Icelanders have voted a second resounding "no" to proposals to repay €4bn (£3.5bn) to Britain and the Netherlands for the collapse of the country's banking system.
When Landsbanki went under in 2008, the British and Dutch governments reimbursed nearly 400,000 people in danger of losing savings held in the Icelandic bank's "Icesave" accounts.
After 60 per cent of Iceland's voters at the weekend rejected a repayment plan, the issue will now be decided by the European Free Trade Association (Efta) Surveillance Authority court.
Danny Alexander, the Chief Secretary to the Treasury, described the outcome as "disappointing" yesterday and said the British Government would continue to pursue the matter. "There is a legal process and we will try to make sure we do get back the money that the British Government paid out," he said.
Jan Kees de Jager, the Dutch Finance Minister, was more strident still. "The time for negotiations is over. Iceland remains obliged to repay," he said. "The issue is now for the courts to decide."
Iceland's Prime Minister, Johanna Sigurdardottir, said yesterday that Icelanders had chosen "the worst option" in rejecting the repayment plan. But Reykjavik also played down the impact of the vote, stressing that the vote would not affect payments to come from the Landsbanki estate to "priority claimants" – including the British and Dutch authorities – which should cover nearly a third of priority claims.
The outcome of the referendum could have serious consequences for Iceland. It is already struggling to rebuild its economy in the aftermath of the financial crisis, having been forced to accept a $4.6bn (£2.8bn) bailout from the International Monetary Fund (IMF) and put in place capital controls to protect the krona. And the Efta court could take several years to reach a verdict.
In the meantime, prolonged uncertainty over Icesave will hamper economic recovery, undermine the country's ability to borrow on the financial markets, and increase the likelihood of another credit rating downgrade. Fitch Ratings has already cut Iceland's rating to "junk'" status, after the first referendum rejection, and Moody's warned in February that it would follow suit if the second referendum also came up with a "no".
In an effort to reassure the market, Reykjavik yesterday stressed its continuing commitment to the IMF-backed programme, emphasising that the country would still have "no difficulty" covering its debts in the years ahead, despite the referendum.
The 'no' vote also has significant political implications, with the dispute causing continuing friction with Britain and the Netherlands and raising the chances that one or the other might veto Iceland's bid to join the EU.
The first attempt at a repayment deal – specifying an interest rate of 5.5 per cent to be paid over eight years - was rejected by 93 per cent of Icelandic voters in March last year.
Under the second proposal, Iceland was to pay over 30 years from 2016, with a 3.3 per cent interest rate to Britain, and a 3 per cent rate to the Netherlands.
The deal had the backing of the Icelandic parliament, which hoped to draw a line under the dispute. But the President, Olafur Ragnar Grimsson, refused to sign it, triggering a second referendum.
Iceland's government says the cost to taxpayers will be far less than the €4bn headline figure and could drop to below £200m once the assets of Landsbanki have been sold.
But the country's "no" campaigners maintain that taxpayers are not liable for losses incurred by a private bank. Of the 230,000 Icelanders eligible for the referendum, 169,000 voted.