Iceland's president has rejected a revised plan to pay compensation to Britain and the Netherlands over the collapse of the online Icesave bank three years ago, saying it should be subject to a new referendum.
British and Dutch savers had Icesave accounts
Iceland's president has triggered a referendum on an updated plan to pay $5 billion (3.7 billion euros) to Britain and the Netherlands for debts incurred during the financial crisis, renewing uncertainty over Iceland's membership negotiations with the European Union.
The Icelandic government owes money to Britain and the Netherlands, which were forced to bail out savers who lost money after the failure of the online "Icesave" bank, an arm of the Landsbanki bank. The financial system in Iceland collapsed in late 2008.
Icelandic President Olafur Grimsson said the new terms thrashed out after months of negotiations were better than the first deal, which Icelanders rejected last year. However, he said it was fundamental that "the people exercised legislative power in the Icesave dispute."
Icelanders already voted on Icesave in March 2010
"I have, therefore, decided in accordance with Article 26 of the constitution, to refer the new bill to a referendum," he said.
The new vote will not take place for at least a month.
Prospects of EU membership
Resolving the Icesave dispute has long been seen as necessary for Iceland's plan to join the European Union and for getting the economy back on its feet.
The government wants a deal, but many Icelanders believe it is unfair that taxpayers must foot the bill for mistakes made by private banks.
Should Icelanders reject the plan, progress on EU membership will be more difficult.
Prime Minister Johanna Sigurdardottir said the president's decision was "disappointing."
The Dutch government said the time had passed for talks over Iceland's debts.
"We have passed the stage of negotiations, but it is not up to us how this situation in Iceland will advance. We are sure the Icelandic government will consider the new situation and we hope to hear from them soon," Dutch Finance Ministry spokesman Niels Redeker said.
Iceland's financial meltdown in 2008 caused the currency to collapse and sent the economy into a tailspin. The country had to be bailed out by the International Monetary Fund and others.
Since then, things have slowly been returning to normal. The Icelandic economy is expected to grow this year for the first time in three years. The Icesave bill is seen as another step towards normalization.
Author: Joanna Impey (AFP, dpa, Reuters)
Editor: Kyle James