Iceland’s government gave the go-ahead on Thursday for a referendum on a hugely unpopular compensation deal for a failed bank, as analysts warned of turmoil if voters rejected it.
“The referendum is going to go ahead,” Finance Minister Steingrimur Sigfusson said in an address to parliament, despite frantic attempts to avert a vote.
“We have been trying to resolve the matter in another fashion than the referendum, but now time has run out,” he said, adding however that “technically we could cancel the referendum until Friday night.”
The bill to be voted on would pay Britain and the Netherlands 3.9 billion euros (US$5.2 billion).
The money would cover British and Dutch government reimbursements to 340,000 savers hit by the collapse of the online bank in October 2008.
The repayment would take place between 2016 and 2024, at a 5.5 percent interest rate.
Iceland hopes to reimburse a large chunk of the money — up to 90 percent — by selling assets of its nationalized Landsbanki bank. The process is expected to take several years, however, and estimates vary on its potential value.
A poll published on Tuesday predicted that three-quarters of voters would reject the deal, paving a rocky road ahead for the country.
The main fallout feared by the government, central bank and analysts would be if London and The Hague block a US$2.1 billion IMF rescue package for Reykjavik, sharpening Iceland’s recession.
“A delay of several months could deepen the contraction [of Iceland’s GDP] to 5 percent this year,” Economics Affairs Minister Gylfi Magnusson told reporters.
The IMF has already handed over half of the money to Iceland, while the other Nordic countries, which have vowed to chip in an additional 1.8 billion euros in loans to help with their neighbor’s recovery, have so far shipped more than US$300 million.
“There is in fact a risk that the cost of the delays might actually be higher than the cost of the deal itself,” Magnusson said.
Still, Iceland’s central bank sought to allay fears of bankruptcy, saying it expected “difficulties and delays, but Iceland has enough to fulfill its obligations,” Sedlabanki spokesman Stefan Stefansson said.
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