Iceland agrees to repay €4bn to UK and Netherlands in Icesave deal

British and Dutch governments were compelled to extend the loan to Iceland to bail out local account

Iceland has agreed to pay back the estimated 4bn euros (£3.4bn) borrowed from the UK and the Netherlands in the wake of collapse of the online bank Icesave at the height of the financial crisis two years ago.

The British and Dutch governments were compelled to extend the loan to Iceland to bail out local account holders with the online bank after its parent company, Landsbanki, failed in October 2008.

The new deal involves full reimbursement to the UK and Dutch governments whereby Iceland will pay a fixed interest rate of 3 per cent on the money owed to the Netherlands and 3.3 per cent on the money owed to the UK. As a result, the UK will get back the £2.3bn owed by Reykjavik.

Payments are scheduled to begin in July 2016 and must be completed by 2046.

The UK Treasury welcomed the deal, saying, "Mutually satisfactory closure of this issue will mark a new chapter in UK-Iceland relations."

Chancellor of the Exchequer George Osborne said, "I think this has led to a much more constructive relationship between the Icelandic government and the British Government, which was pretty glacial, frankly."

The actual deal has not been signed as the terms of the agreement must first be approved by Iceland's parliament and president. There is little chance, however, of it not getting assent.