March 8, 2010 / 4:15 AM / 9 years ago

Analysis - Referendum strengthens Iceland hand in debt talks

REYKJAVIK (Reuters) - The spectacular rejection by Icelandic voters of an “Icesave” accord gives Iceland a resounding mandate to push for better terms in settling $5 billion in losses to Britain and the Netherlands.

Pedestrians walk down the main shopping street in downtown Reykjavik March 5, 2010. REUTERS/Bob Strong

Fireworks lit up the Reykjavik sky late on Saturday after referendum results showed some 94 percent of Icelanders voted against a previous Icesave agreement, widely seen here as placing an unfairly large financial burden on Iceland.

Mandate in hand, Iceland will push for better terms in new Icesave talks with Britain and the Netherlands, knowing it needs a deal to unblock international aid.

But negotiators have only a small window of opportunity for agreement before British and Dutch elections, and Prime Minister Johanna Sigurdardottir’s cabinet could face challenges from an opposition which also feels empowered by the referendum.

“The likelihood of quick deal is quite high as they already agree on the big issues...and it’s in nobody’s interest to see the talks end without agreement,” said Mats Olausson, chief strategist emerging markets at SEB in Stockholm.

“The UK and Holland may soften up a little as a result of the ballot, but for the Icelandic side it may become a bit harder to keep cross-party support,” Olausson added.

Iceland owes money to Britain and the Netherlands after they compensated 400,000 savers in their countries who lost deposits in a failed Icelandic bank during the global financial meltdown in 2008.

The Icesave debts come to more than $15,000 for each of the 320,000 people on the island. Much of that should be raised by selling overseas assets of the failed bank Landsbanki.

So the focus of negotiations is on the interest payments, which Icelandic officials say may cost $1 billion to taxpayers.

Britain has said it offered Iceland an interest rate equal to the LIBOR money market rate plus 275 basis points — the same as the rate Nordic countries get for their loan that is part of an aid package run by the International Monetary Fund.

This offer was rejected, even though it was an improvement over the 5.55 percent fixed interest rate in the previous Icesave bill that was rejected in the referendum.

One sign of possible movement came from Britain on Sunday.

Britain’s Finance Minister Alistair Darling said that he would be flexible in reaching a solution with Iceland, suggesting scope for a face-saving compromise for both sides.

OPPOSITION FEELS VINDICATED

But Sigurdardottir will need to show her government has won further compromise from Britain and the Netherlands if she is to win parliamentary approval for any new deal.

The opposition was dead-set against the old deal and feels vindicated by the referendum result. It is likely to exploit any perceived weakness in the government’s negotiations, especially if support for Sigurdardottir continues to plummet.

The centre-left government has flip-flopped on Icesave and its popularity has fallen in past months. Sigurdardottir has said the government will stay on, but if it fails to win a deal soon, its future is shaky.

Sigurdardottir has already angered Icelanders by declining to take part in the referendum, which some interpret as a sign that she is out of touch with ordinary people.

“Not voting in a referendum that is of the greatest importance to the future of the country...shows a great rift between them (the government) and the nation,” said Olafur Isleifsson, an economics professor at Reykjavik University.

Foreign aid to Iceland’s shattered economy remains on hold due to the Icesave row, which has dominated the political agenda for months, pushing issues such as soaring unemployment and a rising tide of mortgage defaults to the back burner.

“The message from the people is clear and the government must pay attention,” Finance Minister Steingrimur Sigfusson said after Saturday’s referendum. “But as I have said before, Iceland can’t wait any longer for the matter to stay unsolved.”

That impatience was echoed on the streets.

“The government is only concerned about Icesave and sort of forgotten about our problems. It has to solve this quickly and move on,” said Kristin Jonasdottir, an office worker.

(Editing by Dominic Evans)

(For more news on Reuters Money visit www.reutersmoney.in)

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