Britain has secured agreement from the Icelandic authorities to repay the £2.3 billion paid out by the Government in compensation to UK depositors in the failed Icesave bank, the Treasury said.
Under the terms of the agreement, the money paid out by the Government will be treated as a loan to the Icelandic Financial Compensation Scheme which will be repaid over 15 years.
The deal was announced in a joint statement by the governments of Iceland, Britain and the Netherlands which has struck a similar agreement with the authorities in Reykjavik.
There will be an initial seven year "period of grace" in which payments will be made only from the UK assets of the Icesave's parent bank, Landsbanki, which the Government froze following the collapse of the Icelandic banks last October.
A Treasury spokesman said that the agreement was "good news" for both Britain and Iceland.
"The Government welcomes Iceland's commitment to recognise its obligations under the EC Deposit Guarantee Scheme to repay depositors in Icesave," the spokesman said.
"The actions we took in October last year following the collapse of Landsbanki protected UK financial stability and ensured that no UK retail depositor lost any money.
"Today's announcement is a positive step forward for relations between our countries. It will ensure the taxpayers interests are protected and that the Icelandic economy can continue in its recovery after very difficult times."
