REYKJAVIK/STOCKHOLM (Reuters) Iceland has agreed better terms on repaying Britain and the Netherlands over failed online bank Icesave, negotiators said yesterday, bringing the island a step closer to recovery from its financial crisis.

In a crash that symbolised the global financial crisis, Iceland’s indebted banks collapsed at the end of 2008. The country took an IMF bailout and imposed currency controls to protect the crown, which an Icesave deal could help ease.

Britain and the Netherlands covered more than $5 billion in losses incurred by British and Dutch Icesave account holders after Icelandic parent Landsbanki collapsed in October 2008.

“This (the new agreement) is significantly more advantageous to Iceland and that will play a role in the public perception of it,” US attorney Lee C. Buchheit, who headed Iceland’s negotiating team, told Reuters, referring to a previous deal rejected by Icelandic voters in March.

The agreement, which could also pave the way for better relations between the various countries and may help to speed up Iceland’s membership negotiations with the European Union, also still needs political approval.

“If (the Icelandic) parliament approves the agreement and the law, and Iceland’s president will sign it, the Icelandic government will get the mandate to finalise the agreement,” the Dutch Finance Ministry, which was the first to announce the terms of the deal, said in a statement.

Britain welcomed the agreement. The Treasury said in a statement that “mutually satisfactory closure of this issue will mark a new chapter in UK-Iceland relations”.

Under the agreement, Iceland hopes that a recovery of the assets of Landsbanki will be enough to repay the $5 billion of principal, which it has to start repaying from 2016.

The agreement also stretches through to 2046, longer than the agreement rejected by voters.

The government will cover interest on the debt and a statement from its negotiating team said this was expected to amount to a maximum 50 billion crowns ($434 million). The interest will accrue from October 2009 and repayments are to begin from 2011.

Buchheit said Icelandic officials did not expect any shortfall from the recovery of Landsbanki, but provisions were in place if there was. “If the deficiency is less than 45 billion krona, it will get paid off in one year,” he added.

“For every additional 10 billion krona of the liability there will be an additional year added onto the payment period with the maximum payment period through 2046.”

“So that is 37 years under this deal as opposed to 15 years on the original deal.”

The deal also includes a cap on future servicing of liabilities of five percent of government revenues, with a minimum repayment of not less than 1.3 percent of GDP.

“A satisfactory settlement of the Icesave issue would remove one of the great uncertainties over the Icelandic economy and hopefully stimulate foreign investment and do other good things,” he added.

Icelanders rejected a previous repayment agreement with a 5.5 percent interest rate in a national referendum last March.

The new deal sets a lower interest rate, of between 3 and 3.3 percent, on repayments from 2009-2016.

After that the rate will be based on certain official commercial interest reference rates, the Dutch ministry said.

Iceland compensated its own savers who lost money, but Britain and the Netherlands footed the bill for their citizens.