Government seeks thaw in Icelandic relationship

Oct 10 2008

Treasury officials were today in Iceland for urgent talks after the collapse of the country’s banking sector left councils and charities in Britain facing losses of up to £1 billion.

The crisis sparked a furious war of words between London and Reykjavik, with Prime Minister Gordon Brown denouncing the “totally unacceptable” failure of the Icelandic authorities to guarantee UK depositors would get their money back.

Icelandic Prime Minister Geir Haarde in turn blamed Britain for the collapse of his country’s third largest bank, Kaupthing, after the Government used anti-terrorism laws to freeze Icelandic assets in the UK.

Downing Street confirmed that the Treasury delegation - which included officials from the Bank of England and the Financial Services Authority - was in Reykjavik.

Mr Brown’s spokesman said they hoped now to work “constructively and cooperatively” with the Icelandic authorities. However he strongly defended the Government’s action in freezing the Icelandic assets.

“The Prime Minister made clear, as is the case, that the behaviour of the Icelandic authorities had been unacceptable,” he said.

“We had found it very difficult to get information from them. They had indicated that they would be giving preferential treatment to domestic creditors over overseas creditors.”

The Government has promised individual savers with deposits in Icelandic accounts that it will reimburse any losses they suffer, but it has been resisting calls to extend the guarantee to local authorities and the charitable sector.

More than 100 councils, as well as police forces, fire services and transport authorities, have deposits running into millions of pounds each in the crisis-hit institutions.

Private companies are thought to have in excess of £10 billion in Icelandic accounts they are unable to access. Charities, too, have tens of millions of pounds on the line.

Following talks yesterday between the Government and the Local Government Association, ministers said only that those councils facing the most severe difficulties would receive “appropriate” support.