By Omar Valdimarsson and Mia Shanley
REYKJAVIK,/STOCKHOLM (Reuters) - Fitch Ratings Agency said on Monday there was renewed uncertainty about Iceland's recovery after the country's president triggered a vote on a new bill to pay back Britain and the Netherlands $5 billion of debt.
President Olafur Grimsson said on Sunday he would not sign the bill, which parliament approved last week, a refusal which forces Iceland to hold a referendum on the new plan. Icelanders overwhelmingly rejected an earlier bill, but government negotiators say the new package is on much better terms.
Polls have shown voters either split or slightly in favor of the new deal, which offers reduced interest payments compared with an original plan.
Fitch, which has Iceland on a BB+ non-investment grade rating with a negative outlook, said resolving the Icesave dispute was key to getting the country back on a stable outlook and that the referendum could delay the lifting of capital controls -- key to restarting the flow of foreign investment.
"Until it is resolved, it does restrict access to international capital markets," Paul Rawkins, Fitch's senior director for western Europe, told Reuters. "I think the Icelanders really hope to regain access to capital markets, and this casts a shadow over that."
Iceland put capital controls in place to stem an outflow of funds from the country when all of its top banks buckled under a weight of debt during the 2008 crisis.
Iceland owes Britain and the Netherlands money they used to bail out domestic savers who lost money in online "Icesave" accounts run by one of its failed banks.
The government is expected to decide on Tuesday when the referendum will be held though the law stipulates that it must take place within two months.
This is the second time Iceland will vote on Icesave and follows several months of negotiations between Icelandic, Dutch and British officials on a new repayment plan.
There is great concern that Iceland will not be able to get Britain and the Netherlands back to the negotiating table.
Rawkins said he doubted the current deal with Britain and the Netherlands would be superseded by a better one.
ICELANDERS UNCERTAIN
People in Iceland are split on the issue.
"Don't even mention Icesave," said petrol station worker Jens Sigurdsson, 55. "The president should simply have signed the bill -- we have to pay this whether we like it or not."
Lawyer Larus Blondal, who was the opposition's representative on the negotiating team, told Morgunbladid he was convinced there would be no further negotiations.
"It seems to me that the issue now is whether people want a negotiated settlement at all," he said.
There are also concerns that the issue could wind up in a court in the EFTA trade and cooperation bloc of which Iceland is a part. This could mean it may have to pay higher interest rates than outlined in the current deal.
Islandsbanki said in a note that even if Iceland won a lawsuit, it would have costs associated with taking the matter to court while a further delay in resolving the dispute would exacerbate damage already caused by it.
"There is also the possibility that Iceland could lose the case, which would probably put the country in a weaker negotiating position than it currently has, and result in a less beneficial result," it said.
Many Icelanders believe it is unfair that taxpayers must foot the bill for mistakes made by private banks.
Sveinn Gudjonsson, an office manager in downtown Reykjavik, said he had been opposed to paying the IceSave bill from the beginning.
"But I have now come to the conclusion that we should pay and I will be voting in favor of the deal in the referendum," he said. "It's time to put this behind us -- and I don't want to take the risk of having my future decided by a European court."
(Additional reporting and writing by Mia Shanley; editing by Stephen Nisbet)
