PM says he is freezing assets of Icelandic companies in the UK in response to 'illegal action they have taken'

This article is more than 11 years old

This article is more than 11 years old

Gordon Brown has told the Icelandic prime minister that he is considering legal action against the country over the collapse of its national banks.

The prime minister said tonight that Iceland's decision not to recompense those with savings in the bank was "completely unacceptable" and the British government would do "whatever is necessary to recover the money".

"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.

"We are talking to the local authorities to see what we can do to help them."

Brown's comments came after it emerged that the chancellor, Alistair Darling, was to send a team to Iceland to help solve the stricken economy's financial problems.

The Icelandic PM, Geir Haarde, announced that move after talks with Darling. He also urged his country to not panic after a third bank toppled today, and he asked the public to hold back from drawing large amounts of money in attempt to salvage their savings.

Such a move would make the country's situation more difficult, he said.

"I want to emphasise ... that people remain calm and understand that the transaction system is fully functioning and deposits are safe.

"I also ask the public not to withdraw large sums of money from the banks. It will make things more difficult."

Haarde also said he had spoken to Darling, who had assured him that transactions between the two countries would return to normal.

Brown said yesterday that the UK government would compensate individual savers with Icesave, and vowed to take legal action against Iceland to recoup any losses. Unlike Icesave, Kaupthing's UK accounts were already covered by Britain's banking guarantee.

But up to 20 UK councils who banked with Icesave could lose millions of pounds because wholesale deposits are not protected. The Tories have estimated that up to £1bn may be at stake.

The LGA has urged the government to guarantee them against any losses, and the prime minister's official spokesman said the government was willing to discuss the problem with local authorities "to see if we can find a way though".

"The government does understand the situation that they [the councils] are in. We have had difficulties getting complete clarity from the Icelandic authorities for all UK depositors."

Pressed on whether the government would extend its guarantee to the Icelandic banks, the spokesman said: "We are trying to extract information from them [the Icelandic authorities] about the scale of the deposits. We need to established what the facts are."

The financial meltdown in Iceland continued this morning when Kaupthing became the third bank to fall into the hands of the authorities, and trading on the Icelandic stock market was halted.

The Nordic nation's government also used sweeping new emergency powers to create a new bank that will take over the bulk of the domestic operations of another one of its collapsed banks.

Kaupthing was forced to turn to the country's financial watchdog after the evaporation of confidence in the Icelandic economy left it unable to keep operating as a private company.

The collapse of Iceland's biggest bank comes just days after Glitnir and Landsbanki were also nationalised. Virtually the entire top-heavy Icelandic banking system is now under state control. Haarde has warned the situation is putting Iceland at risk of "national bankruptcy".

He acknowledged that the banking sector had "become too big" and said that it will take the tiny Nordic nation of just 320,000 people several years to recover from the current crisis.

Iceland's whole economy appears on the verge of breakdown, with debts 12 times larger than its GDP. Its stock exchange was today shut down until Monday, due to the "unusual market conditions". Three days ago trading in financial firms was stopped.

Sigurdur Einarsson, executive chairman of Kaupthing, claimed that the company had been performing well just two weeks ago, before the first reports of problems at Glitnir sparked panic.

"Credit rating agencies downgraded their credit ratings for the Icelandic state and the Icelandic banks, and foreign investors unleashed a landslide in which they tried to get rid of Icelandic assets, regardless of how solid they were," he said.

Einarsson also appeared to lay some of the blame on the UK, claiming that the panic over Landsbanki's Icesave deposit scheme had led to a flood of funds out of Kaupthing Edge, his bank's UK offering.

Kaupthing's British operations were placed in administration yesterday by the UK's Financial Services Authority. Its £3bn of deposits were swiftly sold to ING, leaving hundreds of staff fearing for their future.

The crisis at Kaupthing has also forced property tycoon Robert Tchenguiz to sell major stakes in J Sainsbury and Mitchells & Butlers, Britain's largest pub operator, leaving the billionaire nursing losses estimated to exceed to more than £800m.