Hopes of reaching a deal on Iceland’s debt to Britain and the Netherlands slip away

Hopes of Icesave deal dwindle

LONDON — Hopes of reaching a deal over the payment of $5.7 billion owed by Iceland to Britain and the Netherlands — and avoiding a divisive referendum on the issue in the Nordic country — were dwindling on Friday amid recriminations on both sides.

With the national poll just a week away, the British and Dutch said they were disappointed that their “best offer” for repayment of the so-called Icesave loan was rejected, while Iceland expressed disappointment that their creditors did not try harder in weeklong talks.

The standoff could have far-reaching implications for Iceland, the tiny island nation in the North Atlantic that was consumed by the global credit crisis. It threatens key funding from the International Monetary Fund and other Nordic countries and endangers its application to join the European Union. Both measures are seen as key to the country’s recovery.

Ratings agency Moody’s Investors Service underscored the risk on Friday, saying the country’s debt rating, already close to junk status, was “under further downward pressure” because of the breakdown in talks.

“Moody’s believes the failure to reach a new agreement is likely to lead to an extended delay of the IMF program, a weaker economic recovery and potentially, political instability,” it said in a statement. “Overall, Moody’s believes that Iceland’s path out of the crisis now appears more difficult.”

At the heart of the issue is the collapse of the Icesave Internet bank, a subsidiary of Landsbanki, in October 2008.

National governments in Britain and the Netherlands stepped in to compensate their nationals with savings in the bank, and are now seeking recompense from Iceland.

The three countries had agreed on a repayment plan at the end of last year, but that was thrown into disarray in January when Icelandic President Olafur R. Grimsson refused to sign a bill greenlighting the deal into law.

His action triggered a referendum that is scheduled to take place on March 6. Polls suggest a likely “no,” vote, leaving the plan in limbo and likely extended talks that could delay the IMF funds and EU access.

Iceland had sought to avoid that outcome by seeking a revised deal in a bid to appease opponents at home, who objected to the tough initial terms imposed by Britain and the Netherlands for repayment, rather than the deal itself.

Sources close to the talks said Iceland was offered a floating interest rate on the debt, plus 2.75 percent, representing a significant cut on the 5.5 percent under the original deal. It could also have taken up a two-year interest holiday worth $600 million.

“The U.K. and Dutch governments are disappointed that despite their best efforts over the past year-and-a-half that the Icelandic government is still unable to accept our best offer on the Icesave loan,” the pair said in a joint statement. “We have consistently supported Iceland’s economic recovery.”

But Icelandic Prime Minister Johanna Sigurdardottir said the British and Dutch governments had refused to discuss ideas put forward by Iceland’s negotiators in London on Thursday.

“It is, of course, clear that the matter is difficult, but we feel that there are still options in the current situation and feel that it has not been tried to the fullest to get a common and acceptable result between the nations,” Sigurdardottir said at a news conference in Reykjavik.

Sigurdardottir said she was not ready to concede defeat because she still hoped that a new agreement could be reached before the March 6 referendum.

Given the closeness of the referendum, Sigurdardottir said it was unclear if it would go ahead or not if a deal was reached beforehand, but said it would likely be invalid in that scenario.