Iceland says will honour its obligations over failed banks

Iceland will "honour its obligations" over the more than $5 billion (£3.1 billion) owed to Britain and The Netherlands that was lost in failed savings banks, President Olafur Grimsson told British television.

The Icelandic Parliament had approved a deeply unpopular bill to cover compensation already paid out by the British and Dutch governments to holders of "Icesave" accounts after Icelandic banks collapsed in 2008.

But Mr Grimsson stunned international financial markets and the government on Tuesday by refusing to sign it and forcing a referendum on the issue.

"The view that we will not honour our obligations is completely wrong," Mr Grimsson told the BBC Newsnight programme late on Wednesday. "The fundamental basis of the law which is already in existence and which I signed is that Iceland declares it honours its obligations."

The dispute over the Icesave payments has severely strained relations between Reykjavik and London, with Britain warning Iceland faces economic isolation if voters reject the bill.

Asked if people could trust Icelanders anymore, Mr Grimsson replied: "We should involve ourselves in a constructive agreement with the British and Dutch governments in order to resolve this issue."

"The only thing that I have decided is to allow the Icelandic people to have the final say in a referendum which is in accordance with our fundamental democratic principles." Iceland's government proposed on Wednesday a February 20 referendum on the issue that has divided the country. Mr Grimsson did not say what would happen if the country voted against the bill.