Icelandic president Olafur Grimsson's refusal to sign the unpopular Icesave bill into law today plunged the country into a political crisis and put its hopes of joining the European Union in jeopardy.
The bill was intended to compensate the governments of Britain and the Netherlands after they were forced to bail out their savers with Icesave accounts following Iceland's banking collapse.
Prime Minister Johanna Sigurdardottir, who has pushed hard for a deal to repay the two countries the money they used to compensate savers who lost funds in Icelandic accounts, said her government was committed to honouring Iceland's debts.
In Brussels, an Icelandic official negotiating Iceland's EU membership bid said the government expected to hold a referendum in four to eight weeks. The outcome is highly uncertain - a recent poll showed almost 70 per cent of voters oppose the bill.
Britain warned Icelanders that if they rejected the bill, the north Atlantic island with just 320,000 people faced financial isolation.
"The Icelandic people . . . would effectively be saying that Iceland does not want to be part of the international financial system," Financial Services Minister Paul Myners said. That would mean losing access to international funding and being shunned as a business counterparty, he said.
Rating agency Fitch reacted to Mr Grimsson's decision by downgrading Iceland's long-term foreign currency issuer default rating to "junk" status with a negative outlook.
The next tranche of a €1.8 billion loan from Iceland's Nordic neighbours is also likely to be delayed, a Finnish official said. The Dutch government said it was "very disappointed" and would demand an immediate explanation.
Only once before in the republic's 65 years has a president refused to sign a bill into law, triggering a referendum.
"Now the people have the power and the responsibility in their hands," Mr Grimsson told a news conference. Nearly a quarter of Icelandic voters, angry at the prospect of paying debts they find onerous and unfair, had petitioned Mr Grimsson to reject the bill.
They accuse Britain and the Netherlands of using their EU veto and IMF voting power to bully a small country's taxpayers into repaying savers who imprudently poured money into high interest Icesave accounts.
Reuters
