The Local Government Association and ministers have revealed that thirteen councils may be facing short-term difficulties as a result of the Icelandic banking crash.
However, both sides said they had no reason to believe that services would be at risk or wages left unpaid at any of the councils.
In a joint statement, the LGA and the government said financial experts will be working with three of the 13 from today and will report interim findings shortly. In the other 10, experts are establishing contact, fact finding and offering support and will report back to the government and LGA.
Rapid response unit
Yesterday, the LGA called for a “full and independent inquiry” to discover why councils were not warned by credit rating agencies that their investments in Iceland were under threat until just days before the country’s banking system collapsed.
An LGA review of the two most popular rating agencies revealed that the affected Icelandic banks had been awarded relatively good ratings up until 30 September, giving no indication to councils that their investments were at risk.
LGA chair Margaret Eaton said that local authorities needed to be able to rely on credit agencies. She added: “Our analysis dispels the myth that many councils were investing recklessly after credit warnings were issued.”
However, it has emerged that a small number of authorities did continue to invest in Icelandic banks after their credit rating had been downgraded. The LGA said it was looking into the matter and urged the relevant councils to conduct their own internal inquiries.
116 councils affected
The latest figures show that 116 councils in England and Wales have combined investments of £858.3m in Icelandic banks. The LGA said it was hopeful that the majority of investments would be recovered after “encouraging” discussions with the administrators of two of the affected banks, Heritable Bank Plc and Kaupthing Singer and Friedlander Ltd. It is thought the assets of these two banks roughly match their liabilities.
Eaton added: “We are not aware of councils that are in serious imminent liquidity problems and in the long term we are confident that vital frontline services will remain unaffected.”
The LGA is also seeking a meeting with the Icelandic ambassador.
“So you have some spare cash and you want to put some aside for the proverbial rainy day. Do you invest it in a low-interest account or do you stash it away in a high-interest one? For the person in the street it is a no-brainer. So why should it be any different for local authorities, charities and the police whose missing millions add up to £1bn, according to latest estimates.”
Outside Left blog: Don’t blame councils for banking on Iceland
“We should expect increases in homelessness and poverty and cuts in services and jobs.”
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