* Iceland govt eyes Feb. 20 for Icesave referendum -draft
* Parliament to reconvene on Friday, ahead of schedule
* Polls suggest public against bill
* Economics minister said IMF aid on hold pending resolution
(Adds Gallup poll, background on talks, govt statement)
By Omar Valdimarsson
REYKJAVIK, Jan 6 Iceland's government proposed
on Wednesday a Feb. 20 referendum on repaying Britain and the
Netherlands for huge sums lost in a failed savings bank, an
issue that divides the country and threatens more economic pain.
Britain has warned Iceland it faces economic isolation if
voters reject the bill authorising repayment of more than $5
billion to cover compensation already paid out by the British
and Dutch governments to holders of Icesave accounts.
Parliament had approved the deeply unpopular bill, but
President Olafur Grimsson stunned international markets and the
government on Tuesday by refusing to sign it, citing a wave of
popular anger over the measure.
The Feb. 20 date was given in a draft referendum bill, seen
by Reuters, which is due to go before parliament. Legislators
have been called back to start work on Friday, nearly three
weeks ahead of schedule, due to the Icesave impasse.
The government confirmed in a statement it would propose a
referendum for late February, but did not specify the date.
Swathes of the 320,000 population think it unfair that they
should have to pay for the mistakes of private firms under the
watch of foreign governments.
Polls released on Wednesday showed opposition to the bill is
strong, although it has eased in recent weeks. Polling firm MMR
reported 58 percent of respondents would vote against the bill,
while a Gallup poll said 51 percent were opposed.
The Icesave saga threatens to hold up much-needed financial
aid for Reykjavik, put the country's European Union candidacy in
jeopardy and undermine the coalition government.
The government has sought to push through an Icesave deal
while acknowledging public fury, arguing Iceland must honour its
debts and failure to do so would have dire repercussions.
The president's move has made the task more daunting.
"I don't like it, certainly," Economics Minister Gwlfi
Magnusson told Reuters in a telephone interview. "And we wish
things were different, but those were the cards that were dealt
and we're trying to do our best given the situation."
Magnusson said further aid from the International Monetary
Fund and efforts to loosen capital controls were on hold until
the Icesave impasse was settled.
"You could say it's put on ice until the problem has been
resolved," Magnussen said, adding that the result could be a
further contraction of the Icelandic economy this year after a
fall estimated at more than 8 percent in 2009.
Ministers rushed to allay foreign creditors' fears, holding
talks with their counterparts in Britain and the Netherlands as
well as at the EU level, a government spokesman said.
State media reported that Finance Minister Steingrimur
Sigfusson would meet British officials in the coming days. A
government official said Foreign Minister Ossur Skarpheoinsson
would speak with British Foreign Secretary David Miliband.
The European Commission said on Wednesday that the way
Reykjavik handles the Icesave issue could affect the assessment
of its EU membership bid.
Financial markets took a dim view of developments, although
international exposure to Iceland is much smaller than in the
heady years that preceded its October 2008 meltdown.
The cost of insuring Icelandic debt against restructuring or
default jumped on Wednesday. Five-year credit default swaps rose
38 basis points to 482 bps from Tuesday's close, according to
CDS monitor CMA DataVision.
Moody's Investors Service said the Icesave referendum could
lead to political instability which would put pressure on the
country's credit ratings.
Rival agency Fitch downgraded Iceland to "junk" status on
Tuesday and Standard & Poor's said it too may slash its ratings.
Grimsson, whose post is mostly symbolic, used his
constitutional power to force a referendum. It was only the
second time in the republic's 65-year history that a president
has refused to sign a bill.
Iceland applied for EU membership last year, but public
opinion on joining the bloc has soured, in large part because of
the Icesave issue.
Many Iceland residents believe Britain and the Netherlands
are using their veto power as EU members and their IMF voting
rights to bully the small North Atlantic nation.
A group called InDefence has mobilised anti-Icesave
sentiment, organising a petition that called on the president to
reject the bill and acting to rally the public on the issue.
"This referendum is not about whether Iceland should pay,
but how much and how fair the deal is," Johannes Skulason, a
spokesman for InDefence said. "There is immense anger at the
Icelandic bankers who gambled the future of Iceland's economy,
lost and then ran away."
People in Iceland are also furious with Britain, which used
anti-terrorism legislation to freeze Icelandic assets during a
chaotic period in late 2008 when Iceland's banks all collapsed.
A "no" vote would put pressure on the coalition government
of Social Democrats and Left-Greens to resign.
(Editing by Robin Pomeroy)