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Britain threatens to sue Iceland to protect savers

Britain added to the financial chaos engulfing Iceland by declaring yesterday 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 yesterday 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 Icesave, which has suspended withdrawals.

British Chancellor of the Exchequer Alistair Darling said the British government would also guarantee all customer deposits at Icesave, even if they were above Britain’s standard £50,000 (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 BBC.

Darling said that savings bank ING Direct UK had agreed to buy more than US$5.3 billion in 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 Haarde, who has complained of a lack of support from other European countries, was due to make a statement on the crisis later yesterday.

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.

The Swedish central bank said yesterday it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing with a loan of up to US$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 Europe, given the heavy investment by Icelandic banks and firms across the continent.
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