Britain paved the way for a prompt compensation deal for Icesave depositors by offering to lend up to £100 million to one of the country’s crippled banks.

The loan, announced to parliament by Alistair Darling, the Chancellor, marks the beginning of the end of the fierce diplomatic spat with Iceland, the worst clash since the so-called Cod War of the 1970s. The anger of British Icesave depositors — fearing that they would be excluded from Icelandic compensation — stoked the conflict. Britain infuriated Iceland by using anti-terrorist legislation to seize the £4 billion held by Landsbanki in the UK.

“The Bank of England is providing a short-term secured loan of up to £100 million to Landsbanki, to help maximise the returns to UK creditors,” Mr Darling said.

The Icelanders were enthusiastic — they have been waiting for a sign of international confidence since the crisis began. The Reykjavik stock exchange has been closed since Thursday because of fears that the whole financial edifice could collapse. “This is a very encouraging step,” a government source in Reykjavik said. A government delegation is heading for Moscow today and there is talk in Reykjavik of a possible short-term Japanese loan. But Iceland was nervous that without a kind of peace with Britain, there would be no significant lending.

The Icelandic Government was also understood to be continuing talks with Sir Philip Green, the Topshop billionaire, over his attempt effectively to seize control of Baugur, the Icelandic investment group that owns a swath of the UK high street. Sir Philip has offered to buy, at a significant discount, the estimated £1.5 billion of Baugur debt held by three Icelandic banks that have been nationalised by Icelandic authorities in recent days.

Sir Philip told The Times yesterday: “We are nowhere yet.” He indicated that he would want day-to-day control of any of Baugur’s chains as part of any deal.

Despite reports to the contrary, Iceland has not officially requested the International Monetary Fund for financing, an IMF spokesman said last night.

Iceland has become one of the biggest victims of the credit crunch as the crisis in global credit markets wipes out a decade of unprecedented growth by the country’s previously unheralded financial sector.

Ingibjorg Solrun Gisladottir, the foreign minister, said that joining the European Union must now be a long-term ambition.

Such a move had been fiercely opposed by the country’s fishing industry because of the likely concessions its fleets would have to make.

Ms Solrun Gisladottir said: “In the short term, our defence is co-operation with the International Monetary Fund and in the long term EU membership, adoption of the euro and backup from the European Central Bank.” Einar Gudfinnsson, the fisheries minister, admitted that there may be little alternative.

Experts said that it was still unclear how the domino effect that has engulfed Iceland’s economy would hit the British businesses owned by Baugur, the investment group run by Jon Asgeir Johannesson.

House of Fraser and Hamleys separately said yesterday that their day-to-day operations would not be affected by Baugur’s seeming demise. Baugur owns a 35 per cent stake in House of Fraser and 65 per cent in Hamleys.

Bankers said that Sir Philip was likely to get Baugur’s fashion chains, such as Karen Millen, Oasis, Jane Norman and Whistles. By acquiring the debt he would be in pole position to seize control of any Baugur business that runs into difficulty.

What Baugur owns

35% Stake in House of Fraser
65% Stake in Hamleys
49% Stake in Mosaic Fashions, owner of Oasis, Principles, Karen Millen, Warehouse and Coast
29% Stake in Moss Bros
10% Stake in Woolworths

Source: Times Database

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