Icelanders voted in a referendum on Saturday on a $5 billion deal to repay Anglo-Dutch loans, with an expected resounding No set to delay foreign aid, hopes for economic recovery and possibly EU aspirations.
Despite the consequences of rejecting the standing deal, angry Icelanders are intent on voting down a 2009 accord with Britain and the Netherlands they see as too costly. They are also certain they can get a much better deal.
Britain and the Netherlands have already offered easier terms than those included in the deal put to a vote, but Reykjavik has so far held out.
Iceland needs to agree how to pay back its Icesave debts, equivalent to half of the country's annual GDP, to unlock more financial aid from the International Monetary Fund and the Nordic states, and to turn around its shrinking economy.
Some 300-400 demonstrators braved the freezing rain and howling wind to protest against the Icesave accord, saying that Iceland should focus on helping its own citizens get through the crisis before repaying foreign obligations.
The ballot gives Icelanders an opportunity to vent anger at what they see as reckless Iceland bankers and politicians who caused the meltdown and now expect taxpayers to pick up the tab. There is also deep rancour over the approach of the British and Dutch governments.
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.
Surveys show most Icelanders believe they should pay the Icesave debt but view the current accord's terms as unfair.
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.
Partial results are expected after polls close at 2200 GMT.
No political parties are backing the Icesave accord agreed in late 2009, not even Prime Minister Johanna 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.
The Icesave debt amounts to more than $15,000 for every one of Iceland's 320,000 people, though most of the money is likely to be raised eventually by the sale of assets of Landsbanki, which operated Icesave accounts before folding late in 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 appeared to harden their 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 Finance Minister Steingrimur Sigfusson said the expected results of the referendum should not be interpreted as Iceland refusing to pay its Icesave obligations.
We will honor our obligations. To maintain anything else is highly dangerous for the economy of this country, he said.
The foreign minister told Reuters on Friday that he expected a new deal in the next weeks, perhaps sooner, which would limit the economic impact of the ballot.
The economy minister said a several month delay would shave 2-3 points off GDP in 2010, while a deputy central bank chief said the foreign aid was needed by late 2011, when Iceland refinances $1.8 billion in debt.
In the referendum, Iceland's 230,000 voters will be asked whether to approve a deal on paying money back to Britain and the Netherlands, after they compensated savers in their countries who had lost money in Icesave accounts.
Sigurdardottir said Britain and the Netherlands were holding Iceland hostage by linking Icesave to Reykjavik receiving more IMF aid. With the cash in its coffers, Iceland would be able to open its borders to capital flows that feed investments.
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)