Iceland will "honour its obligations" over almost €4 billion owed to Britain and the Netherlands that was lost in failed savings banks, president Olafur Grimsson has told British television.
The Icelandic parliament had approved a deeply unpopular bill to cover compensation already paid out by the British and Dutch governments to holders of "Icesave" accounts after Icelandic banks collapsed in 2008.
But Mr Grimsson stunned international financial markets and the government on Tuesday by refusing to sign it and forcing a referendum on the issue.
"The view that we will not honour our obligations is completely wrong," Mr Grimsson told the BBC Newsnight programme late yesterday. "The fundamental basis of the law which is already in existence and which I signed is that Iceland declares it honours its obligations."
The dispute over the Icesave payments has severely strained relations between Reykjavik and London, with Britain warning Iceland faces economic isolation if voters reject the bill.
Asked if people could trust Icelanders anymore, Mr Grimsson replied: "We should involve ourselves in a constructive agreement with the British and Dutch governments in order to resolve this issue."
"The only thing that I have decided is to allow the Icelandic people to have the final say in a referendum which is in accordance with our fundamental democratic principles."
Iceland's government yesterday proposed a February 20th referendum on the issue that has divided the country. Mr Grimsson did not say what would happen if the country voted against the bill.
Iceland's foreign minister said today he had been assured by British foreign secretary David Miliband that a presidential rejection of the so-called Icesave bill would not torpedo Iceland's EU bid.
"I have spoken to Foreign Secretary Miliband and I have his permission to state officially that this will not affect the EU application," Icelandic foreign minister Ossur Skarphedinsson said.
The minister said the coalition government was making every effort to limit any potential fallout of the president Olafur Grimsson's move and stressed Iceland's need for support from its Nordic neighbours, who are contributing money under the International Monetary Fund's aid programme for the island nation.
"I stress that if the Nordic countries were not to stand by us, it would be a terrible blow for us and it would be out of harmony of what their leaders have said and with our long-standing relations," he said.
"I mean, these are our kinsfolk."
Iceland's finance minister is to meet with some of his Nordic counterparts tomorrow to pursuade them to keep vital credit lines open to the cash-strapped nation, a government spokesman said.
Steingrimur Sigfusson will meet with Norway's finance minister on Friday before flying on to Copenhagen to meet with his Danish counterpart, Icelandic finance ministry spokesman Elias Jon Gudjonsson said.
Mr Sigfusson has already talked by phone to Swedish Finance Minister Anders Borg, Gudjonsson said.
"He is of course telling them what the situation is and, of course, getting their feedback and, of course, (trying to) convince them to support the plan ... the loans," the spokesman said.
Reuters