Icelanders are set to reject the terms for repaying Anglo-Dutch debts in a referendum on Saturday, forcing new negotiations with creditors and delaying financial aid the country needs to fix its shattered economy.
Despite the negative consequences of rejecting the deal, Icelanders are furious about what they see as overly harsh terms from Britain and the Netherlands and they are now certain they can get a much better deal.
Some will vote 'No' to tell the world that Iceland won't accept this treatment, but studies have shown more than half believe that Iceland is ethically bound to pay back the debts, said Gudbjorg Andrea Jonsdottir, director at pollster Capacent.
Britain and the Netherlands have already offered easier repayment terms, so there is no reason for voters on the island of 320,000 to agree to the existing deal, which was drawn up late last year, on repaying about $5 billion.
But in addition to thumbing their noses at the British and the Dutch, the referendum gives Icelanders a chance to vent their anger at greedy bankers and politicians in Reykjavik who are widely blamed for bringing down the island's economy.
The Icesave debt amounts to more than $15,000 for every Icelander, although most of the money is likely to be raised eventually by the sale of assets of Landsbanki, which operated the accounts before folding late in 2008.
Surveys show that about three-quarters of Icelanders will reject the Icesave bill, which was agreed by parliament late last year, but which the president refused to sign.
But nullifying the agreement will have costs.
Recovery may be delayed and prolonged because Iceland needs (foreign) money to address the structural imbalances that exist in its economy, said Antje Praefcke, an analyst at Commerzbank.
The liberalization of Icelandic capital markets will also take more time. Ultimately, I don't expect the IMF and the Nordic countries to let Iceland down, but it will be more difficult, with more negotiations and time needed, she said.
Economy Minister Gylfi Magnusson warned on Thursday that gross domestic product could shrink 5 percent this year rather than the 2-3 percent currently forecast if a deal on Icesave is not reached soon.
Disposable incomes have already fallen by around 30 percent during the crisis.
IN A CORNER
Facing a heavy defeat in the referendum, Iceland's government had hoped that eleventh-hour talks with Britain and Netherlands could make the referendum unnecessary .
Finance Minister Steingrimur Sigfusson said on Thursday a vote was now unavoidable, but he held out hopes a deal might not be far off.
A quick end to the impasse would help the government recover its waning popularity and unlock aid from the International Monetary Fund.
The Icesave row with the two European Union countries has also rekindled anti-EU sentiment at a time when Brussels has invited Reykjavik to begin negotiations to join the bloc.
Support for membership has been falling in past months and it is now opposed by more than half of Icelanders, nearly twice the level seen just after the 2008 financial collapse.
Pro-EU voices have kept a low profile, seeking to distance membership prospects from the Icesave drama, so we may yet see support for accession rebound once a deal is finally approved and Iceland moves on, said Capacent's Jonsdottir.
(Editing by Robin Pomeroy)