Iceland’s president rejected a bill to repay Britain and the Netherlands more than US$5 billion of the funds their savers lost when Icelandic banks collapsed, forcing a referendum on the issue and threatening vital economic aid.
Icelandic President Olafur Grimsson’s refusal to sign the unpopular Icesave bill into law on Tuesday plunged Iceland into crisis and put hopes of joining the EU in jeopardy.
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 percent of voters oppose the bill.
Icelandic 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 honoring Iceland’s debts.
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,” British 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 Grimsson’s decision by downgrading Iceland’s long-term foreign currency issuer default rating to “junk” status with a negative outlook.
Standard & Poor’s followed up saying Grimsson’s decision could lead it to cut, by one or two notches, its current BBB-minus rating to “junk” status, citing the political uncertainty and external liquidity pressures.
The next tranche of a 1.8 billion euro (US$2.60 billion) loan from Iceland’s Nordic neighbors is also likely to be delayed, a Finnish official said.
On Tuesday the IMF said the Icesave agreement was not a condition for the IMF’s agreement with Iceland as long as the loan program was financed by Nordic partner countries.
The Dutch government said it was “very disappointed” and would demand an immediate explanation.
Nearly a quarter of Icelandic voters, angry at the prospect of paying debts they find onerous and unfair, had petitioned 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.