Tensions mounted yesterday between the Cayman Islands and Britain as the territory moved to delay its budget over demands for new taxes, set as a condition for an emergency loan.
The Caribbean territory, home to most of the world's hedge funds, is resisting pressure by Britain to broaden its tax base to shore up its finances. In the meantime the UK is refusing to sign off a loan for CI$372m (£278m).
The impasse has prompted a backlash on the islands over the UK's power to restrain their borrowings above a certain threshold.
McKeeva Bush, leader of government business, said the Cayman islands had put forward adequate proposals to cut costs and raise revenues without the introduction of new taxes.
"We have identified steps to move forward and restore balance," he said in an interview with the Financial Times.
He called for an overhaul of the UK's power of veto over additional borrowing by its territories, saying he had put a proposal on the agenda of the Overseas Territories' Council, which oversees the relationship. The argument that the UK had a contingent liability for the Cayman Islands' borrowings was unfounded, Mr Bush said.
"Fairness must be the foundation stone . . . If they are not paying or prepared to pay, there is no contingent liability."
Mr Bush insisted that the Cayman Islands could put its finances, hit by the economic downturn and rising public spending, on an even keel by raising fees for work permits, registration fees and certain services. But he has yet to convince the Foreign and Commonwealth Office, which has delayed approving the package that was put to it 10 days ago.
Chris Bryant, foreign office minister, has defended the UK's restrictions on the overseas territories' ability to borrow until they came forward with a clear strategy for cutting their debt.
"I am sure these discussions will continue for some time but I am determined to continue working with the territories to ensure that their public finances are resilient enough in the long term to handle economic shocks," he wrote on a blog.
The territory postponed its budget, due yesterday, until Thursday. A Cayman Islands official said the delay in signing off the loan would not cause problems in meeting the government's bills at the end of the month, but it needed clarity over the loan.
Anthony Travers, chairman of the Cayman Islands Financial Services Association, said indications that the UK government was still pushing for a payroll tax was "a cause for great concern" and would lead to job losses and falling -revenues.
A move to a direct system of taxation would be a "seismic shift which has not been thought through and which is not justified on the facts", he said.