UPDATE 1-"No" vote ahead in Iceland debt deal referendum

* Iceland holds referendum on debt to Britain, Netherlands

* PM says “no” side appears to have won

* Second referendum on issue in just over a year

* Dispute now likely to end up in lengthy court process

(Adds background, more ministers’ comments)

By Anna Ringstrom and Omar Valdimarsson

REYKJAVIK, April 10 (Reuters) – Voters in Iceland appeared
on Sunday to have rejected for a second time a plan to repay
debts to Britain and the Netherlands from a bank crash, a move
the prime minister said risked economic and political chaos.

“The worst option was chosen. The vote has split the nation
in two,” Prime Minister Johanna Sigurdardottir told state
television as partial results were issued which she said made it
fairly clear the “no” side had won.

With around 85,000 votes in the referendum counted, official
figures showed 58 percent had voted against the accord compared
with 42 percent in favour, the television said. Iceland has
230,000 voters but the turnout was not immediately available.

The prime minister, who had predicted a no vote would cause
economic uncertainty for at least a year or two, did not say
whether the government planned to resign.

“We must do all we can to prevent political and economic
chaos as a result of this outcome,” she said.

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Graphic, Iceland growth vs deficit:

http://r.reuters.com/sef88r

Graphic, Iceland growth vs currency

http://graphics.thomsonreuters.com/11/02/IC_FXGDP0211_SB.png

Factbox on the Icesave dispute [ID:nLDE736171]

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The debt was incurred when Britain and the Netherlands
compensated their nationals who lost savings in online “Icesave”
accounts owned by Landsbanki, one of three Icelandic banks that
collapsed in late 2008.

Icelandic lawmakers in February backed the repayment plan
agreed with creditors in December but the president refused to
sign the bill, triggering the vote. In March 2010, Iceland
rejected an earlier Icesave repayment blueprint in a referendum.

The dispute over repayment has soured relations between the
small North Atlantic island nation and the two other countries.

It may now be solved in a European court rather than in
bilateral negotiations — a solution that may take several years
and that some economists say would be much costlier.
[ID:nLDE64P26Q]

“It is clear that we have reached the end of the negotiation
road,” Finance Minister Steingrimur Sigfusson told state
television.

Sigurdardottir said Iceland would now defend its case before
the court of the European trade body overseeing Iceland’s
cooperation with the EU, the EFTA Surveillance Authority (ESA).

Economic Affairs Minister Arni Arnasson told the television
he would be in touch next week with ESA, which said last year,
in a first stage in legal proceedings that may end up in court,
that Iceland should pay compensation to Icesave depositors.

Policymakers and economists have said solving the Icesave
issue would help Iceland, whose economy went into deep recession
after its bank crisis, get back into financial markets to fund
itself. That is a condition for it to remove controls on capital
flows it imposed in 2008 to stabilise a tumbling currency.

The controls have left an estimated 465 billion crowns
($4.10 billion), equivalent to a quarter of Iceland’s gross
domestic product, in the hands of foreign investors, many of
whom are expected to want to pull out when controls are lifted.

Iceland last month outlined a cautious plan to gradually
relax the capital controls, a process expected to take years.
The main steps will take place only once Iceland has shown it
can refinance loans in foreign credit markets. [ID:nLDE72O1Y8]
(Editing by Philippa Fletcher)
($1=113.31 Iceland Krona)

UPDATE 1-"No" vote ahead in Iceland debt deal referendum