PREVIEW-Iceland set to reject Icesave repayment deal

* Iceland holds referendum on debt to Britain, Netherlands

* Two new polls show agreement will be rejected

* Solving issue seen key for long-term economic health

By Omar Valdimarsson and Anna Ringstrom

REYKJAVIK/STOCKHOLM, April 7 (Reuters) – Icelanders look set
to reject a deal to repay Britain and the Netherlands for debts
from a bank crash, denting government hopes to draw a line under
its financial crisis and speed economic recovery.

A referendum will be held on Saturday on an agreement to
repay the $5 billion debt, run up after the British and Dutch
governments repaid depositors who had money in an online account
called Icesave. The account was run by one of the three
Icelandic banks which collapsed in late 2008.

On Thursday, one poll showed 57 percent and another 55
percent against the new deal, which the government says is
better than one they rejected in March 2010. The readings came
after weeks of polls showing support for the deal.
[ID:nLDE73609T]

A “no” vote would be a blow for the centre-left coalition,
which managed Iceland out of the depths of its financial crisis
but it has not said it will resign if so.

“A ‘no’ vote is a recipe for uncertainty for at least the
next one to two years,” Prime Minister Johanna Sigurdardottir
said on Thursday. “We would have to review and possibly revise
the current economic programme.”

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Graphic, Iceland growth vs deficit

http://r.reuters.com/sef88r

Graphic, Iceland growth vs currency

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Factbox on the Icesave dispute [ID:nLDE736171]

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Many Icelanders say they are angry that taxpayers have to
bail out irresponsible banks.

“Last week I had settled on a yes but now I’m going to vote
against,” said Bragi Baldvinsson, a 42-year-old aero-engineer.

“People here have lost massive amounts of money. That’s
tough luck — and tough luck also for the Icesave depositors in
Britain and the Netherlands.”

Hjalti Gudmundsson, 45, said he planned to vote “yes”.

“The overriding factor is the need to be on good terms with
our neighbours and the outside world. We should settle our
differences through negotiation, not through the courts.”

If Icelanders turn down the new Icesave deal, the dispute
may instead be solved in a European court, a solution some
economists say would be much costlier. [ID:nLDE64P26Q]

The referendum, in which 230,000 voters can take part,
begins at 0800 GMT and ends at 2200 GMT.

ECONOMIC REHABILITATION

The government and economists say solving the Icesave issue
will help Iceland get back into financial markets to fund itself
after a financial rescue programme, led by the International
Monetary Fund, runs out this year.

It will also help the country of 320,000 people remove the
controls on capital flows it imposed to stop its currency from
falling further.

The controls have left an estimated 465 billion crowns
($4.10 billion), equivalent to one-fourth of the island’s
output, in foreign hands, some of which wants to escape.

“The protracted dispute over Icesave has complicated many
aspects of Iceland’s recovery and economic rehabilitation,” said
Paul Rawkins, an analyst at ratings agency Fitch.

Foreign investment has been delayed for example, he said.

A “yes” vote would show the world Iceland wants to normalise
relations with international creditors and could set the stage
for credit rating improvements, he said.

“If it remains a ‘no’, it could stall the resolution of
capital controls and leave Iceland where it’s been for the last
18 months or so, which is sort of caught in a state of limbo.”

Iceland last month outlined a cautious plan to gradually
relax the capital controls, a process expected to take years.
The main steps will only take place once Iceland has showed it
can refinance loans in foreign credit markets. [ID:nLDE72O1Y8]
(editing by Elizabeth Piper)

PREVIEW-Iceland set to reject Icesave repayment deal