Icy storm blows through the High Street

In Iceland, they are keeping their fingers crossed. The Krona has slumped to its lowest level against the dollar since 1992, the credit-ratings agencies have downgraded the small country's banks and one of them, the 104-year old Glitnir, has had to be rescued by the government.

Whether the Icelanders can repeat the same trick with their other institutions is a major doubt. What has long been thought of in the international business community as a potential house of cards — the huge growth enjoyed by Icelandic banks and companies linked to them — could be about to come crashing down.

As they fret in Iceland, we should also worry. On the UK High Street, 40-year-old Jon Asgeir Johannesson is one of the kings. His realm takes in Hamleys, Karen Millen, Mappin and Webb, House of Fraser and much more.

Now, this handsome Norseman, with his shoulder-length hair and glacier-blue eyes, faces what many believe is the severest test of his business career. His company, Baugur, is coming in for intense scrutiny amid fears it could fall victim to banking crisis and international squeeze on credit.

On television in Reykjavik, three nights ago, Jon Asgeir was asked: "Is Baugur bankrupt?" He denied it emphatically and articulated a convincing case, stressing that Baugur was financially sound and well able to ride out the current storm. But the questions refuse to go away and our own investigation suggests Jon Asgeir is engaged in a do-or-die struggle to keep his empire together.

The consequences of problems at Baugur can hardly be overestimated, especially in London. Companies in which Baugur has a stake employ 55,000 people in Britain. Household names such as Iceland, Debenhams and Whittard of Chelsea all feature in Jon Asgeir's £1.5 billion portfolio and are woven into Baugur's complex web of interests.

That, some observers say, is part of the problem. Baugur is a private company and is not known for its enthusiasm for transparency. Five years ago a Baugur associate in the United States, Jon Sullenberger, claimed he had filed fake invoices to disguise the purchase of a 62‑ft motor yacht, Thee Viking, for Jon Asgeir and his father, Johannes.

Mr Sullenberger went on to allege that he submitted a further invoice for $19,000 to pay for escort girls who had been hired from a Miami agency for a party aboard the vessel. All this was highly embarrassing for Jon Asgeir, not least because it came out as he was negotiating the agreement to buy Hamleys. But the most damaging element was Mr Sullenberger's claim that the alleged phoney invoices amounted to fraud.

The police in Iceland seized on this point. They had already mounted an extraordinary case against Jon Asgeir and his associates, at one point alleging 40 offences including embezzlement. Jon Asgeir said the whole thing was politically motivated and denied all the charges. Some of the sums involved were trifling and, as one of his associates pointed out, he would hardly embezzle the price of an Armani suit. Earlier this year, the most serious matters were dismissed by the Supreme Court in Reykjavik but Jon Asgeir had a conviction for book-keeping offences upheld.

This has increased pressure on him at an unfortunate time. Under Icelandic law, anyone with such a conviction cannot be a company director. This left Jon Asgeir with a stark choice: abandon his directorships or abandon his homeland. He appears to be choosing the latter and Baugur, which already has a headquarters building in New Bond Street, is expected to relocate to London where his conviction would not be an impediment to holding directorships.But the question now is what kind of company would Britain be welcoming?

Baugur is a product of Iceland's business miracle. This volcanic, largely barren, island with a population of around 290,000 earned most of its living from fishing the seas around its shores. Then, in the 1990s, a new generation of politicians scrapped currency controls, de-regulated the market and encouraged business pioneers, a number of whom had made a lot of money in Russia in the crazy years that followed the fall of the Soviet system.

Jon Asgeir was an entrepreneur by instinct. In his teens, he was selling popcorn to fellow students and renting ride-on toys placed outside Reykjavik's shops. In 1989, he and his father Johannes started a store of their own, a tiny supermarket called Bonus. They went on to dominate Iceland's entire retail sector and, from there, took Baugur on its heady climb to international recognition.

Last April, signs of nervousness emerged in some quarters over some of Baugur's companies. The business was more than four months late in filing accounts at Companies House for 22 of its subsidiaries. Earlier filings had borne bad news; there had been losses in a number of companies and a drop in the value of Baugur's UK shareholdings of £110 million.

As the late accounts were awaited there was another unsettling event. Baugur's MK One, the discount retailer, was in trouble, it seemed. A supplier who claimed he had not been paid moved to wind up the company and other creditors found they could no longer get insurance against a collapse. Baugur's response was to sell MK One. Days after the sale went through, the company was put into administration, apparently with huge debts.

While all this was happening in London, Jon Asgeir was moving fast in Reykjavik. Against a background of crumbling confidence in the country's economy he oversaw a major restructuring of his family's holdings.

Assets were moved into a company called Stodir. They included media and telecommunications stocks and, in July, it was decided Stodir would buy 39 per cent of Baugur. The sale was based on share transfers and it was not clear whether the move was intended to reinforce Baugur or Stodir.

In the end, it hardly mattered. On Tuesday, Stodir investors planned to meet to pass final agreement on the purchase of the Baugur stake. On the eve of the planned meeting the Icelandic government announced it was nationalising Glitnir Bank, one of the country's big three commercial lenders. The biggest shareholder in Glitnir was Stodir, the company controlled by Jon Asgeir and his family. In a matter of hours the nationalisation reduced their holding to a fraction of its former perceived worth. The deal to buy Baugur shares evaporated.

The Johannessons placed Stodir in administration to protect it from its creditors. Baugur's chief executive Gunnar Sigurdsson swiftly put out a statement to stress his company's position had not been jeopardised.

"Baugur's assets are based in the United Kingdom, Scandinavia and the United States," he said. "Our businesses continue to perform well in what are evidently tough market conditions. For Baugur, it is business as usual."

But is it? London Analysts looking at Stodier's failed bid to acquire 39 per cent of Baugur are wondering what was behind it. Retail specialist Nick Bubb, at London stockbroker Pali International, was sceptical.

"It's hard to think there won't be repercussions from Stodir. It all looks a bit shaky and I think they will be lucky not to be blown away by the storm."

While Baugur stresses that its assets are mostly held in Britain, there is a strong suspicion that its debts are here, too. "Jon Asgeir is facing the biggest crisis he has ever faced," Jon G Hauksson, editor of Iceland's respected business magazine Frjals Verslun (Free Trade), told the Standard. "He has to try to protect Stodir from bankruptcy. He probably has two or three British banks behind him but in the current situation they will be asking for guarantees. He has to satisfy that and I'm sure that's what he's working on now. If Stodir is bankrupt, there will be a domino effect that will impact badly on Baugur. If you ask me if Jon Asgeir is about to lose his business empire, I would say no. I think people here in Iceland would agree. But he does have a problem."

If nervous banks are demanding comfort, the obvious place for Jon Asgeir to turn is Baugur. Despite a number of loss-making assets, its portfolio contains some highly desirable holdings. Its stake in Iceland, the food store, for example, would probably be snapped up, were it to be offered for sale.

That really is the question facing Baugur now: can it ride out this crisis without declaring a fire sale? Much may depend on the extent of its borrowings and the nerve of its banks. Jon Asgeir has already been caught out once this week. He may be the last person to say it won't happen again, some time soon.