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Iceland President Olafur Grimsson (STR)
Iceland President Olafur Grimsson (STR)

Iceland blocks repayment deal, sparks global outrage Add to ...

Until Tuesday, Olafur Grimsson's role as president of Iceland was largely ceremonial. Suddenly, it's worth billions.

In a twist to the island nation's much-watched struggle to cope with its massive debt, Mr. Grimsson blocked a $5-billion (U.S.) deal to pay Britain and the Netherlands for losses suffered by depositors in one of Iceland's banks.

The move drew outrage around the world, and handed the country's people a tough choice to make in a referendum - agree to repay the money, or say no and risk cementing the country's status as an international deadbeat.

Icelanders, resentful at paying for their banks' failings amid a crumbling economy, are widely expected to deliver a resounding "No." One recent opinion poll suggests 70 per cent of the country's 320,000 people would oppose the settlement.

Such an outcome could imperil an International Monetary Fund bailout for Iceland, delay the next phase of $2.6-billion in loans from the country's Nordic neighbours, and harm talks to bring Iceland into the European Union.

It would also leave Iceland as an economic, not just a geographic, island, Britain warned.

"The Icelandic people … would effectively be saying that Iceland does not want to be part of the international financial system," Britain's Financial Services Minister Paul Myners said.

It is only the second time the largely ceremonial president, akin to Canada's governor-general, has rejected legislation passed by Iceland's parliament. It came after Mr. Grimsson received a petition signed by 60,000 Icelanders - 20 per cent of the population - opposing the deal, which is supported by the island's fragile left-leaning coalition government.

Mr. Grimsson said he took the step to allow the people a chance to have their say.

Iceland's Parliament had previously passed a bill pledging to repay at least some of the money, but ceasing payments in 2024. Britain and the Netherlands said this was unacceptable. The bill vetoed by the president, axed that provision.

The move prompted the Fitch credit ratings agency in London to downgrade the country's credit to junk. Standard & Poor's New York warned of a future downgrade.

Sveinn Agnarsson, director of the Institute of Economic Studies at the University of Iceland, said in an interview that if talks with Britain and the Netherlands drag on, the country's hopes for fast-track EU membership would be harmed.

"It could derail it," Dr. Agnarsson said. "When you have one domino that falls, it isn't always clear what else will happen."

He said more delay to foreign loans would further hurt Iceland's efforts to replenish its foreign currency reserves, something it needs to do before it can lift the capital and currency controls it imposed to deal with the crisis. And he said there was a danger a renegotiated deal could end up worse for Iceland.

Roger Boyes, author of Meltdown Iceland and a journalist with The Times of London, said the referendum campaign threatens to widen the divide in the country over EU membership, rejected historically because it would force Iceland to relinquish its exclusive fishing rights.

While some, especially young Icelanders, are in favour of joining the EU, opposition to it and to the repayment deal remain strong, he said. Opponents argue foreigners that "irresponsibly invested" in Iceland are also to blame for the crisis, seduced by higher interest rates such as those offered by the so-called Icesave accounts from Iceland's Landsbanki bank at the centre of the disputed payback deal.

An emotional referendum would likely end in the deal's rejection, he said.

"It will be something that splits families, it will spilt generations. There will be a younger generation that will say, 'We've got to join the European Union. The alternative is that we emigrate, because there's no work here.'

"There'll be older people saying, 'The European Union is the devil incarnate … Why should we bow to Britain and to Holland and to all these people that want their money back?'"

With files from Reuters

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