[2] The referendum was held under article 26 of the Constitution of Iceland after President Ólafur Ragnar Grímsson refused to counter-sign the corresponding Act of Parliament (known as the third Icesave bill) into law on 20 February 2011.

[5] The background for the Icesave bills, was that the privately owned Icelandic bank Landsbanki was declared bankrupt on 7 October 2008.

As the bankruptcy of Landsbanki was one of 3 big systemically important financial institutions going bankrupt within a few days in Iceland, the Tryggingarsjóður however had already been drained from capital reserves, and had no money left to repay the legally required €4.0bn of minimum deposit guarantees to the 343,306 foreign retail customers from United Kingdom and Netherlands, who had lost all their €6.7bn of deposits in the Icesave branch of Landsbanki.

The negotiations resulted in December 2010 in a new adjusted version of the repayment agreement named Icesave bill 3, with better terms for Iceland.

The improved terms included the removal of a previous creditor priority issue, and the introduction of a lower 3.2% interest rate in combination with interest moratorium for the first year until 1 October 2009; and if needed when the Icelandic state overtake repayment liabilities from the receivership in 2016 - then also a possible extension of the "repayment window" up till 30 years.

[7] According to an early opinion poll carried out in Iceland on 20 and 21 February 60.7% supported the president's decision to refer the law to referendum, while 57.7% said that they would vote to confirm the legislation.

UK Chief Secretary to the Treasury Danny Alexander described the decision as "obviously disappointing [and that] we tried to get a negotiated settlement.