It was the day that Iceland came crashing down to earth. A team of Treasury experts flew in to Reykjavik, as crisply efficient as emergency doctors at a car crash. Their source of authority: the stern words of Gordon Brown – “totally unacceptable” – about Iceland’s mismanagement of the financial meltdown, its failure to reassure the hundreds of thousands of British savers who put their trust in a tiny island that punched well above its weight.

The slapdown by Mr Brown, the fury of the British, has stunned the Icelanders. Suddenly it has become clear to them that they are no longer a global financial player capable of buying up the fashion chains of their old Cod War enemy. They are an island on the outer northern fringe of Europe with sheep, haddock and an orthopaedic limb factory.

“I don’t like this Brown, it’s the rudeness we got in the Cod War, respectless,” said Leifur, a 37-year-old trawlerman who has been catching up with the news since his vessel, the Venus, docked with 700 tonnes of cod and haddock scooped out of the Barents Sea. They were out of port 40 days – five days to the Barents Sea, five days back – and in those days, as the boat tossed and bucked, the world changed. The financial crisis, he said, had swallowed up Iceland and spat it out again.

We were talking in the English pub, a short walk from the docks past the offices of Kaupthing and Landsbanki, past the Landsbanki-sponsored opera house which, when finished, is supposed to be a spectacular Sydney-like presence at the mouth of the harbour. Now work on the building is sluggish. And Landsbanki has announced the first 500 lay-offs – a major blow in a country of 300,000.

“My cousin works there and she’s going to lose the job,” said Leifur, waving at a colleague in smeared blue overalls. “That’s Andi the Pole, he’s going home. There’s no money to be made in a place where the currency is dropping like a chunk of lead.”

There are 8,000 Poles on the island, the biggest foreign minority, attracted to the place when it was hot. It had somehow all fitted together – the clubs, the purchase of West Ham United, jet-setting tycoons who behaved like Russian oligarchs - and the frozen cod, caught and packaged for the world. “We felt like we were a big country and now we have woken up,” said Gunnar Sigurdsson, who has been working on a new concept for internet auctions. And it is Britain that has brought the message home.

The Scandinavians and the Dutch have all been looking nervously towards Reykjavik, too. The Russian eagerness to loan €4 billion to the Icelanders is not just mischief, or an attempt to buy the goodwill of a nation; it is also because Russian businessmen have been attracted by the laundering possibilities offered by a banking system that is not very thoroughly regulated.

Britain is admired for its seafaring skills, its stability, but it also manages to irritate, to jar the Icelandic national consciousness. “In the Cod War, we were fighting for something essential, for an Icelandic way of life and against British overfishing,” said Mr Sigurdsson. “This is an island that lives on fish. Take that away from us and we are nothing. But now we are supposed to fight the UK and the rest of the world for the men in suits with their Cayman Island accounts? I don’t think so.”

The Cod War of 1975-76 was won by the Icelanders. It demonstrated the strength of a small nation battling for its livelihood – and its ability, even then, to present Britain as a bit of a bully on the high seas. Indeed, as a result, Iceland became a global player in the fishing world.

All around the harbour, there are the smells and signs of a real economy: the fishmeal and cod-liver-oil-exporting offices, the shrimp and shellfish delivery vans, the dumping-off place for Atlantic salmon, fished since before the days of the Vikings. There are few nets and some of the nasty work has been taken over by robots that seize the most slippery of fish and decapitate them.

When the Icelandic leader at the time visited Britain at the height of the Cod War he was able to thump the table, knowing that he had the full backing of his island – it was an issue too fundamental for Icelanders. But the Prime Minister now, Geir Haarde, though full of righteous outrage against the British, finds it increasingly difficult to defend the banking behaviour of the Icelandic banks.

In response to Gordon Brown’s comments, he said: “To say our country is in default does not paint a true picture of the situation. These kind of comments were not helpful as far as the markets are concerned.”

Responsible for the 1990s wave of privatisation was the Thatcherite former prime minister David Oddsson, now governor of the central bank and a hate figure in the clubs and pubs of Reykjavik.

Ultimately, Mr Haarde knows that Britain has done him a favour. It has delivered a wake-up call. Mr Brown’s message came over loud and clear in yesterday’s Reykjavik papers: Iceland has overstretched itself and has wrought damage beyond its shores.

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