January 8, 2010 / 9:28 PM / 9 years ago

Iceland to hold Icesave referendum by March 6

* Iceland parliament orders referendum on Icesave terms

* Nordic states say Iceland must meet obligations

* EU President Spain says Reykjavik risks delay in EU bid

(Recasts with passage of referendum bill)

By Omar Valdimarsson

REYKJAVIK, Jan 8 (Reuters) - Iceland’s parliament on Friday said a referendum must be held no later than March 6 on terms under which the country will repay Britain and the Netherlands more than $5 billion owed as a result of its financial meltdown.

Lawmakers returned to work early on Friday to thrash out the details of the bill on the referendum, which the government wants to hold as soon as possible to avoid further fallout from the Icesave affair.

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 fuelled by debt. The two countries compensated savers in full and want their money back.

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

Icelandic President Olafur Grimsson unexpectedly refused to sign an amended law this week approving repayment, citing a wave of popular anger over the bill. Under the constitution, his refusal forced Iceland to hold a referendum on the bill.

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

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

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

The referendum date will depend on practical matters such as how quickly ballots can be prepared and the electoral register updated.

The president’s refusal to sign the repayment bill wreaked political turmoil and forced Icelandic officials to appeal for the continued support of their Nordic creditors — part of a multilateral aid programme led by the International Monetary Fund.

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



PROMISE TO MEET COMMITMENTS

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

Many Icelanders oppose giving an open-ended state guarantee, believing they have been saddled unfairly with crippling debts resulting from the mistakes of their banks.

Others see it as the only way to restore economic normality, ensure Iceland has access to international markets and allow it to join the European Union.

"I keep swinging back and forth on this," said Gunnar Hansson, a 38-year-old actor with a wife and two children. His equity in a two-bedroom apartment was wiped out by the 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?" he asked.

The bill on the referendum calls on the government to present the case for the Icesave deal in a neutral manner. Sigurdardottir said the government would "inform voters carefully".

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 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. (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 Tim Pearce)




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