Iceland's new bill guarantees loans from the UK and Holland to repay those who lost money in Icesave Internet accounts after the country's bank collapse

By Omar R. Valdimarsson

(Bloomberg) — Iceland's parliament passed a foreign depositor bill that marks the final milestone in repairing the island's international investor relations.

The Reykjavik-based assembly voted 33 to 30 to allow the government to provide a state guarantee for loans from the U.K. and the Netherlands to cover depositor claims from the two countries stemming from the collapse of Landsbanki Islands hf.

"I'm very relieved that the bill has been passed, as it's been a burden on Iceland for a long time," Prime Minister Johanna Sigurdardottir said. "The resolution of this case will contribute to Iceland regaining the trust and confidence of the international community."

Thousands of British and Dutch depositors risked losing their savings when Landsbanki collapsed along with the rest of Iceland's over-leveraged banking system in October 2008. By passing the bill, lawmakers have paved the way for unlocking further disbursements from a $4.6 billion bailout from the International Monetary Fund and Nordic countries.

The bill allows Iceland's government to guarantee repayments of as much as 2.35 billion pounds ($3.8 billion) borrowed from the U.K. and 1.2 billion euros ($1.7 billion) borrowed from the Netherlands to repay depositors in the so- called Icesave Internet accounts. Failure to approve the accord would have reignited a dispute that prompted the U.K. last year to use anti-terror legislation to freeze Icelandic assets.

'Major Step'

"I believe this is a major step for Iceland in creating a better relationship with other nations, international institutions and investors," Finance Minister Steingrimur J. Sigfusson said in an interview after the vote. "We're now heading towards resurrecting Iceland's reputation as a responsible nation which shoulders its obligations. The resolution of this matter simplifies the tasks that lie ahead, such as creating economic stability."

A tentative agreement on repaying the depositor claims and a state guarantee attached to them was reached on June 6. The agreement had to be ratified by Iceland's parliament which attached conditions to the state guarantee.

Parliament's conditions linked repayments to economic growth, preserved the island's right to legally challenge its payment obligation, and called for a full suspension in repayments in 2024. Some of the conditions were rejected by the U.K. and the Netherlands, sending the three nations back to the negotiating table.

'Very Good News'

"This is very good news on the last day of the year," Dutch Finance Minister Wouter Bos said today in a statement on the ministry's Web site. "It hasn't been an easy process, but Iceland takes its responsibility and that also deserves a compliment."

The bill allows for some of the parliament's original conditions, such as linking payments to economic growth. It also establishes a mechanism on how to settle any outstanding claims in 2024, for which Iceland bears full responsibility. The Netherlands and the U.K. will acknowledge that Iceland has the right to challenge the agreement, according to a joint statement from the three countries published on Oct. 19.

The failure of Landsbanki, Glitnir Bank hf and Kaupthing Bank hf led to the collapse of the currency and forced Iceland to go to the IMF to get a $2.1 billion loan, with a further $2.5 billion pledged by Nordic nations.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net