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Brits try to retrieve assets frozen in Icelandic banks

The country's banks expanded greatly during boom years and now can't roll over the debt.

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Frieze says she'll probably put whatever money she can get back into a British bank account. But even that doesn't fill her with confidence, given the way her own country's financial sector is still shuddering under the tremors unleashed by the credit quake of the past month.

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"It makes me very concerned about most banks, given what's happened in the UK and across Europe. I'm left wondering what one should actually do with one's money," she says. "I don't want to buy a safe."

Iceland has been referred to as the "canary in the gold mine" of the financial crisis. The first warning chirps were sounded in 2006, but the volume really ratcheted up as the credit crisis hit this year.

Its three largest banks had expanded aggressively, acquiring assets in Scandinavia, Britain, and as far away as China and Canada, worth around 10 times Iceland's gross domestic product ($14 billion). When global credit markets froze, however, they found themselves unable to roll over debt. The collapsing kronur, Iceland's currency, made their foreign liabilities even harder to honor, and earlier this month the government had to step in.

Britain quickly froze Icelandic assets in the United Kingdom and threatened to take legal action as the British investors' exposure quickly became apparent: some 450,000 customers with about $12 billion in Icelandic accounts, more than 120 local municipalities with around $1.3 billion at risk, police and transit authorities similarly imperilled, and 12 universities – including Oxford University – with an estimated $130 million in North Sea limbo.

British government bodies affected say the missing millions will not impair their day-to-day operations. For almost all, the deposits are a small fraction of their annual budgets. And some say the ultracautious view will not be sustainable in the long term. Organizations with multimillion pound budgets will lose out if they keep too much cash in low interest-bearing government safety deposit boxes for too long.

Transport for London, the capital's transit authority, which has £40 million frozen in Iceland, says that despite following a "prudent treasury strategy" it wants to get the best returns it can, given its need to hold large amounts of cash. Oxford University, which had invested £30 million in Icelandic accounts, says it still wanted to maintain a "diversified portfolio" and would "keep all investments under regular review," according to spokeswoman Ruth Collier.

As for Iceland, it's clearly down but not yet out. Analysts point to bountiful natural resources – fish, geothermal and hydroelectric energy, and a well-educated workforce – and say recovery might not be as remote as it seems.

"Iceland may be the first victim of the financial crisis but may be one of the first nations to get back on its feet again," says Hannes Holmstein Gissurarson, professor of political science, reached by phone at the University of Iceland.