Fears mounted last night over 300,000 British savers who have plunged £4.5 billion of their hard-earned cash into Icesave, the Icelandic account provider.

Unlike savers with rival Icelandic banks, Britons who have deposits with Landsbanki’s Icesave have their first £16,300 guaranteed not by the British government, but by the government of tiny Iceland.

Icesave customers continued to be able to withdraw money as normal despite problems earlier in the day. But savers will be concerned by comments from Iceland’s Prime Minister Geir Haarde in a televised address last night that there was a “very real danger” the Icelandic economy could follow its banks into bankruptcy.

A spokeperson for Landsbanki said that the government of Iceland had enough foreign currency to pay savers and even in a worst case scenario could raise money from its Scandinavian neighbours to cover deposits.

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Back when British savers plunged the £4.5 billion into IceSave, deposit guarantees were a mere technicality. After all, save Northern Rock, the irresponsible mortgage lender, nobody could remember a European bank going bust. Fast forward a few months and banks are collapsing left, right and centre. Deposit guarantees are of mainstream interest.

At present, the level of deposit protection varies widely in Europe. In Britain, savers’ deposits are protected up to a limit of £50,000 with each banking group. This limit has been the subject of intense debate, with calls for it to be increased after moves across Europe in the past week.

The Republic of Ireland raised the stakes on deposit guarantees last Tuesday, when it abandoned European solidarity and offered complete protection for the €400 billion (£310 billion) in retail and commercial deposits held by its biggest banks for the next two years. Previously, Ireland had offered protection of €100,000 per customer.

The Irish Government produced legislation formalising the guarantee, invoking protests across Europe that savers would rush to Irish banks to the detriment of local companies. Two days later, Greece offered a similar guarantee, although a government spokesman described it as a “political commitment” without plans to change legislation. Greece’s previous guarantee covered €20,000 per depositor.

On Sunday Germany appeared to offer the same kind of political commitment to the holders of €598 billion of German accounts, again without any legislative change – but it is not clear yet what this guarantee will mean for savers. Austria promised that it would increase its guarantee, without spelling out the new limit. At present it offers cover up to €20,000, although some banks offer a higher guarantee.

Yesterday Denmark said that it would provide up to DKr35 billion (£3.6 billion) to its protection fund over two years. The Danish Guarantee Fund for Depositors and Investors had offered protection up to DKr300,000, which would be netted off against any debt the customer had with a bank.

France covers savers up to €70,000 for each banking group, regardless of the number of accounts held by each customer. In Italy, the Interbank Deposit Protection Fund guarantees customers’ first €103,291. Portugal covers up to €25,000 for each bank, regardless of the number of accounts, as does Finland. Spain offers €20,000 in protection and Slovenia €22,000.

Sweden said yesterday that it would raise its guarantee from SKr250,000 (£19,900) to SKr500,000 for each customer. Each account-holder in the Netherlands is covered up to €40,000, although bank customers must accept a 10 per cent cut in any compensation over €20,000 to reflect their share of the risk of their bank collapsing. Bulgaria covers up to 40,000 leva (£15,900) and Norway up to NKr2 million (£185,200).

British savers with cash in some Icelandic banks, such as Kaupthing, are protected by the UK’s Financial Services Compensation Scheme (FSCS); those with Icesave are not fully. The Icelandic fund says it is prefunded, but it has only £88 million to cover deposits worth £13.6 billion. The local desposit protection scheme could ask other banks to cover the shortfall, but given the state of the country’s financial system, this does not look perfect. Savers will be watching Iceland carefully.

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