By Paul Reynolds
World affairs correspondent, BBC News website
British savers had billions of pounds invested in Iceland's banks
Here we go again.
Having fought three rather pointless - though at times bitter - little wars over fishing limits, Britain and Iceland have now allowed a problem over British deposits in a failed Icelandic bank to become a crisis.
Instead of two North Atlantic islands who are partners in the North Atlantic Treaty Organisation and who both charged into financial danger zones quietly sorting this out, prime ministers have swapped insults. Echoes of those cod wars are heard.
The British Prime Minister, Gordon Brown, has publicly declared Icelandic actions to be "effectively illegal" and "unacceptable" and the Icelandic Prime Minister, Gier Haarde, has expressed his annoyance that the UK used anti-terrorism legislation to seize assets in Britain of the one of the Icelandic banks.
In a situation where people's money is at stake, one government tends to blame another and vice versa.
The complaint in the present case from the British side is that Iceland was not prepared to compensate UK investors equally but was protecting its domestic savers first. I am told that the case refers only to that of the internet bank Icesave. Britain did not get the assurance it sought that a legal agreement for equal treatment would be honoured.
Icelanders are hurt that the British government acted under the Anti-terrorism Act
The British government therefore decided that it had to take steps to try to protect its own savers and seized assets of Icesave's parent bank, Landsbanki, in the UK.
It is interesting to note that the tone adopted by Treasury minister Stephen Timms in the House of Commons on Thursday was much milder than that of his prime minister. Mr Timms said the freeze was a "precautionary measure... and could be lifted once safeguards are in place."
But the damage had been done and will take some repairing.
The Icelanders are hurt that the British government acted under the Anti-terrorism, Crime and Security Act 2001, specifically Part 2, Article 4.
Geir Haarde on the 'painful process' facing the banking industry
The Act is in fact very broadly based and says that assets can be frozen in the UK if the Treasury "reasonably believe" that "action to the detriment of the United Kingdom's economy (or part of it) has been or is likely to be taken by a person or persons, or action constituting a threat to the life or property of one or more nationals of the United Kingdom..."
The person against whom action is taken has to be either a foreign government or resident.
It is not clear why the Act and not another had to be used but one suspects that it was to hand and was quick.
And it shows how an Act designed for one set of circumstances can easily be used for another.
It is worth recalling how angry each side got over fish to understand these feelings about finance.
It was all about the extension of fishing rights, something that has since been settled and indeed, at the height of the third round of clashes between British trawlers and frigates and Icelandic gunboats, was already on the way to being agreed internationally.
Britain and Iceland have had bitter disputes over fishing rights
Britain was furious that Iceland started to cut British trawler nets within the 200 mile zone before an actual international agreement was reached.
Iceland countered that it had to show that it was serious.
No shots were fired, though at one stage an Icelandic captain did order his guns to be manned, in the face of somewhat superior firepower from a Royal Navy frigate.
One lighter moment came when the BBC's venerable agriculture correspondent, Archie McPhee, who also doubled as fisheries correspondent, landed in Iceland from a British vessel, without taking the precaution of checking in with immigration. He was arrested and held for several hours before resuming his duties, now with a good story to tell.
But at the time, I recall, it seemed to be the Icelanders who had the better of it. They had designed their gunboats to cut nets and be strong enough to withstand ramming. The British frigates were lightly armoured and at one stage had to fix wooden planks to their bows to strengthen themselves. They were designed for anti-submarine warfare, not protecting the nets of trawlers.
The damage had been done and will take some repairing
It was a classic case of how a small force designed for a specific job can hold off a larger force designed for another.
Fishing stocks have nevertheless declined even in Icelandic waters and the island turned to finance and tourists instead. Iceland has become a favourite haunt for racy weekenders after hot tubs and environmental explorers after hot springs.
It has come as a surprise to many of us how much British public money was invested in Icelandic banks. An island of 300,000 souls seems to have been supporting not just West Ham United (whose owner is Icelandic) but a great swathe of private and public investors.
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