Iceland's economic and political future hangs in the balance as it heads towards a referendum on how to compensate Britain and the Netherlands for money lost in the collapse of an Icelandic bank. Skip related content
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Still shaken from the crumbling of its once-booming financial sector in 2008 that left its economy in tatters, Iceland is bracing for a plebiscite Saturday that observers say could easily increase its isolation, complicate its road to economic recovery and block its entry into the European Union.
"A 'no' vote in the referendum may prevent access to significant external liquidity" and thus could cause "a weaker economic recovery and potentially, political instability," rating agency Moody's cautioned late last week.Icelandic President Olafur Ragnar Grimsson has refused to sign legislation approved by parliament that would pay Britain and the Netherlands 3.8 billion euros (5.2 billion dollars) to cover their reimbursements to 320,000 savers hit by the collapse of the online Icesave bank in October 2008.
Grimsson instead referred the issue to a referendum, citing public opposition, and opinion polls predict the legislation will be widely rejected.
According to the latest poll, 58 percent of voters intend to vote down the repayment law.
In an attempt to ward off chaos, the government in Reykjavik has been scrambling for weeks to negotiate a new accord with Britain and the Netherlands that would avert the popular vote.
So far however, all attempts have failed.
"Overall, Moody's believes that Iceland's path out of the crisis now appears more difficult," the agency said after the latest round of talks collapsed on Thursday.
Britain and the Netherlands would likely continue blocking progress on a 2.1-billion-dollar International Monetary Fund rescue package for Iceland until Reykjavik agreed to pay off its Icesave debt, Moody's warned.
No repayment deal could also negatively affect the Nordic country's EU membership talks, according to Gunnar Helgi Kristinsson, a political science professor at the University of Iceland.
"If there is no Icesave deal it is obviously far from certain that all the European countries will agree to accepting Iceland's EU candidacy," he told AFP.
"And from a local perspective, the Icesave case has created hostility among Icelanders to countries that used to be considered our friends and has heightened the opposition to the EU in opinion polls," he added.
There still remains some hope that the March 6 referendum could be avoided, with Prime Minister Johanna Sigurdardottir stating on friday that "there is still a possibility to reach a reasonable solution between the three nations."
Her government -- the first leftwing cabinet to lead Iceland since its independence from Denmark in 1944 -- came to power on the back of the country's deep financial crisis.
During the parliamentary discussions on Icesave late last year however, Sigurdardottir threatened to resign if the bill was not adopted, and the government could easily be unseated if the repayment deal it has strived for is rejected.
"If the referendum takes place it could upset the country's political balance. The government is therefore trying to avoid the political upheaval the referendum could entail," Kristinsson said, pointing out that government officials had been trying to distance themselves from the Icesave legislation.
"To survive a 'no' vote, the government ... must try to avoid taking responsibility for the law that will be submitted to a referendum," he said.
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