Britain is "prepared to be flexible" to reach a deal with Iceland over the £2.3bn debt owed since the collapse of the online savings bank Icesave, the Chancellor, Alistair Darling, said yesterday.
But there is still no clear way out of the deadlock, as negotiators go back to the drawing board in the wake of Icelanders' overwhelming "no" in last weekend's referendum on the issue.
"The fundamental point for us is that we get our money back, but in terms of the terms and conditions we are prepared to be flexible, because it's not in our interest to have Iceland excluded," said Mr Darling.
"We want Iceland to be part of mainstream Europe, and this is just part of that process."
Under the rejected deal, Iceland was to pay the Dutch and British governments a total of €3.9bn (£3.5bn) by 2024, at an interest rate of about 5.5 per cent, in repayment for the cost of reimbursing savers when Icesave's parent Landsbanki collapsed in 2008.
Iceland's government signed off the plan and its parliament passed a Bill authorising a state guarantee to repay the funds – which are equivalent to 40 per cent of Iceland's GDP and about £10,000 for every one of the 320,000-strong population.
But Icelanders vehemently opposed the proposals, blaming reckless bankers and politicians for the crisis and claiming that the country must help its own citizens before repaying foreign debts. Some 62.5 per cent of the electorate turned out to vote in the referendum called by President Olafur Ragnar Grimsson, and a massive 93 per cent of them voted "no".
"The referendum was not about refusing to pay back the money," President Grimsson said yesterday. "Iceland is willing to reimburse those two governments, but it has to be on fair terms."
Improved terms were offered by the British and Dutch last week, but can only be discussed in detail now the referendum is over.
Iceland desperately needs to find a way out of the deadlock. Several countries have refused to pay their portion of a $2.1bn loan for Iceland from the International Monetary Fund (IMF) until the matter is resolved, although the IMF managing director Dominique Strauss Kahn said yesterday that the Icesave matter is a "private question". The dispute is also complicating talks about Iceland joining the EU.