Iceland approves UK payout after Icesave collapse claim

Iceland gives green light to €3.8bn payout after UK and Dutch governments compensated savers

Iceland's parliament yesterday narrowly approved a Bill that will pave the way for Britain and the Netherlands to recoup the €3.8bn (£3.4bn) lost by customers of the online savings bank Icesave, which collapsed under a mountain of debt in 2008.

Under the deal, which is deeply unpopular with Icelanders, the two governments will receive payments over the next 14 years after compensating the losses of more than 320,000 of the bank's customers. In the UK, deposits of up to £50,000 were guaranteed by the Government under the Financial Services Compensation Scheme.

Savers were attracted to the high interest rates offered by online Icelandic banks in the run-up to the credit crisis in 2008. Landsbanki, which operated Icesave, Kaupthing and Glitnir all collapsed after the wholesale banking markets – where the banks funded themselves on cheap debt – imploded after the failure of Lehman Brothers. Kaupthing's savings arm, Kaupthing Edge, was later rescued by ING Direct after the Financial Services Authority closed its London operations.

A Treasury spokesman said yesterday that the vote brought an end to the dispute. "The UK welcomes this latest step taken by the Icelandic government to draw a line under the financial crisis. This action, along with support from the IMF, EU and Nordic countries, will enable Iceland to recover confidence in international markets and focus upon economic recovery."

In a statement posted on his ministry's website, the Dutch Finance Minister, Woulter Bos, said: "This is very good news on the last day of the year. It hasn't been an easy process, but Iceland takes its responsibility and that also deserves a compliment."

Yesterday's vote was backed by just 33 Icelandic MPs, with 30 voting against the measure. The €3.8bn represents 40 per cent of Iceland's total gross domestic product, while a poll in August showed that 70 per cent of Iceland's 320,000 citizens were against the Bill.

Iceland's Finance Minister nevertheless hailed the vote: "Approving the Bill is the better option and will avoid even more economic damage," said Steingrimur Sigfusson, who is also the leader of the Left-Green party. "History will show that we are doing the right thing."

The deal does not cover a number of UK local authorities, which invested more than £900m in the Icelandic banking system in the years leading up to the onset of the banking crisis. So far, less than 10 per cent of investments have been refunded to councils such as Kent, which had deposits worth £15m, and Nottingham, which invested £11m.

Last month Stephen Jones, the finance director of the Local Government Association (LGA), attended a Glitnir Bank creditors' meeting after the bank's winding-up order named UK councils simply as "general unsecured" creditors, rather than "priority" creditors, triggering worries that councils could get back as little as 25 per cent of their money. In Landsbanki's winding-up order UK councils were made priority claimants.

Yesterday, a spokesman for the LGA said that nothing had changed since the December meeting, and that discussions were ongoing.

Iceland's economy has been one of the worst hit by the financial crisis, resulting in the near-collapse of Iceland's currency, the krona, and a deep recession: economic activity fell by more than 8 per cent in 2009 and is not expected to grow again until next year.

As well as a number of savers initially losing vast amounts money, the row with the UK and the Netherlands held up International Monetary Fund payments to assist Iceland's battered economy and stalled talks on the country's membership of the European Union.

Iceland has now signed up to a $10bn IMF-sponsored aid package.