Brown versus Iceland

Gordon Brown last night branded Iceland's failure to guarantee British savings in its failed banks as "totally unacceptable and illegal", amid warnings that more than 100 local councils, police authorities and fire services have up to £1bn lost in its bankrupted system.

Charities, including children's hospices, warned they were at risk of losing £25m.

In unusually aggressive terms, the prime minister said he was willing to use anti-terrorism legislation to freeze the assets of other Icelandic companies operating in Britain in an effort to recoup the lost money. The extent of the potential difficulties for councils and other bodies began to emerge yesterday as more and more said they had invested money in Iceland's high-yielding savers' accounts.

By yesterday evening, the Local Government Association (LGA) had accumulated reports showing that 108 councils in England, Scotland and Wales had deposited £798.95m in Icelandic banks.


Alan Wardle of the LGA on council savings in Iceland Link to this audio With no sign of Iceland being able to repay the money and councils lobbying ministers for reassurance that the cash would be recovered, Britain went on the offensive. "What happened in Iceland is completely unacceptable," said Brown. "I've spoken to the Icelandic prime minister, I have told him this is effectively an illegal action that they have taken. We are freezing the assets of Icelandic companies in the UK where we can. We will take further action against the Icelandic authorities where necessary to recover the money.

"The responsibility for this lies fairly and squarely with the Icelandic authorities, and they cannot simply default. The Icelandic authorities are responsible for this, and we are demanding the money is paid back to the local authorities, and we are prepared to consider all forms of action, including, as we did, attempting to freeze assets."

Geir Haarde, Iceland's prime minister, said he was surprised by Brown's remarks, and urged him to consider resolving the issue in the courts. The Treasury said it had no imminent plan for a wider move against Icelandic companies operating in the UK saying the only action taken so far was the freezing of the Landsbanki's estimated £7bn of UK assets.

The British government invoked the Anti-Terrorism Crime and Security Act 2001 to freeze the British assets of Landsbanki, something for which Brown refused to apologise, saying he had a responsibility to recover the assets in the most effective way possible.

Referring to the move, Haarde said: "I told the chancellor that we consider this to be a completely unfriendly act."

Asked if the financial crisis engulfing Iceland had become a diplomatic crisis with Britain, Haarde added: "I thought so for a few minutes this morning when I realised that a terrorist law was being applied against us. That was not very pleasant. I'm afraid not many governments would have taken that very kindly, to be put into that category."

Haarde said Iceland had not decided on whether to seek help from the International Monetary Fund (IMF) and negotiations to secure a €4bn (£3.2bn) loan from Russia would not begin until Tuesday.

Under Iceland's financial regulations, the government is supposed to pay up to £16,000 compensation per frozen account at a total cost of £2.2bn.

Britain is angry since it has received no assurances from the Icelandic government that they would meet this commitment. It is estimated that British investors have a total of £8bn deposited in the Icelandic banks, including £4.6bn in the Icesaver internet bank.

The Treasury said it was sending a team to Iceland today after failing to get satisfactory answers from the authorities there for at least three days.

In an effort to work out the scale of the potential exposure of public bodies to the Icelandic banking collapse, leaders of local councils met with John Healey, the local government minister, yesterday.

At the meeting in London yesterday afternoon the councils tried to persuade the government to guarantee their savings, in the same way that ministers had guaranteed the savings for individual investors in Landsbanki. But Healey refused to give any such commitment after the meeting. Instead he said the government "will not leave councils under pressure on their own". He conceded that the councils had not acted recklessly, and had been following Whitehall advice sent out in 2004 to spread their investments across a wide range of banks.

Local councils pointed out that they had been given legal advice that the Icelandic banks had three star credit ratings, and there was no way of predicting this collapse was imminent. "The local councils are well informed investors. This is not money that is lost, it may be money that is at risk," a statement said.

After the meeting , the LGA said "a small number" of authorities faced specific short term problems.

In a joint statement, the LGA and the government said: "For those local authorities who are facing severe short-term difficulties government and the LGA will agree an appropriate set of ways to assist. We will judge what's appropriate on a case by case basis." Authorities with big investments include Kent county council with £50m; Nottingham city council, £42m; Norfolk county council, £32.5m; Dorset county council, and Hertfordshire county council, both £28m.

Fifteen police forces also have investments in Iceland, as does Transport for London which revealed it had a £40m deposit with Kaupthing Singer & Friedlander, a UK subsidiary of the bankrupt Kaupthing bank.

TfL, which runs the London's bus and tube services, said it did not know if it would get the money back. But a spokesman said TfL's £7bn budget was big enough to absorb the loss.

Stephen Bubb, chief executive of Acevo, the representative body for charity chief executives, urged the chancellor to guarantee the bank deposits of UK charities. He said the collapse of Icelandic banks had hit charities hard with some losing up to one fifth of their reserves, in sums ranging up to £12m. The total losses reported to Acevo added up to more than £25m. It also emerged yesterday that the 300,000 UK personal savers who had accounts with Icesave would be lucky to get their money back by Christmas.