UK 'disappointment' as Iceland rejects repayment deal

After the voters' verdict, the issue may now have to go to the courts

Icelanders have rejected the latest plan to repay the UK and Netherlands some 4bn euros lost when the country's banking system collapsed in 2008.

Partial referendum results show 58% voting no, and 42% supporting the plan.

Johanna Sigurdardottir, Iceland's Prime Minister, said the rejection meant "the worst option was chosen".

UK Treasury minister Danny Alexander said the decision was "disappointing" and the matter would go to an international court.

Dutch Finance minister Jan Kees de Jager said he would be consulting Britain about taking further steps against Iceland, but added that the matter would likely end up in court.

"I am very disappointed that the Icesave agreement did not get through. This is not good for Iceland, nor for the Netherlands.

"The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide," Mr de Jager said in a statement.

It is the second time a referendum has rejected a repayment deal.

Iceland's Landsbanki bank ran savings accounts in the UK and Netherlands under the name Icesave and investors there lost 4bn euros (£3.5bn; $5.8bn).

When it collapsed in 2008, the British and Dutch governments had to reimburse 400,000 citizens - and Iceland had to decide how to repay that money.

Mr Alexander, Chief Secretary to the Treasury, said on the Andrew Marr programme: "It's obviously disappointing... We tried to get a negotiated settlement.

"We have an obligation to get that money back, and we will continue to pursue that until we do... We have a difficult financial position as a country and this money would help," he said.

'Such a revulsion'

Iceland's parliament had backed the deal, but President Olafur Ragnar Grimsson refused to sign it, triggering the referendum.

A previous deal, imposing a tougher repayment regime, was rejected in a March 2010 referendum by 93% of voters.

Finance Minister Steingrimur Sigfusson appeared to rule out a third attempt to persuade voters to accept a repayment deal.

"I think we're getting a very clear sign from this referendum, that further negotiations are ruled out. No use in trying that again."

The issue will now be referred to an international court, the European Free Trade Association Surveillance Authority, a process which could take several years.

Backers of a "yes" vote had argued the repayment deal was the best way to resolve the issue in terms of cost and risk to Iceland.

The "no" camp said the Icelandic taxpayer was under no legal obligation to pay for a private bank's losses and that the deal would put a heavy burden on the nation.

Longer period, lower interest

Under the terms of the rejected deal, Iceland would have paid the money back with 3.3% interest to the UK, and 3% to the Netherlands, over 30 years between 2016 and 2046.

Under the previous proposal, the money was to be paid back with 5.5% interest between 2016 and 2024.

Prime Minister Johanna Sigurdardottir: "Disappointing numbers"

The actual cost to the state was expected to be much less than the 4bn euros owed, as the government said most of the repayment would come from selling the assets of Landsbanki.

The government has said it did not expect the cost to exceed 50bn kronur (£168m).

Analysts say a resolution of the issue is vital to Iceland's prospects for recovery because it would allow the country to return to the financial markets to fund itself.

Solving the dispute is also seen as key to Iceland's chances of joining the EU.

Iceland's three main banks collapsed within days of each other in October 2008.

The government compensated Icelandic savers, but overseas customers faced losing all of their money.

The issue sparked a diplomatic row between Iceland and the UK, and created uncertainty over Iceland's economic recovery.