SCENARIOS-What's next for Iceland after debt referendum?

(repeats story first issued on March 7)

REYKJAVIK, March 7 (Reuters) - After the crushing rejection by voters of a previous "Icesave" accord, Iceland's economic and political fortunes now hinge on how quickly the country can forge a new debt deal with Britain and the Netherlands.

Iceland owes $5 billion to the two European Union members after they compensated savers in their countries who lost money in online Icelandic accounts during the 2008 financial crisis.

The three countries have already had three weeks of talks, during which Reykjavik said progress had been made.

The critical issue is timing. The longer Iceland takes to agree terms for paying back the money, the longer the delay to financial aid and the greater the risk to the government.

Here are three main scenarios after Saturday's referendum.

A QUICK DEAL

Iceland's finance minister said on Sunday the government wanted to reach a new agreement before the British and Dutch governments get bogged down in elections.

Britain's elections must be held by June 3 and are expected for May 6 which means the government will be focused on an election campaign, and the Netherlands holds elections on June 9, which means the window for doing a deal is tight.

The International Monetary Fund and Nordic countries have promised Iceland about $4.5 billion in financial assistance, which could allow it to lift capital controls imposed during the crisis. While those controls remain, investment in Iceland will be scarce.

A small portion of that has been disbursed but most is on hold as the IMF wants to see an Icesave resolution first.

Iceland's central bank has forecast the economy to contract 3.4 percent this year, and that does not factor in the possibility of an extended delay in aid and investment. So the incentive for a fast deal on Iceland's side is clear. For a deal to be agreed, one of two things must happen.

One possibility is that the British and Dutch soften their terms further, potentially even by a token amount to give Reykjavik something it can sell back home. The other is that Iceland is persuaded to take what is on the table and somehow get the new accord approved in parliament.

With a new deal, Iceland can look forward to aid restarting and can start focusing on fixing the economy.

DEAL DELAYED FOR MONTHS

If the three nations cannot move ahead within a few weeks, Iceland's plight may deepen.

The Dutch and British have expressed frustration Reykjavik has not accepted the terms on the table -- a more attractive variable interest rate instead of the previous fixed rate.

Under this scenario, negotiations may be stalled until well into the second half of 2010, particularly if it proves difficult for new governments to take shape in Britain or the Netherlands after their elections.

Iceland's GDP will contract roughly twice as fast as previously expected in 2010 if the Icesave deal is delayed by several months, its economy minister has said. [ID:nSAT008413]

Iceland's credit ratings -- already at junk status with one agency -- would in all likelihood also be cut further if the prospects for a new deal by mid-2010 began to fade. Iceland and its companies would find it difficult to raise capital or do deals with foreign parties.

Statistics detailing the share of recent foreign investment are not available but Iceland's central bank says overall business investment dropped more than 50 percent last year after a 25 percent fall in 2008. It has forecast a pickup this year but that was before the latest Icesave impasse.

The local political fall-out would be greater, too. The government would lose credibility for failing to reach its promised agreement and endangering the fragile economy.

Icelanders trusted Prime Minister Johanna Sigurdardottir more than perhaps any other politician after the 2008 collapse, but recent signs are that her Social Democratic party has lost popularity.

Given the lack of clear-cut political alternatives and the ballot fatigue Icelanders are starting to feel, the government might just be able to scrape by. But it could be less effective.

Iceland's chances of joining the EU would lessen. The Dutch have publicly linked Icesave with the EU bid. The pro-EU camp would find it far harder to make a case to enter a union that includes Britain and the Netherlands.

NO DEAL CAN BE REACHED

The worst outcome for all three countries, and the one considered least likely, is that no deal gets done.

Iceland would be cut off from capital markets and aid. Its economy would have no chance of recovering. Energy and aluminium projects, which need foreign cash, would be delayed or scrapped.

Iceland would have to rely more on its fishing sector, which in decades past had played a key role in the economy.

By late 2011, it would face problems repaying other debts and could default. This would weaken the country's economic position for years to come.

Joblessness, in an island that had almost zero unemployment before the crisis, would soar raising the threat of social unrest. Last year unemployment was already 8 percent.

The central bank's deputy governor told Reuters on Thursday Iceland could cover its debt needs in 2011 but this would bring foreign reserves uncomfortably low. [ID:nLDE6230VZ]

The two EU countries would also have no guarantee of repayment. Icelandic resentment towards the British and Dutch, and the EU in general, could be expected to be high.

Iceland's government might also find its position untenable. Having first tried to sell a costly deal to the Icelandic people, and then failed to reach any deal at all, confidence in the Social Democrats and Left-Greens would be sorely tested.

(Writing by Simon Johnson, Wojciech Moskwa and Adam Cox; Editing by Sonya Hepinstall)