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Iceland president promises to pay Iceland president promises to pay
(about 11 hours later)
Iceland's president has told the BBC's Newsnight it will pay its debt to the British and Dutch governments. Iceland's president has told the BBC's Newsnight programme that the country will pay its debts to the British and Dutch governments.
The country's willingness to refund the money those governments paid to citizens who lost money in the banking crisis has come under question. President Olafur Grimsson said that Iceland would "honour its obligations", arguing that a forthcoming referendum would not change that.
The president, Olafur Grimsson, stunned observers on Tuesday when he refused to sign off a bill approved by parliament. On Tuesday, the president called a public vote on a new bill committing Iceland to repaying $5bn (£3.1bn).
If passed it would have helped unleash much-needed loans and speed Iceland's attempt to join to European Union. There has been significant opposition to the bill among Icelanders.
"Junk" move Opponents say the repayment plan could harm the Icelandic economy further, and force taxpayers to pay for bankers' mistakes.
There has been significant public opposition to the Icesave bill, which commits Iceland to repaying $5bn (£3.1bn) to the UK and the Netherlands. The debt stems from the Icelandic banking crisis in 2008, when the UK and the Netherlands were forced to compensate savers with accounts in Icesave - a subsidiary of the collapsed Landsbanki bank.
This credit rating (downgrade) by Fitch has no practical consequences Olafur Grimsson, president of Iceland Laws already in place
There have also been international ramifications. This week one agency which assesses how safe it is to lend money to countries and companies, rated Iceland's debt as "junk" in the wake of the president's move. "The view which is being put forward that we will not honour our obligations is completely wrong," President Grimsson said.
But Mr Grimsson told Newsnight his action in refusing to sign the bill and hold a referendum had not harmed Iceland's financial reputation. He argued that legislation signed by him in September already ensured that Iceland would repay the money.
"This credit rating (downgrade) by Fitch has no practical consequences," he said. The Icesave bill has been the subject of protests in Iceland
A weaker credit rating makes lenders less willing to invest, and means the borrower has to pay a higher interest rate. "The law which I signed in September is based on the agreement that we have made with Britain and the Netherlands, where Iceland acknowledges its obligations," he added.
Mr Grimsson also denied he had acted in a high-handed fashion in overturning the wishes of Iceland's parliament. He said parliament was there to represent the people's will and the referendum was designed to test their wishes. However, it is not clear that this earlier agreement will be acceptable to the UK government.
Bill of good faith Unlike the later agreement it does not include a sovereign guarantee that the loan will be repaid in full.
Further bail-out money from the International Monetary Fund and others - which Iceland's recovery plan relies on - is also seen as dependent on Iceland striking a repayment deal. Public vote
Meanwhile the latest opinion polls suggest the referendum is not necessarily simply a rubber stamp to blocking the bill. The referendum is currently scheduled for 20 February, according to draft legislation to be discussed by the Icelandic parliament on Friday.
President Grimsson said that it was his duty to ensure that the public will on the matter was followed.
The latest opinion polls suggest the referendum is not necessarily simply a rubber stamp to blocking the bill.
The latest opinion polls, quoted by the Reuters news agency, suggest a lessening of hostility.The latest opinion polls, quoted by the Reuters news agency, suggest a lessening of hostility.
Some 51%-58% are against, down from around 70% formerly. Some 51%-58% are against, down from about 70% formerly.
Parliament will meet on Friday to plan the referendum on the controversial Icesave bill. A successful resolution to the dispute is essential if Iceland is to continue accessing the $7bn of financing from the International Monetary Fund and other Nordic countries - funds seen as crucial to its economic recovery plan.
Opponents believe the payment terms are too onerous and will hurt Iceland's economic recovery.