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.

Arni Torfason
PROTEST: On Oct. 8 during a Reykjavik protest over the credit crisis, a man wore a sign reading, 'Your bank does not care about you.'

It's a country with a population smaller than Cincinnati and a climate that can only be described as frigid. But for a couple of boom-time years, Iceland was the hottest investment idea around: high returns, a rock-solid credit rating, and a dab of the exotic to go with it.

But now, as the North Sea island goes into financial meltdown – the first sovereign victim of the global financial crisis – hundreds of thousands of people are ruing their decision to park money in Icelandic banks - and many of them are British.

In a striking example of the intertwined nature of global finance, capital, risk, and liability, entire classes of British savers – housewives, expatriates, city halls, police forces, universities, even charities – are scrambling to get billions of pounds' worth of savings back.

And in a telling sign of a more conservative era ahead, many are indicating that they will not be so adventurous in the future. The upshot of the effective bankruptcy of Iceland Inc. is that a lot of money will revert to safer shores in Britain and Europe.

"People will return to brands they know," says Neil Freemantle, a an independent financial adviser in Britain. "Advice will change. People have had their fingers burned and are going to go back to choosing the things they know and trust."

In fact, they already are. Authorities contacted for this article indicated that they were reviewing their "treasury strategy" and were consulting credit-ratings agencies to reassess the spread of risk.

David Lloyd, deputy leader of Hertfordshire County Council which has £28 million frozen in Icelandic accounts, says a cabinet meeting this week agreed to increase fivefold the cash held overnight with the British government's debt management office – a sort of low-interest safety deposit box that helps local governments manage their money.

"We chose to increase the amount we put with the government – it will allow us to take a more cautious view," he says, adding that the council commissioned PriceWaterhouseCoopers, an international accounting firm, to review how it was handling the public money. "Until we've got some answers to that, we are being slightly more cautious generally."

Kent County Council, which has £50 million tied up in Icelandic banks, is also reviewing its portfolio and will place any new deposits with the debt management office. Its leader, Paul Carter, has suggested that if all councils and charities move their money back onshore it would provide a timely boost for Britain's own beleaguered banking sector.

Private investors are no different. Andree Frieze had parked "a couple of thousand" in Icesave, the British arm of Icelandic bank Landsbanki, which attracted investors with juicy rates of interest. As Landsbanki followed Glitnir Bank and Kaupthing Bank into nationalization earlier this month, Ms. Frieze dashed to retrieve her money. To no avail. Infuriatingly (and ironically, given its name), Icesave's deposits were frozen.

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.

"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.

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