REYKJAVIK (Reuters) - Icelandic voters vented their fury on Saturday at the bankers and politicians who ruined their economy, overwhelmingly rejecting a $5 billion deal to repay debts to Britain and the Netherlands, early results showed.
The outcome of the referendum had not been in doubt since Iceland had recently been offered better repayment terms than those contained in the deal on which residents were voting.
Partial referendum results from around a third of the cast votes showed 93 percent opposed the deal and less than 2 percent supported it. The rest cast invalid votes.
But the rejection will still have major repercussions, keeping financial aid on hold and threatening to undermine the center-left government of Prime Minister Johanna Sigurdardottir.
“This has no impact on the life of the government. We need to keep going and finish the (Icesave) debate. We have to get an agreement,” Sigurdardottir told public television.
The referendum, Iceland’s first since independence from Denmark in 1944, was forced by the refusal of Iceland’s president to sign a law in January on repayment terms negotiated by the government and approved by parliament.
He cited public anger at the time. Since then, the anger of the people on this recession-hit island has only grown.
While polls show Icelandic people believe the debts should be repaid, residents bitterly resent being stuck with a bill for the mistakes of a handful of bankers under the watch of foreign governments. The Icesave debts come to more than $15,000 for each one of the 320,000 people on the island.
The debts arose after Iceland’s top banks all collapsed within days of each other in 2008, brought down when credit dried up in the global financial crunch.
Around 400,000 savers in Britain and the Netherlands had deposits with one of the banks in so-called Icesave online deposit accounts. The two countries compensated the savers and since then have demanded their money back.
What makes the impasse all the more problematic is that the International Monetary Fund is waiting for the affair to be resolved before resuming financial aid, money which is crucial if Reykjavik is to rebuild a shattered economy.
Iceland, Britain and the Netherlands have been in on-and-off talks for weeks to try to reach a new deal. They started talks once it became clear which way Icelandic people would vote.
But a deal has proved elusive. Britain and the Netherlands softened terms, offering a variable interest rate instead of the relatively high fixed rate contained in the old Icesave deal.
Reykjavik held out. The issue has become so emotive that the government is under pressure to come up with a deal that will clearly be acceptable.
Turnout was high despite freezing rain and howling wind -- not uncommon for March in a country near the Arctic Circle.
A group of several hundred protesters gathered, saying that Iceland should focus on helping its own citizens get through the crisis before repaying foreign obligations.
“No Icesave. No traitors in power. The nation is innocent.” read one banner. “Save our homes instead,” read another in a loud protest reminiscent of the “Pots and pans revolution” which helped bring down the previous Icelandic government a year ago.
“We want to pay our debts, but we want to do it without going bankrupt,” said Steinunn Ragnarsdottir, a pianist who voted in Reykjavik City Hall with her two-year-old daughter.
No political parties are backing the “Icesave” accord agreed in late 2009, not even Sigurdardottir who brokered the deal. She has vowed to stay on after the referendum and said she would not cast a vote in the ballot.
Ultimately, most of the money is likely to be raised eventually by the sale of assets of Landsbanki, which operated Icesave accounts before folding in October 2008.
The focus of the negotiations is therefore the interest on the loan, which Icelandic officials say could knock about $1 billion off their costs.
The Netherlands appears to have hardened its position by linking Icesave with Iceland’s hopes to join the European Union.
Brussels invited Reykjavik to accession talks last month.
“The situation has changed,” Foreign Minister Maxime Verhagen was quoted as saying by ANP news agency on Saturday.
“Iceland has launched a referendum and the negotiations went wrong. I see that accession negotiations are an additional tool to enforce the agreement with Iceland,” Verhagen added.
Iceland’s central bank already expects the economy to contract more than 3 percent more this year after a steep fall in 2009. Failure to reach an Icesave deal could make the economic pain much worse, with no aid coming in and foreign companies delaying or scrapping projects.
The Icesave row with the two European Union countries has also rekindled anti-EU sentiment. Support for membership has been falling and is now opposed by more than half of Icelanders.
Additional reporting by Daniel Zdolsek in Reykjavik and Ben Berkowitz in Amsterdam, editing by Charles Dick