Iceland president forces new Icesave referendum

Reuters, REYKJAVIK | Sun Feb 20, 2011 

(Reuters) - Iceland's president on Sunday triggered a referendum on an updated plan to pay $5 billion to Britain and Netherlands for debts incurred from the financial crisis, creating new uncertainty over the island's economic recovery.

Iceland, whose economy and financial system crashed in late 2008, owes the money to Britain and the Netherlands because both countries bailed out domestic savers who lost money in online "Icesave" accounts run by a failed Icelandic bank.

It is the second time President Olafur Grimsson has vetoed an Icesave repayment bill. In the last referendum, a big majority of the country's roughly 200,000 voters threw out an earlier payment plan, sending negotiations between the three countries back to square one and delaying economic recovery.

Grimsson said that the current parliament was the same as that which had approved the original Icesave deal and that, since then, it had not received a new mandate from the people to decide the issue alone.

He acknowledged that the new repayment terms thrashed out between Iceland, Britain the Netherlands over months of negotiation were better than the first deal.

However, he said it was fundamental that "the people exercised legislative power in the Icesave dispute."

"I have, therefore, decided in accordance with Article 26 of the constitution, to refer the new bill to a referendum."

The Dutch government said the time had passed for talks over Iceland's debts.

"We have passed the stage of negotiations, but it is not up to us how this situation in Iceland will advance. We are sure the Icelandic government will consider the new situation and we hope to hear from them soon," Dutch Finance Ministry spokesman Niels Redeker said.

Iceland's parliament approved the latest plan earlier this week and Grimsson said a referendum would be held as soon as possible.

Resolving the Icesave dispute has long been seen as necessary to patching up the country's relations abroad -- talks began last year to join the European Union -- and getting the economy back on its feet.

The island's financial meltdown caused the crown currency to collapse and sent the economy into a tailspin.

The country had to be bailed out by the International Monetary Fund and others. Strict capital controls were put in place to prevent an outflow of funds, keeping Iceland cut off from international capital markets.

The government desperately wants to conclude the matter, but there is deep resentment on the island about the plan.

(Reporting by Omar Valdimarsson, writing by Simon Johnson, editing by Mark Trevelyan)