REYKJAVIK, Jan 18 (Reuters) - Iceland is heading toward a referendum on a deal to repay more than $5 billion to Britain and the Netherlands for money lost in its banking crisis, a vote expected to have a huge impact on the island's financial future.
Latest opinion polls show Icelanders will reject the so-called Icesave bill due to what are seen as harsh terms, in a ballot to be held in late February or early March.
If voters do kill the bill, the law reverts to an earlier version passed in August. However, Britain and the Netherlands rejected those terms as repayments aren't guaranteed after 2024.
Here are some of the likely outcomes of the Icesave saga.
NEW DEAL
The Icelandic left-centre government is frantically trying to restart talks in order to fashion a new agreement.
So far, there is little indication Iceland's two larger European neighbours are willing to revisit the issue. Iceland has said it would welcome outside mediation of the dispute.
Support by Nordic countries, which are bankrolling a large portion of aid to the country, would strengthen Iceland's hand. But they have stressed Iceland must live up to its commitments and Sweden has said an IMF review is key to further payments.
A 'YES' VOTE
A 'yes' would spell an end to the dispute and open the door to the country easing its way back to economic normality while taking on the burden of repaying the debt and related interest.
Detractors of the bill say that burden is too heavy for the tiny nation and would cripple the economy, talk which Icelandic Economy Minister Gylfi Magnusson dismissed as "utter nonsense".
Iceland owes Britain a maximum 2.35 billion pounds ($3.75 billion) and the Netherlands 1.2 billion euros ($1.72 billion), plus interest. A sizeable chunk will be recovered from the sale of assets owned by Landsbanki, the bank that operated Icesave.
A 'NO' VOTE
A rejection of the bill risks slowing Iceland's recovery from its worst ever financial crisis, hitting investments and growth and potentially making it an outcast in the global economy. Below are some of the possible effects of a 'no'.
IMF PROGRAMME -- A rejection is expected to delay payments under an international aid scheme tailored by the IMF. The programme includes $2.1 billion from the Fund and $2.5 billion from the Nordic countries and Poland.
Iceland has received $1.6 billion under the scheme, which was held up for months last year due to Icesave wrangles.
Iceland needs the money to build up its currency reserves so that it can phase out strict capital controls. These are needed to shelter the currency, but they are deterring investment.
Central bank interest rates, currently at 10 percent, may also need to stay high for longer in order to prop up the crown.
CAPITAL -- Icelandic authorities and firms say foreign banks and investors are staying on the sidelines as the dispute is being resolved, waiting for the clean bill of health that steady progress under the IMF programme is seen to signify.
Funds are needed for many investment projects in Iceland, not least in the energy-related sector where expansions of power production are needed for increased aluminium production.
Icelandic firms also remain largely cut off from overseas capital markets and may be so for longer due to the dispute, hampering their ability to grow.
GROWTH -- The delays outlined above would dent growth, holding back the tentative recovery that Icelandic authorities had forecast would begin taking hold this year. This would put additional strain on public finances due to lower tax revenues and would call for spending cuts.
DEBT -- About four fifths of Iceland's 320 billion Icelandic crowns ($2.6 billion) of foreign debt matures in 2011. If Icesave remains in doubt, refinancing could be difficult.
ISOLATION -- Britain has warned that Iceland faces economic isolation. In a worst-case scenario Iceland could become an outcast on the global financial scene, presenting a huge hurdle in exporting to and doing business with the outside world.
POLITICS -- The left-centre government might choose to step down if it loses the vote, though it has no legal obligation to do so, potentially leaving Iceland facing snap elections for the second time in a year and renewed political uncertainty.
Iceland's main opposition party, the Independence Party, has said the government should resign if it loses the vote, but opinion polls show Prime Minister Johanna Sigurdardottir's coalition is still supported by a majority of voters.
EU -- The Icelandic government has said it has been assured by Britain and the Spanish EU presidency that the Icesave row will not hit its 2009 application to join the bloc.
However, Iceland's membership bid might still be delayed since Britain and the Netherlands, like all EU states, have to give the green light for accession of a new member.
Source:reuters.com/
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