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Icelanders to vote on Icesave repayment

The vote is this Saturday on a referendum called by Iceland's president to decide the fate of a £3.4

Opinion polls suggest angry Icelandic voters are expected to reject the unpopular deal because of its harsh terms.

The repayment package was negotiated last year between the three countries when the internet bank Icesave collapsed in 2008. The British and Dutch governments had to compensate savers who lost their money. Now both of them want Iceland to pay them around £3.4bn as reimbursement for bailing out savers.

The three countries negotiated a deal last year, but Iceland's president, worried over interest rate terms, did not sign the bill. He instead chose to call a referendum - the country's first - to decide whether to honour the deal and pay up the debt.

The Icelandic government was trying to resolve the issue "in another fashion" but talks with Britain and Holland failed and it ran out of time as the date of referendum approached.

If the voters vote no to the deal, Iceland will lose credibility in the financial markets and billions of loans from international financial institutions may be jeopardised. This will further delay financial aid to the beleaguered Icelandic economy. However, the referendum could still be cancelled up to Friday night by the government.