Iceland's cabinet met on Friday (26 February) to decide its next move in the 'Icesave' debt debacle after talks collapsed with Britain and the Netherlands, raising the prospect of an indefinite hold on financial aid.
Efforts to reach a new deal to pay back Britain and the Netherlands more than $5 billion lost by their savers failed late on Thursday.
Einar Haraldsson, spokesman for the prime minister's office, said the government might make a statement after the cabinet meeting, likely to finish late in the morning.
Hopes had been high that a new deal was within reach following nearly two weeks of discussions, but the breakdown means that a referendum on the issue is now much more likely to go ahead as planned on 6 March.
Opinion polls indicate voters will strike down an old deal, forcing Iceland to try again to find a solution palatable to its people as well as Britain and the Netherlands.
Icelanders are bitter over what they consider the harsh terms of that deal. The government had hoped that the latest talks would result in softer terms that would enable it to cancel the referendum.
Britain and the Netherlands are seeking to recover money they handed out to savers who lost cash in online 'Icesave' accounts run by one of the Icelandic banks that collapsed in the financial crisis of 2008.
Disappointment in British-Dutch attitude
Opposition Independence Party leader Bjarni Benediktsson told Reuters the referendum should "absolutely" be held on 6 March, and said he was "hugely disappointed" in the British and Dutch attitude.
"The only thing that could prevent a referendum was a new deal, a new agreement, that was broadly accepted in the parliament," he said. "And I do not see that in sight."
A government source told Reuters the opposition could effectively force the referendum to be held since it could delay a parliamentary motion to cancel the vote until it was too late.
The Independence Party is the biggest opposition party in Iceland. Britain has said Iceland faces financial isolation if it fails to make good on its debts.
None of the governments have specified what the sticking point was. A source involved on the Icelandic side said Reykjavik had hoped to reach a deal in which the two countries would not be seen as turning a profit on the money owed.
Both governments said in separate statements that Iceland had been unable to accept the terms of their revised payment plan after tough negotiations and that they were disappointed it could not accept their "best offer".
Iceland's government is hoping the North Atlantic island of 320,000 people will secure entry to the European Union by 2012. The European Commission has recommended that membership negotiations should start (EURACTIV 25/02/10).
(EURACTIV with Reuters.)
In the midst of the economic crisis, Iceland has been pushing for EU membership as a viable solution to its problems. The Nordic country, which is already a member of the European Economic Area (EEA), formally applied for EU membership on 16 July 2009.
Iceland was hit badly by the economic and financial crises. Its troubles came to a head in September 2008 when all the three major Icelandic banks - Glitnir, Landsbanki and Kaupthing - were put under the control of the Icelandic Financial Supervisory Authorities.
EU membership is seen as a way of restoring the country's credibility among creditors and stabilising its currency by adopting the euro.
With 320,000 inhabitants Iceland would be the EU's least populous country and would probably be given the same voting weight and number of MEPs as Malta (which has 400,000 inhabitants). An additional official language would be added to the existing 23.
- 6 March: Iceland goes to the polls on 'Icesave' deal.