A tense standoff between the UK and the Cayman Islands over the state of public finances in the overseas territory – home to most of the world’s hedge funds – has been defused after the British government approved a CI$50m (£39m, $62m, €42m) loan.

But in a letter described by the Cayman government as an “ultimatum”, the UK told the Caribbean offshore financial centre that approval for the further CI$229m of borrowings sought by the islands would depend on expenditure cuts and an independent assessment of the scope for direct taxation.