ICELANDIC president Olafur Ragnar Grimsson made a rare choice for a political figure in the thick of one of the most severe financial crises to hit a developed nation – he decided to put to a public vote a government payout that has the potential to damage the country’s economy for decades.

While most governments have ploughed ahead with costly bank bailouts in the face of deafening public outrage, Mr Grimsson has unexpectedly given the Icelandic people a say, as the country grapples with its economic collapse following the meltdown of its banking system and currency.

The president refused to sign a Bill passed by the government, led by Prime Minister Johanna Sigurdardottir, approving the payment of €3.8 billion to Britain and the Netherlands for deposits lost in the collapse in one of the nation’s banks. The deposits were placed with Icesave, part of Landsbanki (former owner of Dublin stockbrokers Merrion Capital and a one-time suitor of Irish Nationwide Building Society) which failed along with the rest of the Icelandic banking sector in October 2008.

A referendum will be held on March 6th when the Icelandic people will decide whether to send the deal back to be renegotiated with the British and Dutch.

“Will Iceland repay? Yes, but it depends on the conditions and the terms and the risks involved,” said Mr Grimsson, speaking to The Irish Times on the second day of the Davos economic summit. The cost to Iceland is equal to £600 billion to £700 billion (€700-€815 billion) based on the size of Iceland’s population (more than 300,000) and its economy as compared with the UK, said Mr Grimsson.

The overall bill would be paid by Icelandic farmers, fishermen, nurses and teachers for “years or maybe decades to come because of the operation of a single bank outside Iceland”, he said.

Some of this money will be recovered from the sale of assets held by the now state-controlled banks, he said, but there was “great uncertainty of how much will be recovered”.

Mr Grimsson said governments must take certain measures to create stable banking systems to prevent society breaking down into social unrest, but this “has to be done in such a way that the majority of the people not only understand but support it”.

There was public outrage when the deal was agreed – a quarter of the population signed a petition to lobby against the deal being signed into law.

“The payment is so colossal and out of proportion with the strength of the Icelandic economy in the future that it would bring about the breakdown in the Icelandic economy,” he said.

The bill would come on top of much greater pain for the Icelandic people, he said, including job losses, the loss of savings, increased taxes to pay for the bailout of the economy and a higher cost of living following the devaluation of the currency.

“The general lesson is not just for Iceland, but for every country when we look at our financial system, whether it is in Ireland, Britain, Iceland or America,” he said.

He conceded that the crisis arose due to the country’s own failings and the failings of its banks. Iceland has appointed a committee to investigate, in private, how the banking crisis came about with powers to compel witnesses to testify.

The publication of the committee’s report has been delayed until the end of February. The government has also hired special prosecutors with international experience in securing fraud convictions to lead criminal investigations.

Mr Grimsson believes there is a more fundamental issue at stake in Iceland’s debt predicament – striking a balance between democracy, the will of innocent people on one hand and on the other “the interests of financiers, the financial institutions and the domination of money”.

“As we all know in the last 15 years, the balance was that the financial market is paramount,” said Mr Grimsson who has held the presidency since 1996.

He declines to comment on Ireland’s approach to repairing the banking system, saying that it would not be proper to comment on issues facing other countries. However, he said later that the Irish people might be interested in how the devaluation of Iceland’s currency has made the export sector “much more profitable in a matter of weeks”.

“This has been an extremely good year for the fishing sector – the fishermen are getting higher salaries than ever before,” he said.

Another unexpected benefit of the crisis was that talent which was drawn into high-paying banks before the crisis was now moving to other industries.

“The financial sector became too big – it became a stumbling block to the growth of other sectors,” he said.

Mr Grimsson believes Iceland has strong economic growth prospects given that it has access to lucrative fish stocks, rich hydro and geothermal energy reserves and one of the biggest reservoirs of clean water in the world. The country has a well-educated workforce due to its spending on education and a sophisticated technology sector.

Iceland can recover, he said, but it needs time to repay the bill to the British and Dutch, the terms of which may change significantly following the country’s referendum in March.

“There is a limit to how much you can ask taxpayers to pay due to irresponsible, greedy and risky operations by bankers in a foreign country,” he said.