Icesave deal hangs in the balance, says Iceland's PM

The next few days will be crucial in determining whether a deal can be reached between the British and Icelandic governments over debts stemming from the collapse of the online savings bank Icesave in 2008, Reykjavik said yesterday.

The two governments, as well as the Dutch administration, are working to broker an agreement over the €3.8bn owed by the Icelandic government after Landsbanki, Icesave's parent company, failed under a mountain of debt in October 2008. If an agreement is not reached, Icelanders are expected to reject a previous proposal in a referendum on Sunday. "Today and tomorrow are make or break," said Iceland's Prime Minister, Johanna Sigurdardottir. "We need to be hopeful until all avenues have been exhausted."

The British and Dutch governments are claiming the money after guaranteeing the savings of some 320,000 of the bank's customers, many of whom were attracted to the above-average savings rates offered by Icesave in the run-up to its demise. In the UK, deposits of up to £50,000 were guaranteed by the government under the Financial Services Compensation Scheme.

A rejection of the deal would delay a much-needed economic aid package set for Iceland, and could hamper the country's hopes of European Union membership, which it sees as vital to its long-term future.

The previously agreed proposals would see Iceland make the payments over 14 years, but the country's president, Ólafur Ragnar Grímsson, refused to sign a parliamentary bill into law after outrage among the Icelandic population. He instead insisted on the referendum on the agreement.

Polls indicate that Icelanders will widely reject a watered-down version of the original agreement, with most believing that the repayments, which represent about 40 per cent of the country's GDP, are too high.