London councils suffer from Iceland banking crash

Council chiefs were locked in emergency talks with ministers as the Tories claimed up to £1 billion of taxpayers' cash was at risk.

The full extent of the impact of the collapse of Landsbanki and other banks became clear as more than 70 authorities across the country revealed they had placed cash in Icelandic accounts.

London has been particularly hard hit, with the Metropolitan Police Authority admitting £30 million is at risk, while Transport for London and Haringey council have £40 million each at stake.

The sense of crisis deepened when one London borough revealed the entire payroll of its staff was in jeopardy as it had expected a £20 million payment next week from one of its Icelandic accounts.

In what some MPs were already dubbing the "new Cod War", relations between Britain and Iceland deteriorated further sources in Reykjavik claimed Chancellor Alistair Darling had triggered panic yesterday among consumers by freezing the UK assets of Landsbanki, the parent company of online bank Icesave.

Iceland has been engulfed by the global credit crunch more than other countries because the tiny state has more than seven times its national income locked up in banks with risky investments.

The country's premier Geir Haarde raised the spectre of having to go cap in hand to the International Monetary Fund for a bail out today.

But although the Treasury has given an 100 per cent guarantee that individual British savers in Icelandic banks will not lose a penny, they are refusing to make the same offer to councils.

In a bid to ease the pain, part of the frozen assets seized by the Chancellor may now be used to compensate some town halls. Specialist financial "hit-squads" will also be sent in to any council where frontline services may be at risk.

Shadow local government minister Eric Pickles warned that councils could be forced to raise council taxes or slash services.

Local Government expert Tony Travers said boroughs may have to get 25-year loans to cover any losses, a move that would lead to "marginal" council tax rises for years.

Sigurdur Einarsson, chief executive of Kaupthing bank, which owned UK internet bank Kaupthing Edge, criticised Mr Darling today for triggering a run on his bank and forcing Reykjavik to nationalise it this morning.

In a further blow to Iceland, its President Ragnar Grimmsson was in hospital for heart treatment as commentators claimed his country was on the edge of "national bankruptcy".

Gordon Brown and Mr Darling decided to take drastic action when it emerged that the Icelandic government had no clear idea of how to compensate British savers.

Local Government Minister John Healey insisted that today's meeting with Treasury minister Stephen Timms and town hall chiefs was mainly to work out just how much cash was involved.

Mr Healey was telling councils that the money was "at risk, but not lost". Councils can use legal powers to take the banks to court and recover much of the money, Treasury sources said.

Mayor of London Boris Johnson is to write to the Chancellor for reassurances that the £70 million from the MPA and TfL would not be lost.

Chris Bilsland, spokesman for the Chartered Institute of Professional Finance and Accounting, said a £20 million loan could be paid by taxpayers over 10 or 20 years.

The rise could lead to an extra £68.70 next year on a Band D home, and a further £72.14 the following year, each year increasing until the debt is paid off.

Westminster council faces losing £17million, Brent £15 million, Hillingdon £20million and Haringey £37 million. Sutton is left short of £5 million, Havering is missing £12.5 million, while Barnet have lost £27.4million.

The MPA said it had £30million invested and Transport for London also deposited a further £40million.

London Councils leader Merrick Cockell said: "The monies involved are very substantial amount and in some cases exceed reserves. However we are looking at cash flow problem sand short term problems with the payroll.

"The Government and Prime Minister have got to find an answer. Councils are not business but public services. One short term solution could be for the business rates that councils pay the Treasury to be held back."

Councillor Colin Barrow, Leader of Westminster City Council, also defended the council's decision to invest in the banks saying it had been an "acceptable" risk.

He said: "Despite the enormous turmoil in the banking system, we still remain in a strong financial position and it's very much 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."

A TfL spokeswoman said: "We are urgently seeking further information on the situation."

The council cash is on top of the £4 billion British savers had in accounts with collapsed bank Icesave. Mr Darling has said that all this money will be safeguarded.