Iceland to repay UK, Dutch governments for lost savings

REYKJAVIK/LONDON (Reuters) - Resolving a thorny diplomatic dispute, Iceland struck a deal to reimburse Britain and the Netherlands for billions of pounds and euros owed to savers with Icelandic accounts, the nations said on Saturday.

Icelandic Prime Minister Johanna Sigurdardottir hailed the agreement as a milestone in the island's efforts to recover from a devastating financial crisis late last year.

"The settlement of this very difficult issue is an important step for us in regaining our credibility and the confidence of the international community," Sigurdardottir told a news conference.

"It was never an option for us not to pay our debts, even if they were not established or initiated by the Icelandic Treasury," she said.

Some 300,000 savers in Britain, and others in the Netherlands, had funds deposited in Icesave accounts run by Landsbanki, one of three top Icelandic banks that failed in October 2008 when the country's financial system collapsed.

Diplomatic relations between Britain and Iceland became strained as the British government used anti-terror legislation to seize Icelandic assets.

Reykjavik, which saw the British move as adding insult to injury, responded by threatening to sue the British government.

The dispute took on huge importance: Much-needed financial assistance from the International Monetary Fund was delayed until Iceland agreed last November that it would be responsible for repaying the money owed to Icesave savers.

Under the new deal, the Iceland Compensation Scheme will make payments over 15 years, with an initial 7-year grace period. Some 2.3 billion pounds ($3.69 billion) paid out by the British government will be treated as a loan to the scheme.

Sigurdardottir said loans from the Netherlands amounted to 1.2 billion euros ($1.70 billion).

As part of the deal, Britain plans to lift the asset freezing order from June 15.

Authorities will try to use money raised from selling Landsbanki assets to repay the debts. "All parties emphasized the importance of all Landsbanki assets, wherever they are, being used to repay all creditors of Landsbanki, wherever they are," a joint statement from the three countries said.

BETTER RELATIONS

A UK Treasury spokesman said the deal marked an improvement in relations.

"Today's announcement is a positive step forward for relations between our countries," he said in a statement. "It will ensure the taxpayers' interests are protected and that the Icelandic economy can continue in its recovery after very difficult times."

Landsbanki and its main Icelandic peers collapsed after the global financial crisis left them starved of credit needed to service billions of dollars of debt accumulated over years of rapid overseas expansion.

Hundreds of thousands of savers, who had been attracted by the banks' high interest rates, were affected across Europe.

Icelandic Finance Minister Steingrimur Sigfusson said the deal is structured in a way that will help Iceland deal with its pressing financial problems.

"This settlement is as positive as it can be from the viewpoint of the (Icelandic) treasury. It allows us to spread our payments over a longer period and gives us breathing space to concentrate on other difficulties that we are facing."

(Reporting by Omar Valdimarsson in Reykjavik and Avril Ormsby in London; editing by Tim Pearce)