Court case looms as Iceland again rejects debt deal

* Icelanders reject deal to repay debt to British, Dutch

* PM says economic and political chaos must be avoided

* Dispute now likely to end up in lengthy court process

* Government to review economic outlook, IMF talks delayed

By Anna Ringstrom and Karolina Tagaris

REYKJAVIK/LONDON, April 11 (Reuters) – Britain and the
Netherlands plan to sue Iceland in a potentially drawn-out legal
battle to recover $5 billion lost in a bank crash after
Icelandic voters rejected a plan to repay the money.

The British and Dutch governments said they were
disappointed with the result of a referendum on Saturday in
which almost 60 percent of voters opposed a repayment deal, the
second time the Icelandic public has snubbed an agreement.

The debt was incurred when the two countries compensated
their nationals who lost savings in online “Icesave” accounts
owned by Landsbanki, one of three Icelandic banks that collapsed
in late 2008, triggering economic meltdown in the country of
320,000 people.

Britain’s Independent newspaper said the ‘no’ vote would
cause friction with Britain and the Netherlands and increased
the chances that one or the other, both European Union members,
might veto Iceland’s bid to join the bloc.

Britain’s Chief Secretary to the Treasury, Danny Alexander,
said he was disappointed Icelanders seemed to have rejected what
was a negotiated settlement.

“It now looks like this process will end up in the courts,”
he told BBC television” over the weekend.

Dutch Finance Minister Jan Kees de Jager said: “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.”

The issue will now be settled by the court of the EFTA
Surveillance Authority (ESA), the European trade body overseeing
Iceland’s cooperation with the European Union.

“My estimate is that the process will take a year, a year
and a half at least, Finance Minister Steingrimur Sigfusson told
a news conference after Saturday’s vote.

Economists have said the court route could be much costlier
and Iceland will face delays ending currency controls, boosting
investment and returning to financial markets for funding.

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Graphic, Iceland growth vs deficit:

http://r.reuters.com/sef88r

Graphic, Iceland growth vs currency

Factbox on the Icesave dispute [ID:nLDE736171]

Timeline on Iceland since crisis started: [ID:nLDE7371ZO]

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GOVERNMENT’S FUTURE

The Financial Times said the case highlighted flaws in
European cross-border banking rules and raised questions over
who is legal and morally responsible for foreign deposits held
by domestic banks when a country’s financial sector goes bust.

“It has also raised doubts over the future of Iceland’s
centre-left government, led by Johanna Sigurdardottir, prime
minister, who has staked her credibility on resolving the
Icesave dispute and pushing for EU membership.”

Iceland’s centre-left coalition government said it would not
resign despite the defeat.

“The government will emphasize maintaining economic and
financial stability in Iceland and continuing along the path of
reconstruction which it began following the economic collapse of
2008,” it said in a statement.

It said a fresh round of talks on further funding from the
International Monetary Fund, which led a bailout for the island,
would be delayed several weeks, but that it had enough foreign
exchange reserves to cover debts maturing this year and next.

Ratings agencies were following the vote closely. Moody’s
had said it might lower Iceland’s rating in case of a ‘no’.

Standard & Poor’s analyst Eileen Zhang said a ‘no’ vote
“might possibly result in a lengthy legal process and further
uncertainties regarding the ultimate fiscal cost”.

The government still hopes most of the debt will eventually
be paid back from the estate of the bankrupt Landsbanki.

Former British foreign minister Alistair Darling, who
approved the use of 3 billion pounds ($4.92 billion) of
taxpayers’ money to bail out Icesave, defended his decision,
saying it was made “simply to protect British savers”.

“I always thought this would take a long time to resolve,
but the present (British) government is right to pursue it in
the way it is doing,” he said.
(Additional reporting by Omar Valdimarsson in Reykjavik, Sara
Webb in Amsterdam and Avril Ormsby in London; editing by
Philippa Fletcher)
($1=113.31 Iceland Krona)

Court case looms as Iceland again rejects debt deal