Iceland deposit deal paves way for aid

BRUSSELS (Reuters) - A deal on foreign savers' deposits in Icelandic banks over the weekend paves the way for international aid to the crisis-stricken North Atlantic island, the European Commission said on Monday.

"We welcome the announcement by Iceland that it will apply EU rules on the protection of bank deposits," Amelia Torres, spokeswoman for the European Union's executive Commission, said.

"This should indeed open the way for an agreement now for the financial aid requested for the country," she told a regular news conference.

Iceland said on Sunday it had reached a deal with several European Union states on how to repay thousands of foreign savers with money in frozen Icelandic accounts.

Conflicts over the accounts between Iceland, which is not a member of the EU, and EU states Britain and the Netherlands have been delaying an International Monetary Fund-led package worth as much as $6 billion (4 billion pounds) for the country.

Iceland faces a severe recession after the global financial crisis led to the collapse of its crown currency and the government takeover of three of its largest banks. It badly needs funds to revive currency trade and restart the economy.

Prime Minister Geir Haarde said on Sunday that the deal meant the IMF would now discuss the Icelandic case on Wednesday with a view to releasing the negotiated funds.

According to the deposit deal, the government of Iceland will cover deposits of insured depositors in "Icesave" accounts in accordance with EEA (European Economic Area) law, which stipulates that retail and wholesale depositors would be entitled to about 20,000 euros (16,963 pounds) per account.

Britain and the Netherlands have been frustrated by the situation for savers in their countries who had deposited money in the Icesave accounts of Landsbanki, one of the banks that crumbled during Iceland's financial meltdown.