Iceland to `Honor' Obligations to U.K. Depositors, Haarde Says

By Tasneem Brogger and Helga Kristin Einarsdottir

Oct. 11 (Bloomberg) -- Iceland's government will ``honor its obligations'' to depositors at failed Icelandic banks abroad, including the U.K., said Prime Minister Geir Haarde, who will meet a British delegation to the island today.

``Everybody needs to show some flexibility here,'' Haarde told journalists at a press conference in Reykjavik late yesterday. Banking Minister, Bjorgvin Sigurdsson, said tensions between Iceland and the U.K. are based on a ``misunderstanding.''

Iceland is striving to defuse a spat with the U.K. fuelled by concern British depositors may suffer losses on their Icelandic bank deposits. Prime Minister Gordon Brown this week threatened to freeze the U.K. assets of Icelandic companies, which employ 100,000 people.

The Icelandic government is working ``day and night'' to come up with a solution to its woes after its three biggest banks failed and the krona collapsed, Haarde said.

Billionaire retailer Philip Green is in talks with Iceland's government and Jon Asgeir Johannesson, chairman of Icelandic retail investment company Baugur Group hf, to spend as much as 2 billion pounds ($3.4 billion) on purchasing the group's debt in Iceland's failed banks, the Financial Times reported today.

Brown has threatened legal action against Iceland. The feud over money trapped in accounts of Kaupthing Bank hf and Landsbanki Islands hf, the biggest and second biggest Icelandic banks that were taken over by the local regulator this week, has sent relations between the two countries to the lowest since a 1970s dispute over North Atlantic fishing rights, known as the Cod Wars.

`Unfortunate'

``Brown's remarks were unfortunate,'' Haarde said. ``We will honor our obligations. We may need some help from the U.K. authorities to do this in a proper way.''

The U.K. sent a delegation to Iceland yesterday to resolve the matter and talks will start today, Haarde said.

Royal Bank of Scotland Group Plc, the U.K.'s third-biggest bank, is among British banks that may take losses of as much of 500 million euros ($677 million) on securities tied to this week's collapse of Icelandic banks, a person familiar with the matter said yesterday.

The collapse of Iceland's three largest banks, Kaupthing, Landsbanki and Glitnir Bank hf, has affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London's police force.

Iceland's authorities are ``ring-fencing the domestic interests and they're probably abandoning the liabilities externally,'' Standard & Poor's credit analyst Eileen Zhang said on Oct. 9. ``We can't put a number yet on how much money they need to fix this crisis.''

Haarde also said Iceland hasn't had ``direct'' talks on financial aid with an International Monetary Fund mission currently on the island, and denied his country is in default.

The country will start formal talks with Russia on Tuesday in the hope of securing a loan worth as much as 4 billion euros ($5.35 billion) after approaches to western central banks and governments didn't yield any results, Haarde said earlier this week.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;