Healey battles to limit Iceland bank crash damage

15 Oct 08
The government was still trying to assess the impact of the collapse of Iceland's banks on public sector bodies and their partners this week after admitting 13 councils were in short-term difficulties because of the crisis

16 October 2008

By Tash Shifrin The government was still trying to assess the impact of the collapse of Iceland's banks on public sector bodies and their partners this week after admitting 13 councils were in short-term difficulties because of the crisis.

Teams of financial experts from the Treasury and the Department for Communities and Local Government were sent into three councils in England on October 15, with a remit to report back that night. Experts were also trying to establish the situation of another ten authorities that had reported short-term concerns to the Local Government Association.

In the Commons, local government minister John Healey told MPs: 'We want to be clear, we want to be more confident about the position of these councils.' Those with short-term financial problems caused by the Iceland crash 'will not be on their own', he pledged. But he stopped short of offering a guarantee against all losses.

A total of 116 local, fire and police authorities had £858m tied up in Icelandic institutions, according to LGA figures, while around a dozen universities had invested a total of £77m. A joint LGA-government statement said there was 'no reason to think that wages will not be paid or that services could be at risk', even in the worst-hit 13 authorities – all believed to be district councils.

But Healey, pressed by his Conservative counterpart Eric Pickles on the situation of housing associations, Private Finance Initiative schemes and regional development authorities, could say only that the DCLG was still 'making sure we gather information' on these.

He hinted that stricken authorities might be given permission to borrow against their assets to tide them over – a measure used to help councils struggling with equal pay costs. He told the Commons: 'Capitalisation is a step we've taken previously… clearly we would consider that again.'

In their statement, issued after talks on October 15, the LGA and the government said: 'The government and the LGA will continue to work with the administrators and the Icelandic authorities to get the best and most rapid resolution of the situation.'

The LGA added that it had met the Icelandic ambassador to demand that councils' money was 'at the top of the pile when repayments are made'. A spokeswoman said: 'Our priority remains getting back as much town hall funding as possible from Iceland. Support packages and a bail-out may be needed, but it would all be prevented if we can get our money back.'

LGA chair Margaret Eaton earlier said talks with bank administrators Ernst & Young had been 'hugely encouraging'. She added: 'The administrators considered that the book value of the assets of each business appeared to be of the same order of magnitude as the liabilities.'

Seven Scottish councils have money on deposit with banks in Iceland. Scottish Finance Minister John Swinney called on UK chancellor Alistair Darling to give an assurance that these deposits would be safeguarded.

While efforts to recoup the councils' cash continue, questions have emerged over the wisdom of investing in the Icelandic banks – and on whether councils had been badly advised.

In the Commons, Healey was quizzed on central government investment guidance, issued in 2004 when rules were relaxed. 'The government still wishes to encourage authorities to invest prudently, but without burdening authorities with the detailed prescriptive regulation characteristic of the 1989 Act system,' the guidance says.

Healey told MPs that councils were 'not under pressure to maximise their investments' under the guidance. 'Ultimately… the government's responsibility is to make sure there's a general requirement to do it prudently and give proper priority to how safe that cash will be and how readily redeemable.'

Over the course of the week, evidence of differing attitudes to the Icelandic banks among local authorities emerged. In Haringey, north London, council leader George Meehan confirmed that a total of £37m had been invested in three Icelandic banks, with the last deposit just days before the crash.

'The only deposit in Glitnir was made in December 2007. The final deposits were made in Heritable Bank and Landsbanki on September 29 2008,' he told a meeting of the council.

Braintree District Council in Essex had put £5m in Icelandic institutions, with the last deposit made in April. But the council has been left with a £230,000 gap this financial year.

But York city council leader Andrew Waller told Public Finance that the authority's finance officers 'thought there seemed to be something amiss with the interest rates, being too good to be true' and had pulled its money out of Iceland in the summer. The council had only just recovered money deposited with scandal-hit bank Bank of Credit & Commerce International in 1991. 'We're being cautious,' Waller said.

The LGA called for a Financial Services Authority investigation into the advice provided by credit rating agencies. 'There needs to be a full and independent inquiry to find out just how these banks continued to get relatively strong credit ratings until a few days before they went under.'

PFoct2008

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