Extra help for Icesave customers

Prime minister Geir Haarde on the Icesave crisis

Chancellor Alistair Darling has said he will ensure all UK savers with accounts in the closed Icelandic internet bank Icesave get all their money back.

He told the BBC he was doing this because the Icelandic authorities had reneged on their obligations to ensure compensation could be paid.

But the Prime Minister of Iceland said later that they were searching for a "mutually satisfactory" solution.

Customers of other Icelandic banks have also had their savings protected.

Guarantee

Iceland took control of Icesave's parent bank, Landsbanki, on Tuesday.

The internet bank has about 300,000 customers in the UK and their accounts have been frozen.

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"We guarantee that no depositor will lose any money as a result of the closure of Icesave," said a Treasury spokesman.

Dutch bank ING Direct has agreed to take over the £2.5bn of deposits of 160,000 UK customers of Kaupthing Edge, the online arm of Iceland's biggest bank, in a deal backed by the Treasury.

ING Direct is also taking control of £538m worth of savings from just over 22,000 people with savings in the Heritable bank - owned by Landsbanki.

'Exceptional circumstances'

The UK government has frozen all the British assets of Landsbanki until the position of savers in the UK becomes clear.

"The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here," said Mr Darling.

"Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn't got any money in it.

"The British scheme would top that up to £50,000, but people over and above that would lose out," he added.

"But I have decided in these exceptional circumstances that we will stand behind those depositors so they get their money back."

Legal action

Prime Minister Gordon Brown said the UK would take legal action against Iceland over its failure to guarantee compensation.

In response, the Prime Minister of Iceland Geir Haarde said there would be an official review to find a "mutually satisfactory" solution.

Your views: Iceland's credit crisis In pictures

He said the assets of Landsbanki should be sufficient to cover all the deposits in Icesave, and the Icelandic government would provide help in raising funds if needed for the Icelandic compensation scheme.

"The government of Iceland is determined not to let the current financial crisis overshadow the long-standing friendship between Iceland and the UK," he said.

Banks dominate Iceland's economy, leaving the island of just 300,000 people heavily exposed to the global credit crisis.

The country has already nationalised two banks and its biggest bank, Kaupthing, was forced to take an emergency loan from Sweden on Wednesday.

Iceland's currency has plunged, and the Icelandic government was forced to abandon attempts to fix its exchange rate against the euro.

Analysts said it could take years for the the country to recover.

Saver's reaction

British saver Mike Davis, 62, who has £75,000 in retirement savings locked up in an Icesave account and said he had not slept for days, said he was "highly relieved and thankful" after hearing the chancellor's pledge.

"It has restored my faith in Britain and the British government," he said.

"It appears the chancellor is concerned about ordinary savers and ordinary families as well as saving the banks."

Another Icesave customer, Emma Durnford, 40, said: "After 24 hours of worry, stress and no sleep, it was really, really reassuring to see the chancellor's announcement this morning.

"I feel a lot better about it from this time yesterday. We now need to see what the next steps are, how to get compensation. I rely on the interest from my savings for income."

HAVE YOUR SAY

I have £250,000 invested with Icesave. Why can't they sell Icesave to another bank?

Julie, Porthcawl

Your questions

The Treasury said that arrangements were being put in place to ensure that all ISA customers of Icesave would continue to benefit from the tax-free status of their accounts.

The government said it was ready to sit down with local authorities to discuss whether their deposits with Landsbanki were covered in the same way as individual depositors.

The Local Government Association (LGA) said a number of local councils had sums in Landsbanki, which had saved taxpayers money in different institutions to spread risk.

"While this may affect some councils financially, we do not expect it to have any impact on local services," said Margaret Eaton, chairwoman of the LGA.