Councils furious over spreading of Icelandic losses

22 Feb 10
Local authorities facing losses following the collapse of the Icelandic banks are challenging the government’s ‘irrational’ decision to allow only some councils to spread their losses
By David Williams

25 February 2010

Local authorities facing millions of pounds worth of potential losses following the collapse of the Icelandic banks are challenging the government’s ‘irrational’ decision to allow only some councils to spread their losses.

The Local Government Association wrote to the Department for Communities and Local Government on February 22, querying its 2009/10 capitalisation directions on behalf of eight councils.

The local authorities, led by the London Borough of Hillingdon, are threatening to take the matter to judicial review. They are unhappy that most councils that applied for the right to register their Iceland losses in several years’ worth of accounts, rather than just one, were turned down.

The 2009/10 directions, released earlier this month, show that £72.6m in ‘exceptional’ capitalisation was approved for 19 councils, but there were 31 unsuccessful applications.

Among the successful applicants were the London Borough of Haringey, which had £37m invested in Iceland and had applied for £11m capitalisation, Plymouth City Council and Northumberland County Council.

Hillingdon council leader Ray Puddifoot said the department had behaved illogically and not explained its reasoning. ‘It’s such an irrational decision,’ he told Public Finance. ‘It’s an injustice, an absolute nonsense. What is the government saying? That Hillingdon should be more on the ball, but Haringey are Haringey and you can’t expect them to know any better?’

Hillingdon had £20m invested in Iceland at the time of the crash and is currently estimating losses of £3m. Puddifoot said that, although the council could afford to register the losses in a single year, it did not want to take a big hit at the beginning of the funding squeeze for councils.

The DCLG’s action was also unfair on smaller councils with tighter budgets, he said.

Nottingham City Council was also denied capitalisation but is not among the group represented by the LGA. Strategic finance director Tony Kirkham disputed the implication that, in being denied capitalisation, the losses were seen as the council’s fault.

He said Nottingham could cope with the consequences but ‘capitalisation would have given us more flexibility’. He added: ‘We would have liked to manage it over a longer period and take a more measured approach.’

Meanwhile, Exeter City Council is drawing up a set of possible options ‘to deliver a sustainable financial position for the medium term’ after being refused capitalisation.

An LGA spokesman said: ‘The DCLG needs to be more open about the basis upon which it has made those decisions.’

But he would not comment on whether it would assist councils in a future judicial review of the issue.

A DCLG spokesman said: ‘Applications are considered against strict criteria, which are available to councils. In the case of potential losses from Icelandic banks, councils needed to show they would face exceptional financial difficulties for this to be allowed.’

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