The collapse of Icesave's parent company Landsbanki in late 2008 caused a huge diplomatic row. The Icelandic government reimbursed its own citizens, but refused to reimburse any dumb foreigners who had lost money - as a result of which then-Prime Minister Gordon Brown accused them of behaving illegally and froze the assets of UK-based Icelandic insitutions. The GOvernment ended up pouring £2bn into the Financial Services Compensation Scheme pot so potential Labour voters - sorry, wronged online Icesavers - wouldn't end up out of pocket.
Ever since then, the UK has been pushing hard to get its money back, much to the chagrin of Icelanders (its PM even accused Britain of bullying - not the first time that accusation had been levelled at our former PM). An earlier deal, which involved Iceland paying the money back at a 5.5% rate of interest, fell through after Iceland's voters rejected it overwhelmingly in a referendum (not surprisingly, they didn't fancy coughing up for the excesses of their bankers, and who can blame them for that?). This made relations even frostier.
But the good news is that the two countries - plus the Netherlands, which also had to cough up more than €1bn in compensation - appear to have thrashed out a compromise. Having a new Government in Whitehall clearly helped: the Coalition dropped the UK's opposition to Iceland joining the EU, which seems to have thawed relations considerably. Now there's a new deal on the table whereby we'll get our money back plus 3.3% interest, while the Netherlands will get theirs plus 3% (the difference apparently reflects the two countries's respective cost of funds). Let’s hope Iceland’s politicians can square this one away.
The only problem, as far as the UK is concerned, is that since Iceland's still skint - having taken an even bigger and even more reckless gamble on financial services than the UK did - it's going to take it a while to pay up. 36 years, to be precise. So despite Chancellor George Osborne welcoming the deal today, he's likely to be long gone before the money is back in the Treasury's coffers.