Government refuses to rescue councils caught in Iceland bank collapse

Eight town halls, Transport for London and the Metropolitan Police Authority have been left out of pocket after their investments in the bank were lost.

Urgent talks are likely to be held between Treasury officials and council chiefs to explore ways of easing the burden in the short term, but Chancellor Alistair Darling is resolute that he cannot give 100 per cent compensation to local authorities.

Mr Darling yesterday announced he was guaranteeing every penny invested by individuals in Icesave, the online banking arm of Landsbanki, after it went under in the credit crunch.

But a Treasury spokesman told the Standard that similar help would not be offered to councils.

He said: "Local authorities have the prime responsibility for assessing their financial situation and for revising their plans and strategies to address problems caused by the failure of financial institutions."

Whitehall sources went further, insisting there would be no bail-out from central government because councils had a legal duty to work with their accountants to manage their own cash.

As the Evening Standard reveals full details of the losses, council leaders warned that inflation-busting bill rises would not make up the shortfall, even if services were also slashed.

Costs such as parking charges could soar as councils struggle to make up their losses. The councils could struggle to pay staff and may have to make cuts in services such as bin collections and leisure facilities.

Now the Local Government Association and the leader of Kensington and Chelsea and London Councils, Merrick Cockell, have called on the Government to help the authorities.

Mr Cockell said authorities across the country could lose £1 billion. In London one council had been expecting to receive £20 million on 14 October, just as wages were due to be paid.

Mr Cockell said: "The monies involved are very substantial amounts and in some cases exceed reserves, especially in the more reserved boroughs.

"The councils involved have not been taking unnecessary risks but at the time these were very credible investments.

"However, we are looking at cash flow problems and short-term problems with the payroll.

"The Government and Prime Minister have got to find an answer. Councils are not business but public services.

"Even with the most severe cuts and tax rises we can not recoup the money. There really is no fat to be trimmed. The Government can not simply say 'sorry mate' we are a branch of government."

Councillor Colin Barrow, leader of Westminster City Council, insisted residents would not suffer as at £70million the council had bigger reserves than most.

He said: "We remain in a strong financial position and it's business as usual at Westminster Council. It's also important to stress that there is absolutely no threat to the delivery of any our services."