Icelandic, British gov'ts to find solution after UK threat to sue

Britain added to the financial chaos engulfing Iceland by declaring Wednesday it planned to sue over lost deposits held by thousands of Britons with Icelandic bank accounts.The news from London even overshadowed an emergency loan Wednesday from Sweden to Iceland's biggest bank. The promise of legal action by the British government to recover deposits belonging to 300,000 British account holders with the Icesave Internet bank came after its parent, Landsbanki, was placed in receivership."We are taking legal action against the Icelandic authorities," British Prime Minister Gordon Brown told journalists in London. "We are showing by our action that we stand by people who save."British savers have deposited millions in accounts through the collapsed Landsbanki's Internet operation, Icesave, which has suspended withdrawals.British Treasury chief Alistair Darling said the British government would also guarantee all customer deposits at Icesave, even if they were above Britain's standard 50,000 pound (US$88,000) protection plan because Iceland was refusing to meet its guarantees."The Icelandic government, believe it or not, have told me yesterday they have no intention of honoring their obligations here," Darling told the British Broadcasting Corp.Darling added that savings bank ING Direct UK had agreed to buy more than 3 billion pounds (US$5.3 billion) of deposits held by around 180,000 British savers with two other Icelandic-owned banks, Kaupthing Edge and Heritable Bank, which is owned by Landsbanki.Icelandic Prime Minister Geir. H Haarde, who has complained of a lack of support for the country's financial crisis from other European nations, will speak on the crisis later Wednesday.The speed of Iceland's downfall in the week since it announced it was nationalizing Glitnir bank, the country's third largest, caught many by surprise, despite warnings it was the "canary in the coal mine" of the global credit squeeze.In recent days, Iceland has taken over the country's second-biggest bank, fixed the exchange rate of its plummeting currency, and asked Russia for a 4 billion loan as it scrambled to stop the collapse of its economy.It has also introduced emergency laws that give the government sweeping new powers to take over companies, limit the authority of boards, and call shareholder meetings.The Swedish central bank said Wednesday it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing with a loan of up to 5 billion crowns ($702 million) "to safeguard financial stability in Sweden and ensure the smooth functioning of the financial markets."The intervention of the British and Swedish authorities underscores the effect that a full-blown collapse of Iceland's financial system would have on the rest of Europe, given the heavy investment by Icelandic banks and companies across the continent.One of Iceland's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers - including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley's.Kaupthing has also invested in European retail groups, and racked up debts of more than $5.25 billion racked up by Kaupthing in five years to help fund British deals.The Icelandic government said Tuesday that it had extended its own US$680 million loan to Kaupthing to tide it over.The government is also due to send a delegation to Moscow this week to negotiate the terms of a loan that it hopes with bolster its depleted foreign exchange reserves.After watching the currency free-fall for several days, the Central Bank of Iceland stepped in Tuesday to fix the exchange rate of the krona at 175 - a level equal to 131 krona against the euro.With the deregulation of its financial market in the mid-1990s and subsequent stock market boom, Iceland had transformed itself from the poor cousin in Europe to one of the regions wealthiest countries.Icelandic banks and companies made acquisitions across Europe, including the iconic Hamley's toy store and the West Ham soccer team.Back home, the average family's wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year.But the new wealth was built on a shaky foundation of foreign debt - the country's top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland's gross domestic product of $14 billion.

Against this tumultuous backdrop, Haarde vowed Tuesday that ordinary Icelanders would not pay the price for this spending spree and that his country will not default on its debt.

"Iceland has never defaulted on sovereign debt and wont," he said.

Some analysts, however, are not convinced by measures such as the fixing of the exchange rate.

"Given the fact that the Icelandic FX (foreign-exchange) reserve is less than US$3 billion, the peg does not look very credible, and we do not expect it to be maintained," said Lars Christensen, chief analyst at Danske Bank, in a research report.