Iceland wins case on refusal to cover foreign deposits in 2008

Iceland was found to have been within its rights in refusing in 2008 to cover UK and Dutch depositors in a failed Icelandic bank, escaping damages as high as 20 per cent of the country's economic output.

The European Free Trade Association (EFTA) Court in Luxembourg threw out a case brought by the EFTA Surveillance Authority, which claimed the island had breached European Economic Area law, that would have allowed the UK and Netherlands to seek damages of 335 billion kronur ($2.6 billion), according to the estimates of the International Monetary Fund.

All three ''pleas'' were turned down, partly as the laws governing the membership did not ''envisage'' a ''systemic crisis of the magnitude experienced in Iceland," according to the court's statement.

Iceland in 2008 refused to cover $5.4 billion in guarantees to 350,000 UK and Dutch citizens who had opened Icesave accounts at Landsbanki Islands hf, one of three major banks to fail during the financial meltdown in the island. The guarantees were covered by the British and Dutch governments and Iceland was then taken to court by the EFTA Surveillance Authority.

''Iceland is completely vindicated,'' foreign  minister Ossur Skarphedinsso told reporters in Reykjavik. ''All of Iceland's costs will be paid by ESA. That, by itself, underlines how great our victory is.''

Iceland had maintained it wasn't obligated to guarantee the foreign deposits. The caretakers of Landsbanki last year began repaying priority claims, using the proceeds of the bank's estate. They have now covered 50 per cent of all such obligations, or 650 billion kronur, Pall Benediktsson, a spokesman for the lender, said by e-mail last week.