January 4, 2010 8:58 pm

Darling cautions Iceland on debt payback

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Alistair Darling, the UK chancellor, warned Iceland on Monday that abandoning a deal to repay Britain for money lost in a failed Icelandic bank would “make things a lot more difficult”.

The chancellor’s hint at the economic stakes for Iceland came as Olafur Ragnar Grimsson, the country’s president, prepared to announce whether he would sign legislation to reimburse nearly €4bn (£3.5bn) lost by British and Dutch savers in Icesave.

Iceland’s government has been struggling for months to secure domestic backing for the pact, which is crucial to unlocking further economic support from the International Monetary Fund and other lenders, amid public opposition to the repayments.

At a London press conference, Mr Darling acknowledged the repayments placed a “difficult” burden on Iceland. But he stressed that signing the agreement would be “very important” for the country’s economic future.

“I would say to people in Iceland I know this is difficult, but you have to realise that the British government had to step in to deal with a very difficult situation with savers in Icelandic banks,” Mr Darling said.

The Reykjavik parliament narrowly passed legislation last week authorising the deal but Mr Grimsson has held up passage of the legislation by withholding his signature. If he refuses to sign the government would be forced either to abandon the deal or put it to a national referendum.

Mr Grimsson will hold a press conference on Tuesday in which he is expected to announce his decision. Presidential approval is usually a formality in Iceland’s parliamentary system. Only once since independence in 1944 has the president vetoed legislation.

More than 60,000 people, about a quarter of Iceland’s voting-age population, have signed a petition calling for the legislation to be blocked and opinion polls show that about 70 per cent are against the deal.

The dispute – involving British and Dutch savings lost in the Icesave arm of Reykjavik-based Landsbanki – has deepened political turmoil in Iceland after its economy collapsed.

The British and Dutch governments have already compensated their citizens for most of the lost savings and now want Iceland to reimburse the funds.

Many Icelanders say the repayments, amounting to nearly half of annual gross domestic product, will undermine the recovery.

The dispute has delayed support under the $10bn IMF-led rescue programme and complicated the country’s application last year to join the European Union.

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