The UK and Icelandic governments are hoping to agree a loan of up to £3 billion (just under $5 billion) to cover UK deposits frozen in Icesave, the online banking unit of  the ruined Icelandic bank Landsbanki, according to a report in the Financial Times. £3 billion is about 30 per cent of Iceland’s gross domestic product.

Diplomatic relations had also become icy after the UK used anti-terror legislation to freeze the UK assets of Landsbanki, anxious lest Iceland’s government goes back on its undertaking to compensate UK depositors.

The UK government said: “Following conversations between the Chancellor and the Icelandic prime minister, officials from the Treasury and Bank of England are going to Iceland to work on finalising an agreement that aims to compensate UK depositors and ensure fair treatment for creditors.”

The Icelandic government is responsible for paying the first €20,887 ($26,862) of any compensation claim, while the UK government covers the difference up to £50,000. In this case, the UK government will also pay any claims over the £50,000 limit.

The agreement with the Icelandic government will not cover corporate and government account holders, leaving hundreds of local councils and some charities facing losses.