Iceland is pressing Britain and The Netherlands to renegotiate $5.7bn (€3.96bn) owed for lost bank deposits.
However, Prime Minister Johanna Sigurdardottir’s pleas to the International Monetary Fund to keep paying out loans without delay appear to have had little sway, as the organisation suggested its hands may be tied.
The government was forced into holding a referendum on the issue, which must be held by March 6, after President Olafur Grimsson invoked a rarely used power to refuse to sign the so-called Icesave bill.
The bill, narrowly passed by parliament, outlines the terms under which Iceland must repay the British and Dutch governments for funds they used to compensate their citizens after the Icesave internet bank went bust.
If Iceland can negotiate less strict repayment terms that are also acceptable to opposition parties, the referendum could be avoided.
While the government argues that the Bill is necessary for Iceland’s economic recovery, opponents are angry that Britain and the Netherlands succeeded in imposing tougher terms on repayment.
Ms Sigurdardottir said that London and The Hague have so far not agreed to start negotiations, but she was hopeful they would agree.
“We have been in steady contact with them and the Nordic countries in the last few days,” she said. “I expect it to become clear in the next days whether we will sit down to negotiate again with the Dutch and the British.”
Ms Sigurdardottir noted that if the bill is rejected by the public at a referendum, the agreement would have to be renegotiated anyway, and then Iceland would be in a worse position to do so.
The latest poll on the referendum, taken by Capacent Gallup, showed 62% of respondents intended to vote against the Icesave bill in the referendum, while 38% wanted the law to go ahead as approved by parliament.
Ms Sigurdardottir said she planned to meet opposition leaders again to continue to hammer out a deal to take to the British and the Dutch. Among key objections in Iceland are British and Dutch revisions to the original repayment deal that extended time limit of the repayment guarantee and removed Iceland’s right to challenge the payment under international law.
The dispute has jeopardised Iceland’s bid to join the European Union and threatened a crucial bailout package promised by the IMF and Nordic countries.
The IMF has already bestowed some money and is due to carry out a review of Iceland this month to determine the next batch of funding. Iceland is worried that the money could be held up until it settles the Icesave issue.