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London councils suffer from Iceland banking crash
Katharine Barney, Evening Standard09.10.08
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- Government refuses to rescue councils caught in Iceland bank collapse
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London town halls face raising council taxes and cutting spending in the wake of the Icelandic 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.
Reader views (14)
Its not the Icelandic deposits that should be frozen it should be those council leaders that rubber stamped these investments in the first place,they are to blame and should have THEIR assets frozen.They are sitting in their cosy office knowing that the government and joe public will bail them out .These greedy so-called public servants should be brought to account and explain their actions IN PUBLIC, after all its us public that will suffer and these so-called public servants will still have their cushy jobs and a huge pension no matter what happens to us SACK THOSE RESPONSIBLE.
- Bob, london england
Am I missing something here ? Why have all these local authorities got millions of pounds to be of taxpayers money to GAMBLE with. Peoplehave seen their council tax double yet it seems they have a vast slush fund to play with. Like the Met. Why wasnt this cash spent on what it is meant to be doing IE policing. It seems that the job of the local authority has changed from what the public want and it needs to be addressed quickly.
- Duncan Walker, Ex Peckham now Samui Thailand
A tiny country (of which I'm very fond, in other respects) suddenly bursts onto the world economic scene, with previously unheard-of investment companies buying up huge chunks of overseas businesses with what must be borrowed money (of unspecified origin, though I think we can guess). Then its banks, new players on the world stage, start offering interest rates well above the going norm.
So our Councils, pillars of financial wisdom and probity to a man, pile our money into them. Why didn't they just buy lottery tickets? At least the money would have stayed in the country.
An Icelander said the other day that the decisions that have flattened his country were made by about 20-30 people. However, we seem to have similar numbers of people in most of our Councils with similar acumen.
- Mdj, Leyton, e10 london
What I want to know is, who or what band of greedy dealers or government figures advised so many Councils to put all our monies into a bank outside of our own Country. Who gained by these recommendations. Someone has blatantly sold us down the river. When will our press ask the right questions and why is Joe Public as usual the ones to be duped. Lynda, Cleveland
- Mrs Lynda Wild, Stockton on Tees, Cleveland
What I want to know is, who or what band of greedy dealers or government figures advised so many Councils to put all our monies into a bank outside of our own Country. Who gained by these recommendations. Someone has blatantly sold us down the river. When will our press ask the right questions and why isn't Joe Public as usual the ones to be duped. Lynda, Cleveland
- Mrs Lynda Wild, Stockton on Tees, Cleveland
We should sent gunboats to seize the Icelandic fishing grounds as compensation!! Tough if their Prime Minster was offended at the use of terrorist and money laundering powers to freeze the British assets of their banks!
- Lord Palmerstone, Fantasy Island
Do we trust the scottish or labour or neither!
- David Oozageer, surrey, uk
Why don't we just send all the prisoners in our jails to Iceland without passports - that will save a few billion straight away...
- Mc, London
this is what happens when monkeys play with matches! So we have to pay through the nose for all the idiots around us. They can stick my council tax where the sun don't shine if they increase it by this much. I fear mass Civil unrest.
- Stuart, london
Tax and spending cuts are now the only way out of this mess. If every government department had a hiring freeze then the oublic payroll would fall 10% and more... no fuss waste is immediately reduced and no one will even notice it! A 2 year freeze would really purge to oxygen thief good and proper.
- James, New Malden, Surrey
More Tax rises…oh yippee. What a surprise with free-spending Labour. Maybe we will than be able to fund more Afghani mothers with a ridiculous number of children to milk the system at the indigenous taxpayers expense. However Labour tells us what a valuable contribution the huge influx of legal and illegal immigrants have made to our economy.
Now if that is not head –in –the-sand incompetence I don’t know what is.
- Andy, sussex
It's inevitable!
The old scenario.The workers once again bail out the country while the poor continue to breed and scoop up the benefits.
Rule Britannia?Don't make me laugh!
- Eddie, London
Tax rises under this government? surely not.
I await my share certificates in the post Mr. Brown.
- Jimbob, Kensington
Oh dear, even more people will be emigrating now. Wished I could, I'd go tomorrow. If the government carry on like this will there be any of the indiginous population left to pay taxes? Bankrupt Britain!
- Sue, Orpington, Kent
