Icelanders made to pay Versailles-level reparations by British government

An example of how gov't intervention made our lives worse: 1. The British government passes terrorist legislation to freeze terrorist accounts:

2. Icelanders get their assets frozen abroad because of the actions of a private bank in iceland (it made lots of bad loans).

3. So to appease the british government the icelandic government has to promise to pay bank british depositors to the icelandic bank (why would the government post hoc guarantee an insolvent bank??)

4. This way the icelandic government hopes to get british government aid and their accounts unfrozen!

What started the problem here?  The chancellor of the exchequer was ever given the power to freeze innocent people's accounts to begin with, through the terrorist legislation.