January 8, 2010 / 6:38 PM / in 8 years

Iceland PM to trust voters with Icesave decision

REYKJAVIK (Reuters) - Iceland’s prime minister said on Friday she was ready to put her trust in the voters to ratify a deal aimed at repaying Britain and the Netherlands more than $5 billion arising from the country’s banking collapse.

Reaching agreement with the two European Union countries is vital for the continued flow of aid to Iceland, still in the grip of a devastating recession after its 2008 financial meltdown.

But Icelandic President Olafur Grimsson unexpectedly refused to sign an amended law this week on repayment, citing a wave of popular anger over the bill. Under Iceland’s constitution, his move has forced a national referendum on the bill.

Lawmakers came back to work on Friday, nearly three weeks ahead of schedule, to thrash out the date and wording.

“I have full trust in the Icelandic voters and know that they will make the right decision,” Prime Minister Johanna Sigurdardottir said in parliament.

The president’s move wreaked political turmoil and forced Icelandic officials to plead with Nordic creditors for continued support. The country’s neighbors are part of a multilateral aid program led by the International Monetary Fund.

Finland, Norway and Denmark all repeated on Friday that a condition for their loans is that Iceland meets its international obligations.

Icelandic Finance Minister Steingrimur Sigfusson, speaking from Copenhagen after a meeting with his Danish counterpart, promised Reykjavik would live up to all its commitments.

The government had penciled in February 20 for a referendum but now is looking to hold a vote by March 6 at the latest.

One poll earlier this week showed a majority would vote against the bill while a second one, by Gallup, showed a majority would vote in favor.

British and Dutch depositors in high-interest Icesave bank accounts lost their money when Iceland’s banks collapsed in 2008 after years of aggressive expansion fueled by debt. The two countries compensated savers in full and want their money back.

If voters reject the bill, the law reverts to an earlier version passed in August. Britain and the Netherlands rejected those terms because repayments were not guaranteed after 2024.

‘IS THIS FAIR?’

Many Icelanders oppose giving an open-ended state guarantee, believing they have been saddled unfairly with crippling debts to pay for the mistakes of their banks. Others see it as the only way to restore the country to economic normality, ensure it has access to international markets and allow it to join the EU.

“I keep swinging back and forth on this,” said Gunnar Hansson, a 38-year-old actor who has a wife and two children. His equity in a two-bedroom apartment was wiped out by the country’s financial crisis and his loan payments are rising.

“Despite all the talk over the last year, I‘m still not sure if I have all the information I need to make up my mind. Is this a fair deal? Could we get a better deal? How much exactly will the final bill amount to? Should we pay this at all?”

Prime Minister Sigurdardottir promised the government would “inform voters carefully, and by that bring the Icesave issue to a close.”

A failure to back the measure -- which some on the island have dubbed the “Iceslave bill” -- could prolong economic misery and have wider repercussions. Spain, the current EU president, said the issue could affect Iceland’s bid to join the bloc.

“Clearly if it is not approved, it could slow down the whole calendar ... it could slow the whole process of negotiations,” Spanish Foreign Minister Miguel Angel Moratinos said.

Britain has said Iceland faces financial isolation if voters do not approve the measure. Ratings group Fitch downgraded the country’s debt to “junk” status this week and other agencies have issued credit warnings.

Paul Rawkins, a senior director at Fitch, said that if Icesave were to be resolved swiftly, the rating would look sturdier, but for now the agency wanted to wait and see.

“We have downgraded Iceland quite a lot, so I think at this point we would wait and see how this plays itself out actually,” Rawkins told Reuters Insider television.

Beyond debts to Britain and the Netherlands, Iceland has $2.6 billion in foreign currency debt, much of it due in 2011.

Bjarni Benediktssson, leader of the opposition Independents, said he favors renegotiating but is not against a referendum. “I don’t care if we reject the agreement in a referendum or if we renegotiate now. I am looking for a solution,” he said.

Benediktsson told Reuters he believed the British and Dutch may now realize they have been trying to push through a deal which Iceland’s people cannot accept.

Additional reporting by Niklas Pollard in Stockholm, John Acher in Copenhagen, Gwladys Fouche in Oslo, Timothy Heritage in Madrid; Writing by Simon Johnson and Adam Cox; editing by Mark Trevelyan

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