Iceland: 39,800 square miles; population, 285,000; currency, the krona. Beautiful scenery, good salmon fishing and fast becoming the financial capital (if somewhat offshore) of Europe.

You may have read in the papers about the planned £1bn-plus bid for the Somerfield supermarkets group. Or the £151m purchase of Laurel Pub Company. Or the £326m bid for Big Food Company, the £547m cash purchase of the Singer & Friedlander banking group or the acquisition of stockbrokers Teather & Greenwood.

There was also the £770m offer for Arcadia, the Top Shop to Dorothy Perkins retailer eventually bought by Philip Green instead, and the purchase of the Karen Millen and Oasis fashion chains, which next month will be floated off, valued at £300m.

And the connection between all those deals? All the bidders are Icelandic. The people from what claims to be the last country in Europe to be settled have been on a shopping spree of more than £2.5bn in recent years - a sum equal to a third of Iceland's gross domestic product.

The string of deals is coming from a small number of companies and banks that are, perhaps not surprisingly from such a small country, related. But the questions remain: Where does the money come from? Why are they buying so voraciously abroad? And why the UK?

Leading the pack is Bauger, a company formed just six years ago by the merger of two Icelandic supermarket chains and run by Jon Asgeir Johannesson, who is still just 37. It owns stakes in local food shops, a property company, a home improvement chain and Iceland's Vodafone affiliate.

It failed in its attempt to buy Arcadia in 2002 but returned to take over Hamleys for £48m the following year and its subsequent acquisitions include the Mk One and Whistles fashion chains, plus Goldsmiths jewellers and the Julian Graves health food chain.

Just before Christmas, it bought Big Food, which happens to be the holding company for the Iceland frozen-food shops, as well as Bookers. And, having mulled over a solo bid for Somerfield, Bauger has now linked with London-based property millionaire Robert Tchenguiz.

Retail, of course, is not a sector in favour with other investors. Perhaps Bauger is buying cleverly at the bottom, but it is not amalgamating its retail interests to reap synergies.

Bauger's Big Food takeover was partly financed by Kaupthing, Iceland's largest bank, and now it and the country's other financial institutions are buying over here too. Kaupthing backed Tchenguiz's bid for Laurel Pub and took a 25 per cent stake. It also has an equity holding in Karen Millen and Oasis alongside Bauger. Last month, it acquired Singer & Friedlander, one of the City's few remaining independent banks.

Earlier this year, another Icelandic bank, Landbanki, paid £43m for the stockbrokers Teather & Greenwood.

There have been foreign financial invasions of the UK before. After the oil-rich Arabs bought up Britain's property market they were followed, in the 1980s, by the Dutch and Swedes and, over the past decade, by German investors. Now the Irish have a magical source of money to bid for the biggest property investments in London.

UK investors watched with xenophobic satisfaction as each foreign buying spree pushed property prices to new peaks and then left the overseas investors with burnt fingers when the market collapsed.

Such national sprees are often tax driven or result from a sudden relaxation of foreign investment rules. That is not behind the Icelandic invasion, however. Nor is it simple wanderlust or a wish to return to their homeland - Iceland's first inhabitants came from the British Isles, apparently.

The reasons, however, are financial. Iceland has a booming economy, growing at 5 per cent, and companies are cash rich. Even pension funds are in surplus. The Reykjavik stock exchange is modest - it opened in 1985 but the first equities were not listed until 1990 and there were no equity trades until the following year. But it rose 60 per cent last year and companies have raised £1bn a year over the past four years.

That is why Bauger plans to float Oasis and Karen Millen there, not here. Bauger itself, however, went private and delisted two years ago.

With so little to spend the cash on locally, it is not surprising companies are looking abroad. And while the UK has received the lion's share of overseas investment, some has gone to other countries, especially in Scandinavia.

Bauger is part of a consortium that paid £50m for Copenhagen's top department store; Kaupthing paid £700m for FIH, a Danish bank; Burdara, another holding company, is buying in Sweden.

And the spree goes on. Kaupthing wants to buy a UK broker to go with its new bank, Singer & Friedlander.

Should we worry that the Icelanders are on such a spending spree? Not for what they are buying - the country is punching above its weight on purchases but they are still a fraction of all UK inward investment. Nor are there any ethical or other reasons to object.

But this spree has the signs of a classic bubble, albeit a localised one. Where all the money comes from is unclear - though there are rumours of Russian roubles. If international funds are being channelled through an Icelandic conduit into the UK and if it is debt rather than equity, there should indeed be concern at how stable this investment is.

But these are tangible assets being bought. If any of the Icelandic investors or their investments collapse, the businesses will still be in the UK and available to buy. The concern should be less for those UK businesses bought by the Icelanders than for the buyers and their banks. The Icelandic expansion is a mystery, but it is one for the Central Bank of Iceland to worry about.