to pay for the excesses of their bankers, and complicates the country's recovery from economic meltdown.

It is the second time voters have defeated a bid to settle the bitter dispute stemming from the collapse of Iceland's high-flying banking sector in 2008, and the government said it would be the last.

"We are at the end of the road of a negotiated solution," said Finance Minister Steingrimur Sigfusson.

He said Iceland would now opt for "Plan B," with the dispute going to the European Free Trade Association court, which could impose harsher terms on Iceland than those rejected in Saturday's vote.

Britain and the Netherlands said they would fight to get back the money they spent compensating their citizens who had accounts in the failed bank, Icesave.

Dutch Finance Minister Jan Kees de Jager said the referendum result "is not good for Iceland and also not good for the Netherlands."

"The time for negotiations has passed," he said. "Iceland still has the obligation to pay us back. This is now a case for the courts."

British Treasury minister Danny Alexander said "we have an obligation to get that money back, and we will continue to pursue that until we do."

"We have a very, very difficult financial position as a country," Alexander told the BBC. "This money, of course, would help."

Icelandic Prime Minister Johanna Sigurdardottir said the results were disappointing but she would try to prevent political and economic chaos ensuing. Sigfusson said the result would have no effect on Iceland's existing debt repayments and would not derail its bid for European Union membership.

A tiny North Atlantic nation with a population of just 320,000, Iceland went from economic wunderkind to financial basket case almost overnight when the credit crunch took hold.

Its major banks _ which had expanded to dwarf the rest of Iceland's economy during a decade of credit-fueled boom _ collapsed within a week in October 2008, its krona currency plummeted and protests toppled the government.

The savings of Icelandic citizens were protected by an unlimited domestic deposit guarantee, but no such rule applied to the many foreigners attracted to Icelandic banks by their high-interest accounts.

Some 340,000 British and Dutch savers had deposited more than $5 billion in Icesave. After Icesave collapsed, British and Dutch authorities borrowed money to compensate their citizens, then turned to Iceland for repayment.

The dispute has grown acrimonious, with Britain and the Netherlands threatening to block Iceland's bid to join the European Union unless it is resolved.

Failure to approve a deal also stalled installments from a $4.6 billion loan from the International Monetary Fund.

Sigfusson said the government would hold talks with those who have loaned Iceland money _ the IMF, the Nordic nations and Poland _ in the wake of the referendum defeat.

"We have made substantial progress moving out of the crisis in 2008, and we intend to keep on doing so despite this outcome," he said.

Icelanders overwhelmingly rejected a previous deal in a referendum last year, but the government had hoped a new agreement on better terms would win approval.

The Icesave debt was initially set at $5.3 billion _ a crippling burden for the tiny country _ but backers of the rejected deal said it would cost Iceland just under 50 billion kronur ($444 million), with the recovered assets of Icesave's parent bank, Landsbanki, covering the majority of the debt.

The deal was reached in December after long negotiations among the three countries and approved by Iceland's parliament in January. But President Olafur Ragnar Grimsson vetoed it amid strong public opposition.

The president hailed the referendum, and the high voter turnout of 75 percent, as a cathartic step for Iceland.

He said the financial collapse had "paralyzed the nation's will and sapped the courage of our people."

"The two referendums on the Icesave issue have enabled the nation to regain its democratic self-confidence and to express sovereign authority in its own affairs and thus determine the outcome in difficult issues," Grimsson said.

Opposition politicians called on the government to hold new elections, but Sigfusson said the left-of-center coalition would not resign.

"This was a referendum on the Icesave case, not on the government," he said.

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David MacDougall in Reykjavik, Jill Lawless in London and Toby Sterling in Amsterdam contributed to this report.

(This version CORRECTS Adds voter turnout, quote from president. Corrects president's name to Grimsson, not Grisson. This story is part of AP's general news and financial services.)