Darling guarantees UK Icesave deposit

Alistair Darling today pledged that the estimated 300,000 British savers with defunct internet bank Icesave would not lose any money.

The Chancellor said ministers were determined to "stand behind depositors" and warned that the Government was preparing to launch legal action against Iceland over the country's failure to honour its obligations.

His promise will come as a huge relief to the thousands of investors with the failed bank — some of whom faced losing tens of thousands of pounds — although many are still likely to face a lengthy wait before they are able to retrieve their cash.

Mr Darling's pledge coincided with Dutch company ING Direct UK's announcement that it was buying another struggling Icelandic bank, Kaupthing Edge, which will protect the investments of around 160,000 British savers.

ING is also buying Heritable Bank, another Icelandic bank owned by the same parent company as Icesave, in a Treasury -organised step which will safeguard the deposits of a further 22,000 British savers.

The most dramatic development today, however, is the Government's decision to promise that Icesave depositors will be fully reimbursed. Announcing the decision, Mr Darling said he was acting in response to "exceptional circumstances" and strongly criticised the Icelandic government for its treatment of British investors.

"We will stand behind the savers in Icesave to make sure that they get their money back," the Chancellor said. "I wouldn't normally do this but these are exceptional times.

"I, as the Chancellor of the Exchequer, cannot have a situation where we have British depositors being left this way because of what has gone on in Iceland. It is quite extraordinary when you get a country like Iceland which is defaulting on its obligations," Mr Darling added.

"We're going to pursue them with vigour. You can't have a situation where countries simply default. The Icelandic government — believe it or not — told me yesterday that they have no intention of honouring their obligations here.

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

Iceland's prime minister Geir Haarde warned yesterday that his country was facing a risk of "national bankruptcy".

As part of the crisis, Icesave's parent bank Landsbanki was taken over by the Icelandic government yesterday and declared insolvent with all its accounts frozen.

Under the terms of the UK's Financial Services Compensation Scheme, depositors would be entitled to a maximum of only £50,000 — some of which should come from Iceland — leaving some facing the prospect of substantial losses. This risk has now been averted because of the Chancellor's pledge.

Meanwhile, Iceland is facing a severe financial meltdown. Two of its biggest banks, Landsbanki and today Glitnir, have now been taken over by the government, which in turn has asked Russia for a ¤4 billion loan to help it cope.
Shares in another major bank, Kaupthing — parent company of Kaupthing Edge — plunged by a third today, forcing the shares to be suspended on the Icelandic stock market.