Citing public opposition to the bill, on Tuesday the president of Iceland vetoed legislation that would provide a state guarantee for repayment of approximately $5 billion of loans provided by the U.K. and the Netherlands governments to Iceland's Depositors' and Investors' Guarantee Fund, to fund payment of the minimum deposit guarantees to British and Dutch depositors in Icesave, the Internet unit of Landsbanki, which collapsed in late 2008 with the rest of the Icelandic banking sector. The Icelandic legislature passed the bill on December 30 after months of wrangling. The veto is only the second time since Iceland's independence from Denmark in 1944 that a president has used that authority.

Under Article 26 of Iceland’s constitution, the bill will be put to a public referendum, tentatively scheduled for February 20. A rejection would force Iceland to reopen negotiations with U.K. and the Netherlands and could result in the loss or delay of International Monetary Fund assistance. In an interview yesterday, the president of Iceland insisted that Iceland would honor its obligations to the U.K. and Netherlands.

The U.K. had agreed to lend Iceland $3.8 billion and the Netherlands pledged $1.2 billion to meet depositor claims. In June 2009, Iceland agreed to repay the money over 15 years, starting with a seven-year grace period. In August 2009, after nearly 10 weeks of debate, the Icelandic Parliament passed legislation authorizing the repayment, which would have been limited if Iceland suffered economic hardship. However, the U.K. and Netherlands rejected such limits and continued negotiations resulted in the legislation passed by the Althing, Iceland's parliament, last month.