Iceland today...the Federal Reserve, Bank of England... tomorrow...Bank deposit guarantees, are not worth the paper they are written on.

Iceland can escape paying back the money because the European Free Trade Association (EFTA) court ruled that the financial crisis was so severe the country could disregard previous deposit guarantee plans.

The guarantees had been drawn up in case a single bank failed, rather than the whole industry, the court said, noting the very severe systemic nature of the crisis which hit the nation’s banks.

But MPs reacted with shock, warning that the ruling casts doubt on the reliability of the guarantee system as a whole, undermining confidence in the protection states give savers.

“While I am sure there will be rejoicing in the streets of Reykjavik, many in the City will be surprised and disappointed by this ruling,” said Mark Field, Conservative MP for the Cities of London and Westminster.

“This is a worrying precedent which throws into the air a lot of question marks around the future of government guarantees, with the notion of what an exceptional crisis is.”

And Labour’s John Mann MP, a member of the influential Treasury Select Committee, warned governments to reconsider the whole idea of guaranteeing deposits in all instances.

“This ruling has huge ramifications – this blasé attempt by all governments to guarantee all deposits is now in some jeopardy,” he told City A.M.

To ruddy right it has...vast ramifications, it is stealing depositors money, by making it legal to dump state Guarantees.

Who's next.....