Foreigners count cost of Icelandic meltdown

REYKJAVIK (Reuters) - International investors counted the cost of their involvement with Iceland on Friday after a meltdown in its banking system turned the country from a popular financial player to a pauper in just a few days.

A team of British Treasury officials headed to the north Atlantic island on Friday to discuss how to deal with an estimated 1 billion pounds of British deposits trapped in the collapsed banks.

"This is the responsibility of the Icelandic authorities. They have got to take responsibility for this situation," British Prime Minister Gordon Brown said in London.

In Vienna, Austria's Erste Group Bank said it had 300 million euros ($411.7 million) exposure to Icelandic banks.

Austrian cooperative bank Raiffeisen Zentralbank (RZB), the parent of listed Raiffeisen International, said it holds Icelandic bank debt but declined to say how much.

The Finnish financial watchdog said Finnish banks' total Icelandic bank exposure was 210 million euros and it was too early to estimate possible losses from that.

Iceland's financial markets ground to a halt as traders reported hardly any trades in the crown currency and money markets while its stock exchange remains shut until next week.

The government seized control of three of Iceland's biggest banks -- Kaupthing, Landsbanki and Glitnir -- this week and halted all trade on the stock market as the country fell victim to the financial crisis sweeping the world.

Home to just 300,000 people and previously best known for its geysers and other natural splendors, Iceland turned from a fishing-based economy to become an international financial haven in the past decade.

Its citizens enjoyed the trappings of prosperity as its banks expanded dramatically overseas, investors took large positions in its high-yielding currency and foreign money poured in to local projects.

All that changed this week. The government adopted sweeping powers on Monday that gave the state the ability to dictate banking operations.

The International Monetary Fund has sent a mission to Reykjavik and said it was ready to lend to countries hit by the global credit crunch.

Iceland will also start negotiations with Russia on Tuesday to secure a 4-billion euro loan.

PEOPLE ARE HURTING

British officials sought on Friday to defuse a row with the Icelandic government and rescue hundreds of millions of pounds invested in the failed banks by clients ranging from private savers to local councils.

Icelandic Prime Minister Geir Haarde had expressed outrage when Britain used an anti-terrorism law to freeze assets in Landsbanki.

But a British spokesman said London considered the Icelandic authorities' behavior had been unacceptable and it had been difficult to get information from them. Britain took the action after Icelandic officials indicated they would give preference to domestic depositors, he said.

British Prime Minister Brown told reporters: "There's a lot of investigation to be done as to where the money is held at the moment. We've asked the Icelandic authorities to return money that should have been left in Britain."

Britain's Local Government Association estimated 108 British local authorities have some 750 million pounds ($1.30 billion) invested in Icelandic banks.

In addition, London's police force, its transport network and charities across Britain have investments with them.

An Icelandic businessman summed up the mood on the island.

"These are my people and they are hurting now," Kari Stefansson of the Decode Genetics biotech company told Reuters.

"It looks like we are being left out in the cold by everybody else. It is grim. Everybody is taking care of themselves. The only people who are supporting us are the Russians."

(Additional reporting by Michael Kahn, Adrian Croft, David Clarke and Carolyn Kohn in London, Boris Groendahl in Vienna; Writing by Angus MacSwan; Editing by Timothy Heritage)

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