UK pledges to sue Iceland over missing bank billions

Treasury Chief Secretary Danny Alexander said he was "disappointed" that Icelanders had voted against a deal to pay back 2.3 billion spent by the UK government compensating savers.

The settlement would have seen the money paid back over a 30-year period, starting in 2016 and finishing in 2046. Mr Alexander stressed the UK government had an obligation to pursue the money, after early results indicated 58 per cent of Icelanders had voted against the deal in a referendum.

Iceland's Landsbanki ran savings accounts in the UK and Netherlands under the name Icesave. In total, British and Dutch investors lost 3.5bn. Both governments bailed out their citizens' deposits after the 2008 crash.

Mr Alexander said: "It's obviously disappointing. It seems the people of Iceland have rejected what was a negotiated settlement.

"It looks like this process will now end up in the courts. There is a legal process going on and we will carry on through these processes to try and make sure we do get back the money that the British government paid out in past years."

About 300,000 British savers are believed to have held bank accounts with Landsbanki, but the exposure in the UK was far more widespread than individual savers, with Icelandic banks having lent money to British retailing and pub groups.

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Councils in Scotland are still owed more than 20 million.

Mr Alexander said the UK was owed "a very substantial amount of money, several billion pounds", which had been paid to British people who banked with Icesave and other Icelandic banks that went under.

"We had an obligation to people in this country who saved with those banks and we have an obligation to get that money back, and we will continue to pursue that until we do," he said.

"We have a very difficult financial position as a country…This money would help."

It is the second time Icelanders have rejected a repayment deal in a referendum, having overwhelmingly rejected a previous proposal last year.

The Icelandic government had hoped a new agreement on better terms would be approved, after it won the backing of the country's parliament.

But the president, Olafur Ragnar Grimsson, refused to sign it, which led to the referendum.

The previous deal would have imposed a tougher repayment regime.

Finance minister Steingrimur Sigfusson appeared to rule out a third attempt to persuade voters to accept a repayment deal."I think we're getting a very clear sign from this referendum, that further negotiations are ruled out," the minister said. "No use in trying that again."

The issue will now be referred to an international court, the European Free Trade Association Surveillance Authority, a process that could take several years.

Opponents of the deal believed the Icelandic taxpayer was under no legal obligation to pay for the losses of a private bank, and they felt that the deal would place a heavy burden on the nation.

It would have seen Iceland having to pay the money back at 3.3 per cent interest to the UK, and 3 per cent to the Netherlands, over the period between 2016 and 2046.

The 30-year deal on offer was longer that the previous proposal, which would have seen the money having to be paid back at 5.5 per cent interest between 2016 and 2024.

The actual cost to the state was expected to be much less than the 3.5bn (€4bn) owed, as the government said most of the repayment would come from selling the assets of parent company Landsbanki. The Icelandic government has said it did not expect the cost to exceed 168m.

The money does not include more than 20m owed to Scottish councils, which have said they are doing everything they can to reclaim money invested in the banks.

North Ayrshire Council, thought to be the Scottish local authority owed the largest amount of money in Scotland, is waiting to get back 15m invested in Landsbanki and Glitnir.

Analysts say a resolution of the issue is vital to Iceland's prospects for recovery because it would allow the country to return to the financial markets to fund itself.

Solving the dispute is also seen as key to Iceland's chances of joining the European Union.

Iceland's three main banks collapsed within days of each other in October 2008.The banks' shares were suspended by the government, sparking panic in the small country, which has a population of 300,000, about half the size of Glasgow,

Its banks had lent hundreds of billions of pounds overseas, and their position in the world's financial system far outweighed the size of the country's tiny economy.

Icelandic prime minister Geir Haarde addressed the nation at the time of the crisis and admitted that the liabilities of the country's stricken banks were "equivalent to many times Iceland's GNP".

He also warned that Iceland could be facing "national bankruptcy".

The government compensated Icelandic savers, but overseas customers faced losing all of their money.

The issue sparked a diplomatic row between Iceland and the UK, and created uncertainty over Iceland's economic recovery.

Earlier this year, police in Iceland arrested the former boss of Landsbanki and another senior executive.

Former chief executive Sigurjon Arnason and Ivar Gudjonsson, who used to be head of the bank's investments arm, were held on allegations of market manipulation.

It followed a probe by prosecuting authorities in Iceland into allegations of insider trading at the bank.

In 2009, the former boss of collapsed bank Kaupthing became the first high-profile banker to be detained in connection with the investigation.