Iceland's debt problems do not seem to want to go away. If anything the mix of crashed banks, a brutal economic collapse and the demands of foreigners has left the Icelandic population of a little over 300,000 grumpy, ill-tempered and ready to reject a government bill to repay $5 billion to British and Dutch citizens who had put their savings in the now defunct Icesave. Those British and Dutch citizens want their money back; the proposed government bill puts the individual Icelandic price tag at $15,000 each (though most of this would be covered by the sale of bank assets). A referendum is scheduled for Saturday and the most recent poll shows that 74% of intended voters plan to vote down the measure. Hurrah for Iceland! That vote will certainly give the Dutch and British a poke in the eye. At least that it may initially feel like.

The reality of the situation is more tenuous. If Iceland votes down the referendum and talks between Iceland on one side and Britain and the Netherlands on the other side fail to resume, the costs of Lemming-like behavior could be substantial. This is not to argue that Icelandic people do not have the right to exercise their right to vote and one can certainly understand their anger over the harshness of repayment terms. But they should also be aware of the consequences:

1. Iceland needs to resolve the Icesave issue with the Dutch and British to unlock the rest of the IMF's aid package, critical to the economy after 2009's -7.7% real GDP contraction. Unemployment is set to top 10% this year and, according to the media, "empty store windows are an increasingly common sight, even in Reykjavik's main shopping district." The IMF and Nordic countries have promised to lend Iceland $4.5 billion, most of which is still on hold pending resolution of the Icesave debt.

2. A failed referendum could be a blow to the center-left government, which negotiated the deal and is associated with it in the public mind (mind you it was the center-right that helped park the country into its current mess). A weakened government will not help the situation.

3. The prolonging of the Icesave issue is complicating Iceland's entry into the European Union. Indeed, it is likely that without resolution of the Icesave issue, the UK and Netherlands are likely to obstruct membership.

4. A big no victory at the polls could result in a ratings downgrade. Fitch has already taken Iceland to below investment grade and Moody's and S&P have made grumblings in that direction. Moody's stated (February 26th) that it "believes the failure to reach a new agreement is likely to lead to an extended delay of the IMF programme, a weaker economic recovery and potentially, political instability."

What next for Iceland post-referendum? Hopefully it is back to talks with Britain and the Netherlands. Before talks broke down last week Iceland apparently won concessions on financing terms from the British and Dutch governments. Although the talks broke off without a new agreement, there may be a little more room for compromise. If not, Iceland could remain out in the cold with non-investment grade ratings, not a thrilling prospect.