The Treasury has guaranteed to pay £2.2bn to UK depositors who lost money in Iceland's collapsed bank Icesave, it was revealed yesterday.
It will then reclaim the money from the £6.8bn support package the International Monetary Fund has allocated to Iceland.
The figure was the amount paid to Icesave as a guarantee to cover Britons' savings when its parent company Landsbanki went into receivership last month, a Treasury official said.
It is hoped the money from the IMF will stabilise what the fund called a "banking crisis of extraordinary proportions". The move came after Landsbanki was nationalised by the Icelandic government.
About 300,000 British depositors, and numerous local authorities and charities, feared for their savings after Icesave halted transactions at the height of the banking crisis last month. Chancellor Alistair Darling has stepped in to guarantee the savers' deposits, vowing to recover the lost money from Icesave.
The Prime Minister's spokesman said that terms and conditions for the loan were still being negotiated. "We will work out a timetable for repayment over the next few weeks," the spokesman said. "It's money that's owed to us as a result of the problems in the Icelandic banking sector."
Iceland's £2.2bn of liabilities to the UK were confirmed as part of a $10.2bn (£6.8bn) IMF package of support to help the island's financial recovery.
The final $2.1bn (£1.2bn) of that were signed off by the IMF after being held up by a dispute between the UK and Iceland over refunds for depositors.
That was overcome earlier this week when Iceland agreed to cover the first £18,000 that UK savers lost. Previously, the country had threatened only to reimburse domestic depositors. The dispute also involved the Dutch and German governments, whose citizens also had savings in Icesave.
In a joint statement, the British, Dutch and German governments welcomed Iceland's commitment to meet its obligations to depositors and agreed to work with Iceland to conclude agreements on pre-financing that enables Iceland to meet those obligations.
The Icelandic government now faces an angry backlash from the public, who are furious overtheir economic prospects. They will be hit hard by the fact that the central bank raised interest rates by six percentage points to a record 18% last month as a condition for receiving aid from the IMF. The crisis has prompted speculation of early elections and support in Iceland for joining the EU has soared to 70%.
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