UPDATE 5-Iceland again rejects debt deal, court case looms

* 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

(Adds government statement, finance minister)

By Anna Ringstrom and Omar Valdimarsson

REYKJAVIK, April 10 (Reuters) – Iceland faces more economic
uncertainty and a drawn-out European court case after its voters
rejected for a second time a plan to repay $5 billion to Britain
and the Netherlands from a bank crash.

The British and Dutch governments voiced disappointment with
the result of Saturday’s referendum, in which almost 60 percent
of voters opposed the repayment deal.

“We must do all we can to prevent political and economic
chaos as a result of this outcome,” Prime Minister Johanna
Sigurdardottir told state television.

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.

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 overextended
Icelandic banks that collapsed in late 2008, triggering an
economic meltdown in the country of 320,000 people.

Economists have said failure to resolve the issue means
Iceland faces delays ending currency controls, boosting
investment and returning to financial markets for funding.

But the 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.


Graphic, Iceland growth vs deficit:


Graphic, Iceland growth vs currency

Factbox on the Icesave dispute [ID:nLDE736171]

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



The proposed deal at issue in Saturday’s vote set a clear
timetable for repaying the Dutch and the British, including
interest. But voters rejected the idea that taxpayers should
foot the bill for what they see as bankers’ irresponsibility.

“I know this will probably hurt us internationally, but it
is worth taking a stance,” Thorgerdun Asgeirsdottir, a
28-year-old barista, said after casting a “no” vote.

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.”

Economists have said the court route could be much costlier.

The government still hopes most of the debt will eventually
be paid back from the estate of the bankrupt Landsbanki.
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”.
(Additional reporting by Sara Webb in Amsterdam and Avril
Ormsby in London; Editing by Mark Trevelyan)
($1=113.31 Iceland Krona)

UPDATE 5-Iceland again rejects debt deal, court case looms