Bank reparations linked to Iceland's EU membership bid

"A solution to the problem of Icesave would encourage rapid consideration of Iceland's bid to join the EU," said Mr Verhagen, adding "It would show that Iceland takes European directives seriously."

More than 120,000 Dutch clients and 200,000 British clients had their Icesave accounts frozen during the nationalisation of Landsbanki, the parent group of the online banking unit, one of the three key Icelandic banks that went bust due to the global credit crunch and almost brought the country's financial system to a complete collapse in October.

The Social-Democratic government of Johanna Sigurdardottir in June agreed to pay back €1.3 billion to the Netherlands and €2.6 billion to the UK after both countries compensated their nationals.

But the draft deal still needs to be adopted by the Icelandic parliament, in a vote expected in the coming weeks, with several deputies in the 63-member Althingi privately suggesting that they are against the terms under which Reykjavik should pay back the money.

"To this day, I have not been shown any information confirming that Iceland is legally responsible for these debts," Ogmundur Jonasson, a member of the Left Greens told Bloomberg in late June. "The depositors are entitled to all the assets of the failed banks, but they are not entitled to the assets of private citizens in Iceland," he added.

Under the scenario approved by Ms Sigurdardottir's cabinet, the island in the North Atlantic with population of 320,000 would pay back the agreed sum between 2016 and 2024, in exchange for €3.8 billion in loans from the Netherlands and Britain, with a 5.5 percent interest rate.

But the parliamentary vote on the conditions under which Reykjavik will honour its obligations to the foreign savers comes after the green light was granted last week by Icelandic lawmakers to kick start of the country's EU entry procedure.

And although both Sweden as the current EU presidency and the European Commission, the 27-strong bloc's executive, were quick to praise the decision, Iceland will have to overcome all necessary hurdles to become a member.

"Iceland's membership application would be treated like any other, even though its transposition of the acquis communautaire is very advanced," Swedish foreign minister Carl Bildt told the European Parliament's foreign affairs committee on Tuesday (21 July).

Mr Bildt was referring to the EU's book of key legislation that needs to be adopted before accession countries can join the club. However, the bloc's rules on fisheries could prove controversial for the island, as the sector accounts for almost 40 percent of its exports.

Sovereignty over sensitive issues of national interest has also been one of the main arguments of opponents to EU membership that had dominated the debate in Iceland before the financial crisis broke out last autumn.

And the Icelandic public remains evenly divided: a Gallup poll in May showed that 39 percent of Icelanders favour joining the EU while 38.6 percent were against, according to Bloomberg.

It is expected that Reykjavik will formally submit its EU membership application to a foreign ministers' meeting in Brussels on 27 July. Under an unofficial plan, Iceland could start membership negotiations next February and hold a public referendum in late 2011 or early 2012.