Reaching agreement with the two European Union countries is vital for the continued flow of aid to Iceland, which is still in the grip of a devastating recession and needs funds to help bring its economy back to a more normal footing.
But Icelandic President Olafur Grimsson unexpectedly refused to sign an amended law this week on repayment, citing a wave of popular anger over the bill and forcing a referendum on the highly contentious issue.
British and Dutch depositors in high-interest "Icesave" bank accounts lost their money when Iceland's entire financial system imploded in late 2008 under a massive weight of debt.
The two countries compensated their savers in full and want their money back from Iceland.
The government now plans to hold a referendum late in February or early in March, but the result is highly uncertain with opinion polls suggesting a majority of the 320,000 Icelanders oppose the so-called Icesave bill.
"They have to decide the date and the law is quite simple," said Einar Haraldsson, spokesman at the prime minister's office.
"There will be a debate on the phrasing of the question."
If the new Icesave law is rejected, an earlier version - passed during the summer - enters into force.
Britain and the Netherlands said the terms outlined under the earlier bill were unacceptable, mainly because repayments would not be guaranteed by the Icelandic government after 2024.
Spain, which holds the EU presidency, said the issue could hold up Iceland's progress towards joining the 27-nation bloc.
"Clearly if it (the bill) is not approved, it could slow down the whole calendar...it could slow the whole process of negotiations," Spanish Foreign Minister Miguel Angel Moratinos said.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article