Iceland’s President Olafur Grimsson has refused to sign into law a bill to repay more than $5 billion (£3.1 billion), lost by British and Dutch savers when the island’s banks collapsed.
The country’s parliament initially passed the bill on New Year's Eve but the president's move means that under the constitution a referendum must be held.
Grimsson was petitioned by more than 60,000 voters – almost a quarter of Iceland’s population – demanding that he refuse to sign the document on the grounds that the cash-strapped nation could not afford it.
The total compensation package equates to around 12,000 euros (£10,804) per Icelandic citizen.
The British and Dutch governments have already partially compensated more than 320,000 savers who lost money when Landsbanki, the parent of online bank Icesave, failed in October last year.
Grimsson says: “The cornerstone of Iceland’s constitution is that the nation is the highest judge for the validity of law. Now the nation has the power and the responsibility in its hands.”
Iceland’s parliament had approved the bill by a narrow majority of 33 votes to 30.
In August a poll showed that 70% of the country’s population were against paying up.
Chancellor Alistair Darling says it was vital for Iceland's economic future and credibility that the Icesave compensation was repaid.
He adds: “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.”