Page last updated at 00:03 GMT, Tuesday, 16 December 2008

Iceland scowls at UK after crisis

By Ray Furlong
BBC News, Reykjavik

Iceland's parliament
It is still idyllic, but security has been stepped up in the wake of the crisis

It is a sign of the times that security has been increased at Reykjavik's small Parliament building, from one policeman to three.

Iceland's Prime Minister Geir Haarde faces almost daily calls for his resignation from small but angry protests - and has even been seen with an armed bodyguard at the gym.

The crisis that saw Iceland's three largest banks collapse in October also soured relations with Britain.

And while Mr Haarde insists "we need to move on", he also insists his government is considering court action against the UK.

"I think there's a special case with regard to Kaupthing which needs to be looked into," he says, referring to Iceland's biggest bank which collapsed on 9 October.

A decision on whether to go to court is expected by early January, focusing on action by the British authorities to put the UK operations of the bank's subsidiary, Kaupthing, Singer and Friedlander (KSF), into administration.

"We are looking at whether or not the action of the FSA (Financial Services Authority) led to the collapse of Kaupthing, Singer and Friedlander in the UK, which in turn led to the collapse of the mother bank here in Iceland," he says.

Avoidable collapse?

Iceland's financial sector imploded over 11 unprecedented days.

First Glitnir, the third-largest bank, was nationalised on 29 September, then Landsbanki, the second-largest, was taken over under emergency legislation on 7 October.

Iceland's Prime Minister Geir Haarde
The freezing order is still in effect and has the Icelandic Landsbanki listed along with Al-Qaeda and the Taliban
Prime Minister Geir Haarde

When I first met Mr Haarde, at a Reykjavik theatre on 8 October, I asked him whether Kaupthing was safe.

At the time, he said: "I wish I could give you an affirmative answer. I think they are and I hope they are and it's been our objective to ensure that they are, so I assume so."

His government had singled it out for special measures to save it - including an emergency loan. But the next morning, Kaupthing rolled over.

Not told

Three months later, he sounds a regretful tone.

"This was the considered judgement of our central bank: that there was a chance of Kaupthing surviving," he says.

"Hence, they were given a lender of last resort loan for a few days. But the UK government, through the FSA, intervened in the meantime."

So has Mr Haarde told the British government about this?

No, he says, but he is not sure what communication had gone on between the FSA and Iceland's equivalent body.

Yet details like this could be crucial in determining why Kaupthing went down and whether it could have survived.

And if the UK authorities were found culpable the damages would be counted in billions, according to lawyers in London working on a similar possible legal challenge for Kaupthing itself.

Of course, Mr Haarde's talk of court action may be no more than sabre-rattling, as talks between the two sides continue on unravelling the tangle of assets and liabilities held by Iceland's banks and their subsidiaries.

Help requested

Local councils in England and Wales, charities, universities, and private depositors at Kaupthing's subsidiaries on the Isle of Man and Channel Islands, still have no idea when or whether they will see any of their money again.

Prime Minister Geir Haarde
We've been through many crises before in this country
Prime Minister Geir Haarde

Some have levelled more general criticism at the British government, suggesting it had known about the weakness in the Icelandic banking sector and should have warned them earlier.

Mr Haarde was in 10 Downing Street on 24 April this year - so what did he tell Gordon Brown?

"We didn't specifically discuss the banking community, but we did discuss the economic picture in this country and what the outlook was like and what measures could be taken," he says.

"He was very friendly and helpful at that meeting."

Mr Haarde denies asking for help at this meeting, though Iceland did ask the UK for financial help at some point this year.

He says that "around about this time [late April] our central bank was in communication with the Bank of England" about this.

The UK help did eventually arrive - in the form of a 2bn loan to pay UK depositors with Icesave, Landsbanki's Internet bank.

But here, too, Britain's earlier actions - using anti-terror legislation to seize Icesave's assets - still rankle in Reykjavik.

"I still don't understand why Britain had to resort to the use of such legislation, out of proportion with the problem at hand," says Mr Haarde.

"The freezing order is still in effect and has the Icelandic Landsbanki listed along with Al-Qaeda and the Taleban.

"That's unacceptable, and we've had no formal explanation as to why it had to be done in this way."

Bounce back

Three months on, Iceland's economy is in freefall.

The International Monetary Fund predicts its gross domestic product, or GDP, will contract by 10% next year.

Companies are laying off staff.

And those who stay in work are taking pay cuts, at a time when inflation is at 17% and interest rates at 18%.

Mr Haarde is under immense pressure - but in combative mood.

"We've been through many crises before in this country," he says.

"Whether it be natural disasters or economic crisis, we've always bounced back - and that's what we'll do this time."

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