A European court on Monday cleared Iceland of wrongdoing over its refusal to repay depositors' money lost in the country's 2008 banking collapse.

The Luxembourg-based European Free Trade Association Court ruled that deposit-guarantee laws did not cover "a systemic bank failure of the magnitude experienced in Iceland."

A tiny North Atlantic nation with a population of just 320,000, Iceland went from economic wunderkind to financial basket case almost overnight when the credit crunch took hold.

Some 340,000 British and Dutch savers lost deposits when Icesave, an online subsidiary of Iceland's Landsbanki, collapsed along with the country's other banks in 2008.

The savers were repaid — to the tune of $5 billion — by the British and Dutch governments, who have been trying ever since to get their money back. Icelandic voters have twice rejected deals brokered by their government to reimburse the two countries.

Iceland's foreign ministry said it was "a considerable satisfaction that [Iceland's] defence has won the day" in court.

"Icesave is now no longer a stumbling block to Iceland economic recovery," it said in a statement.

The country says it is nevertheless repaying Britain and the Netherlands from money it is raising by selling off the remaining assets of Landsbanki.

The court case was brought by the European Free Trade Association Surveillance Authority, which makes sure that Iceland, Liechtenstein and Norway comply with European Union regulations. The countries are not EU members but belong to the European Economic Area.