An Icesave "no" vote could mean downgrade-Moody's

STOCKHOLM Feb 23 (Reuters) - Iceland's sovereign credit rating could be downgraded if its voters reject a new plan to repay debts to Britain and the Netherlands left over from the financial crisis, Moody's said on Wednesday.

Iceland's president on Sunday forced a referendum on the issue when he vetoed a new law on repaying around $5 billion Britain and the Netherlands doled out to savers who lost money in Icesave accounts when Icelandic bank Landsbanki collapsed.

"If the agreement is rejected, we would likely downgrade Iceland's ratings to Ba1 or below, given the negative repercussions that would follow for the country's economic and financial normalisation," the credit rating agency said in a statement.

Should Icelanders back the plan, which replaced an earlier deal that voters rejected in a referendum in March 2010, Moody's said it would probably raise the outlook on the government's current Baa3 rating to stable from negative.

An opinion poll of 771 people by research group MMR earlier this week showed 57.7 percent in support of the new repayment bill. [ID:nLAN168408]

Resolving the Icesave dispute has long been seen as necessary for Iceland's plan to join the European Union and for getting the bruised economy back on its feet.

Iceland's financial sector collapsed in late 2008 along with the crown currency EURISK= EURISK=D3 and the economy.

Iceland was bailed out by the International Monetary Fund and others and the economy has started to recover.

Interest rates have tumbled to 4.25 percent from around 18 percent, inflation has been tamed and the economy should grow this year for the first time since 2008.

Failing to resolve the Icesave issue could hold up further progress, particularly the removal of capital controls, a key measure to restoring financial normality.

The new deal, which parliament passed last week, is widely seen as much more favourable to Iceland than that which voters rejected last year.

Moody's said that if the current bill is rejected, the issue could have to be settled in court.

This could take a long time and cost Iceland more than the 50 billion Iceland crowns ($426 million) the government believes to be the maximum tab the Icelandic taxpayer will have to pick up under the current deal.

(Editing by Ruth Pitchford)