Equally, there are suspicions in Reykjavik that Britain and the Netherlands see the dispute as a handy way of extracting financial compensation for losses suffered by their citizens when Iceland's banks collapsed.

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The property boom had been fuelled by massive lending from the banks, and when this collapsed - and lenders were unable to repay - the Irish banking system was plunged into crisis.

BBC: Ireland profile

When banks stopped lending, and private-sector spending and investing collapsed, governments continued to spend, even though tax revenues were falling.

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Supervisors on both sides of the Atlantic concluded that the bank's heavy reliance on wholesale markets (very short-term loans from companies and other banks) left it especially vulnerable to running out of money when confidence collapsed.

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European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debt multiplied.

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