Referendum strengthens Iceland hand in debt talks

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 US$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 US$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.

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