Iceland upbeat on new debt deal

06/03/2010 00:15:58

Iceland expects to sign a new deal on "Icesave" debts with Britain and the Netherlands within weeks, limiting the fallout from a widely expected rejection of the current accord in Saturday's referendum over foreign debts.

A new agreement over repayment for $5 billion (3.3 billion pound) in "Icesave" debts to Britain and the Netherlands is key to unblocking vital foreign aid to the North Atlantic island state, especially if the ballot as expected nullifies the deal reached in late 2009.

"I feel... that it would happen in the next few weeks, perhaps sooner than that," Foreign Minister Ossur Skarphethinsson told Reuters in an interview on Friday, when asked when a new deal was possible.

"All the surroundings of the negotiations, and where we stand now, point to a deal in the making," he added.

Prime Minister Johanna Sigurdardottir earlier said talks on a new Icesave agreement had made "considerable" progress.

"The gap is narrowing," she told reporters after a cabinet meeting. "We don't have much time to finish this, the impact on our economy and business is already too high."

Saturday's vote is on whether to approve a deal struck late last year on paying money back to Britain and the Netherlands, after they compensated savers in the countries who had lost money in accounts run by an Icelandic bank. Polls show Icelanders are set to soundly reject the 2009 agreement.

The referendum also has sparked concerns over political stability since Sigurdardottir's government had negotiated it and, until recent

ly, argued that approving it was the best of some bad choices.

"It is a great misunderstanding that this referendum is about the life of this government. We have no intention of resigning," said Sigurdardottir, adding that she will not participate in Saturday's referendum.

Despite the negative consequences of rejecting the deal, Icelanders have no real incentive to approve it. Furious about what they see as overly harsh terms from their creditors, they are now certain they can get a much better deal.

ICESAVE "HOSTAGE"

Sigurdardottir said Britain and the Netherlands were holding Iceland hostage by tying the "Icesave" talks to Reykjavik receiving the next tranche of financial aid from the International Monetary Fund.

"The (Icesave) debt burden is unjustly divided between Iceland, Britain, and the Netherlands," Sigurdardottir told a news conference. "We find it very unfair to link it to the IMF...(They) have gotten away with holding us hostage."

The centre-left government has warned the economy could shrink much more than estimated if the dispute over the Icesave debts continued to block aid under an IMF plan.

Icelandic negotiators left London, the venue for weeks of talks with British and Dutch officials, but the government said it was hopeful talks would resume as early as next week. A Dutch government official said no new talks were so far scheduled.

Consultants Eurasia Group said in a note that even though "all parties have a pressing interest in eventual agreement," the timing of a new deal "could be deferred until after UK and Dutch elections," both due by mid-2010.

The crisis-hit island earlier on Friday got a rare dose of positive news with data showing its economy grew briskly in the latest quarter, the best performance since the country's financial system nearly collapsed in 2008.

Iceland's gross domestic product (GDP) grew by 3.3 percent in the last three months of 2009 from the prior three months.

"That's a nice number, but it's not springtime yet," said Antje Praefcke, analyst at Commerzbank. "Maybe there's less snowfall, but it's not spring yet."

Despite the quarterly improvement, Iceland's economy remains in dire straits and the figures will do little to sway angry voters who are expected to reject the unpopular Icesave deal.

GDP was down 6.5 percent for the full year. Praefcke said Iceland's central bank still expected further economic contraction and the referendum risked delaying a recovery.

Britain and the Netherlands have offered easier terms, so there is no reason for voters to back the old deal.

"It's of utmost importance that we don't over-interpret whatever message comes out of this. We want to be perfectly clear that a 'no' vote does not mean we are refusing to pay," Finance Minister Steingrimur Sigfusson told reporters.

"We will honour our obligations. To maintain anything else is highly dangerous for the economy of this country."

>The Icesave debt amounts to more than $15,000 for every Icelander, although most of the money is likely to be raised eventually by the sale of assets of Landsbanki, which operated the accounts before folding.

(Writing by Niklas Pollard and Adam Cox; editing by Michael Roddy)