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UK Politics

Iceland secretly pressured US to defend it against British 'bullying'

US stays out of dispute with Britain over collapse of IceSave bank

The Icelandic government secretly begged the US to intervene in the dispute with Britain over the collapse of the online bank, IceSave, claiming it was "being bullied", The Independent has learned.

Two officials from Iceland's foreign ministry pleaded with the head of the US embassy in Reykjavik for help last month as the British and Dutch governments demanded to be reimbursed for the billions of pounds they had paid out after the collapse of the Icelandic bank.

Leaked minutes show that the two-hour "marathon meeting" took place on 12 January between the US Charge d'Affaires, Sam Watson, and two Icelandic officials – Einar Gunnarsson, the top civil servant in the foreign ministry, and Kristjan Guy Burgess, a political adviser to Iceland's Foreign Minister, Ossur Skarphedinsson.

The pair pressured Mr Watson to end the neutral stance taken by the US on the issue. "Iceland, they said, was being bullied by two much larger powers and a position of neutrality was tantamount to watching the bullying take place," the memo states. The Icelandic officials added: "A public statement from the US in support of Iceland would be very helpful."

Around 300,000 British savers were affected by the collapse of IceSave, which shut when its parent bank, Landsbanki, filed for bankruptcy in 2008. The Treasury paid back those who had lost their deposits but is demanding reimbursement from the Icelandic government.

Last year, the Icelandic parliament agreed a deal to repay £3.4bn to Britain and the Dutch government, which also reimbursed its citizens. However, its President, Olafur Ragnar Grimsson, blocked the move after a public uproar. The Icelandic government could be toppled next week if, as is expected, it loses a national referendum on whether to go ahead with the repayment.

The Icelandic officials warned Mr Watson that the repayments "would cause Iceland to default in 2011" and "could set Iceland back 30 years".

The relationship between the Icelandic and British governments was strained to breaking point, the memo reveals. It describes how Ian Whiting, Britain's ambassador in Reykjavik, told Mr Watson he had received "mixed messages" from Icelandic officials, with the Icelandic Prime Minister saying she was content to "move forward with a referendum" but her government appearing to look "at other options".

The note added that British officials had tried to get Norway to offer Iceland a loan to cover the repayments to Britain.

The Foreign Office and the US State department made no comment yesterday. The US has so far remained neutral over the issue. A Treasury spokesman denied allegations that the Icelandic government had been bullied.