Iceland's coalition cools on pledge to hold vote on UK repayment

Fears that government would not survive if, as expected, public strikes down deal to pay back £2.3bn

As Iceland's parliament prepared for an emergency debate this morning over a national referendum on troubled plans to repay a £2.3bn debt to Britain, the country's government voiced its frustration at London's refusal to countenance a new deal.

Iceland is gearing up for the crucial national vote after President Olafur Ragnar Grimsson's refusal this week to sign off on the government's long-awaited Icesave compensation repayment programme, which contained stringent conditions at the insistence of Britain and fellow creditors Holland.

Mr Grimsson proposed a referendum, expected to be held by the beginning of March, to decide the question. Opinion polls this week indicated that about two-thirds of the population would vote against the repayment deal.

But the referendum remains an eventuality that the ruling coalition would rather avoid. Many doubt that the left-wing government could survive if its deal were thrown out.

"If we can do it without a referendum I would prefer that," the Economy Minister, Gylfi Magnusson, said yesterday. "If such a solution can be found and it's palatable to all the parties involved I think everybody would be happy to see the end of this."

But he warned that any such deal would have to avoid reference to a state guarantee, for which a fresh parliamentary Bill would be required.

And while key Icelandic opposition leaders who had previously backed a referendum yesterday gave their support to the idea of finding an alternative solution, Britain and Holland are unlikely to agree to any compromise arrangement over repayment.

Benedikt Stefansson, an adviser to the Economy Minister, said: "One has to be realistic. In spite of the heated debate we had before, the depth of emotion from everyone here, still the British and Dutch government came back with the agreements that we now have in place."

In the absence of any encouraging signs from London or Rotterdam, the Finance Minister, Steingrimur Sigfusson, scrambled to ensure that essential help from Nordic countries would remain in place, setting up meetings today with Danish and Norwegian ministers in a bid to shore up loans that will eventually total €1.8bn. The new setback has refreshed the sense among Icelandic politicians that the harsh conditions set by the British Government last October contributed to the public outcry over the repayment plan.

"We will honour our legal obligations," said OgmundurJonasson, the former health minister who resigned in protest at the terms of the deal, which included interest payments of 5.5 per cent. "We recognise what our capitalists were responsible for. But Britain must take its share of responsibility, too. If there was a will by our creditor nations to strike a new deal, we would be willing to look at that."

The British Government has so far not elaborated on an initial statement expressing "disappointment" at President Grimsson's decision. "We expect Iceland to live up to its obligations," a Treasury spokesman reiterated to CNN yesterday. "We support them in finding a way to do that."

The only chink of light was the reassurance reportedly given to the Foreign Minister, Ossur Skarphedinsson, by David Miliband, UK Foreign Secretary, that there was no question of Britain threatening Iceland's entry to the EU over the affair.

Mr Grimsson had earlier taken to the airwaves in the UK to try to persuade Britain to adopt a more conciliatory approach."I think it's important for Alistair Darling and Gordon Brown to realise that a few minutes after they speak to their home audience in Britain, everything they say is being talked about in Icelandic fishing plants and every village and every office," Mr Grimsson told the Today programme. "If they want a constructive outcome of this dispute, they should be aware every sentence they say will have repercussions on the debate in Iceland."

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