Icesave case costs UK taxpayers £100m

The Icesave websitePaying back savers with failed online bank Icesave could cost UK taxpayers more than £100 million, after a European court ruled that the Icelandic government had no obligation to repay Britain and the Netherlands.

The governments of both countries acted to help savers affected by the collapse of Icesave's owner, Lansbanki, in 2008. %VIRTUAL-SkimlinksPromo%

The then Chancellor Alistair Darling decided to bail out Icesave's 230,000 savers in full – at a cost of about £3.5 billion - in a bid to prevent panic and a run on any other banks.

Of the £3.5 billion total, £2.35 billion was covered under the rules of the European financial compensation scheme. But Iceland refused to reimburse these payments.

And now, the European Free Trade Association court has ruled that Iceland did not break European free trade laws on deposit guarantee schemes by refusing to compensate foreign depositors.

In a key ruling that will undoubtedly set a precedent for future cross-border banking guarantees, the court dismissed all three claims brought against Iceland, in part due to the scale of the financial crisis suffered by the Nordic island.

According to the Financial Times newspaper, the ruling was greeted with jubilation in Iceland where the public has twice rejected repayment terms for the British and Dutch governments.

The Icelandic government was also unsurprisingly delighted with the outcome. "It is of considerable satisfaction that Iceland's defence has won the day in the Icesave case," the Icelandic Foreign Ministry told the Daily Telegraph.

The good news for UK taxpayers is that Landsbanki's administrators have confirmed that the estate has more than enough money to cover the £2.35 billion principal and £100 million in official penalties that applied until 2009.

However, the judgment obliterates any hopes the UK government had of pursuing Reykjavik for interest on the £2.35 billion bail-out.

A Treasury spokesman said: "We are being reminded again of all that went wrong in our system of financial regulation, which we are still paying the price for."

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