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March 8, 2010

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Iceland rejects US$5b debt payment

STILL furious over the crippling aftermath of the global financial crisis, Iceland's voters yesterday resoundingly rejected a US$5.3 billion plan to pay off Britain and the Netherlands for debts spawned by the collapse of an Icelandic Internet bank, according to the results.

According to results released yesterday, just over 93 percent of voters said "no" in Saturday's ballot, while only 1.8 percent voted "yes," according to a count of all but 2,500 of the 143,784 votes cast. The rest were blank or spoiled ballots.

Icelanders were deciding whether to back a plan outlining the payment of US$3.5 billion to Britain and US$1.8 billion to the Netherlands as compensation for funds that those governments paid to around 340,000 of their citizens who had accounts with the collapsed bank Icesave, an Icelandic Internet bank that offered high interest rates before it failed along with its parent, Landsbanki.

Many voters object to the tough terms of the deal imposed by the debtor countries, not the idea of payment itself.

"This result is no surprise," Prime Minister Johanna Sigurdardottir said. "Now we need to get on with the task in front of us, namely to finish the negotiations with the Dutch and the British."

The referendum results are indicative of how angry many Icelanders are as the tiny island nation struggles to recover from a deep recession.

The global financial crisis wreaked political and economic havoc on Iceland, as its banks collapsed within the space of a week in October 2008 during the credit crunch and its currency, the krona, plummeted. The Icelandic government was the first to fall as a result of the meltdown.

Ratings danger

The vote could jeopardize Iceland's credit ratings, making it harder to access much-needed funding to fuel an economic recovery. Unemployment has surged since the crisis began, to about 9 percent in January, and inflation is running at about 7 percent annually, while the island's economy continues to shrink.

Icelandic authorities have recently been in talks with Britain and the Netherlands to come up with a better deal to try to avert Saturday's referendum, which was forced by the refusal of Iceland's president to agree to the so-called Icesave bill.

Last-minute talks between the three countries broke down last week, despite the debtor countries saying they offered better terms for a new deal - including a drastic cut on the 5.5 percent interest rate in the original deal hammered out at the end of last year.

The British say their "best and final offer has been turned down," but Iceland's Foreign Ministry said late Saturday it remained confident a solution acceptable to all parties can be achieved.

The debt owed to Britain and the Netherlands may be viewed as a small sum but many taxpayers in the country of just about 320,000 say they can't afford to pay it.

Locals see the deal as an unfair result of their own government's failure to curtail the excessive spending of a handful of bank executives that led the country into its current malaise.


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