Iceland braced for No vote on €4bn refund

Icelanders are poised to decide on Saturday whether the country should repay Britain and the Netherlands €4bn (£5.8bn) lost in the failed Icesave bank, with the latest polls predicting a No vote that would throw the government’s economic recovery efforts into disarray.

Earlier surveys had suggested voters were likely to approve a deal to settle a dispute that has cast a cloud over Iceland’s bid to join the European Union and threatened to derail its bail-out agreement with the International Monetary Fund.

However, polls this week indicated a sharp swing against repayment, with one showing 57 per cent of people planning to vote No, compared with 43 per cent in favour.

The dispute involves money lost by British and Dutch depositors in the Icesave unit of Landsbanki, one of the Icelandic banks that collapsed in 2008.

The depositors have already been reimbursed through their domestic insurance schemes, leaving the British and Dutch treasuries out of pocket.

The case has highlighted flaws in European cross-border banking rules and sparked debate over who bears the legal and moral responsibility for foreign deposits held by domestic banks when a country’s financial sector collapses.

A No vote would almost certainly result in the dispute moving from the negotiating table to the courtroom because the British and Dutch governments are considered unlikely to return to talks after trying for more than two years to strike a deal.

It would also raise doubts over the future of Iceland’s centre-left government, which has staked its credibility on resolving the Icesave dispute.

“The entire economic agenda of the government is based on normalising relations with the international community, and that includes resolving Icesave and pushing for EU membership,” said Eirikur Bergmann, a political scientist at Iceland’s Bifrost University. “A No vote will make it very hard for them to carry on that path.”

The vote marks the second time that an Icesave deal backed by the Icelandic government and passed by parliament has been referred to a referendum by the country’s president, Olafur Ragnar Grimsson. A previous agreement was rejected by 93 per cent of voters last year.

The increased support for the latest deal reflects the improved terms agreed by the UK and Dutch governments last December, with the average interest rate reduced to 3.2 per cent from 5.5 per cent and the repayment timetable lengthened.

However, many Icelanders remain fiercely opposed to the principle of taxpayers being asked to reimburse foreign deposits lost as a result of mistakes and malpractice by bankers and regulators.