Iceland vote freezes debt deal

Rejection of Icesave bill means dispute may drag on until next year

Reykjavik, Iceland - Icelanders' rejection of a foreign depositor bill complicates the prospect of a settlement and may leave the government unable to resolve a dispute with the UK and the Dutch for another year, Moody's Investors Service said.

"Potentially we could see this dragging on until the middle of 2011," Moody's Senior Credit Analyst Kenneth Orchard said in a telephone interview before the vote. "The voting down of the referendum is going to complicate getting a deal."

Ninety-three percent of voters rejected the so-called Icesave bill in Saturday's plebiscite. The bill, covering repayment of a $5.3 billion loan, which would saddle each citizen with $16,400 in debt equivalent to 45 percent of 2009 economic output, sought to cover UK and Dutch depositor claims after the 2008 failure of Landsbanki Islands hf and unfreeze Iceland's international bailout. Moody's on Feb 26 said its 'Baa3' rating, which carries a negative outlook, may be lowered to junk if the issue isn't resolved.

"If they don't come to an agreement very soon, then it gets put on hold through the Dutch and the British elections and then you may not see talks back on until this summer," Orchard said.

UK and Dutch politicians are preparing for national elections, diverting attention to local issues. The British must go to the polls by June, while the Netherlands will hold early elections on June 9 after its government collapsed last month.

IMF limbo

Failure to reach an agreement on the bill has left Iceland's $4.6 billion International Monetary Fund-led loan in limbo and prompted Fitch Ratings to cut its credit grade to junk. Standard & Poor's has signaled it may follow suit.

While the IMF has said its program isn't linked to Icesave, it's made clear disbursements can't continue without the financing in place. The bailout's main contributing countries, the Nordic nations, have signaled they will suspend their loans until the matter is settled.

"The real deadline comes when they need to refinance their international bond," in December 2011, when a 1 billion euro ($1.36 billion) obligation falls due, Orchard said.

"They do have enough money in their foreign exchange reserves now to repay that bond, but it's not really realistic for them to use those funds. It would deplete their foreign exchange reserves quite significantly," he added.

Signs that Iceland was close to striking a deal had sent credit default swaps lower as investor perceptions of credit risk improved. The CDS spread on five-year debt slipped to 450 basis points on March 5, after soaring as high as 675 basis points on Feb 1, almost a month after President Olafur R. Grimsson refused to ratify the bill, sending it to a plebiscite.

Finance Minister Steingrimur Sigfusson has received word from the UK and Dutch that Icesave talks on a new bill can continue after the referendum, he told RUV on Friday.

Dutch Finance Minister Jan Kees de Jager said he is "disappointed" the agreement hasn't yet come into effect, according to a statement.

UK Chancellor of the Exchequer Alistair Darling told the British Broadcasting Corp his government has "tried to be reasonable. The fundamental point for us is that we get our money back".

Even so, the UK is "prepared to be flexible because it's not in our interest to have Iceland excluded", he said.

Iceland's government said there was "steady progress toward a settlement" in the past three weeks, in a statement.

The Social Democrat, Left Green coalition of Prime Minister Johanna Sigurdardottir has been quick to play down concerns the referendum has weakened the government.

"The government's survival doesn't rest with this Icesave vote," Sigurdardottir told RUV after the preliminary count. "The government coalition remains solid," said Sigfusson, who leads the Left Green junior coalition partner.

Even so, Moody's will watch for signs of political instability, Orchard said.

Bloomberg News

(China Daily 03/09/2010 page14)