Title

Local authorities are still coming to terms with the effects of the Iceland banking crisis. Dermott Calpin reports Council staff have been told they must take six days of unpaid leave over the Christmas and New Year holiday period as part of a limited closure of local services. Only a skeletal staff will be retained to provide cover for emergency and family services, and there is to be a freeze on all recruitment, with the prospect of up to 1,000 staff being made redundant as council departments are merged. Councillors are already planning a further series of emergency measures designed to meet the cash shortfall in council budgets. Local property charges will be increased, together with other measures, from higher library fines and parking charges to plans to sell off major council assets, including car parks and airports. This is the bleak scenario already facing the citizens of New York and Chicago, where the economic downturn and shortfall in their investment returns has left both city councils facing a major budget crisis. In contrast, UK councils are only at the beginning of their budget process for the next financial year, and it is still far from clear what exact financial consequences of their own Icelandic investment saga will be. As news of losses in Lansbanki, Glitner, Heritable and the Kaupthing Singer and Freidlander banks began to emerge from Wednesday 8 October onwards, many people were startled at the prospect that councils stood to lose almost £1bn – and perhaps even more surprised to realise that local government, as a whole, is a major investor in financial markets. The Local Government Association's initial analysis of the situation found 116 authorities with deposits totalling £858.3m in Icelandic banks, although this was later revised to 123 authorities and £919.6m – accounting for just 10% of the more than £9.5bn in short-term investments which local authorities, police and fire authorities have made overall. It has also became clear that just above £200m of the investment was scheduled to mature this month, and if the financial storm had broken just a little later, it would have reduced the total level of exposure markedly. Spreading risk across a number of institutions is good practice, and fully in line with the official guidance on local government investments which also emphasises the value of credit ratings and different approaches to short-term and longer-term investment strategies. Given the economic storms that have enveloped the global financial institutions over recent weeks, it was almost inevitable that councils might find themselves exposed if any of the major banks ran into difficulties – but much of this money has been put in Icelandic banks. Overall, it is shire counties which have the greatest proportion of money invested, accounting for some £247.5m (28.8%) of the total, closely followed by the shire districts with 182.5m (21.3%), and London boroughs with £147m (17.2%). The local government watchdog, the Audit Commission, did not play an active role as councils struggled to come to terms with the full implications of the collapse of the Icelandic banks, and it took until Thursday 16 October before it confirmed that it, too, had been caught out by events, with £5m invested in Landsbanki in April, and a further £5m put into Heritable Bank as recently as July. Commission chairman, Michael O'Higgins, has defended the deposits as part of a tranche of 11 investments totalling some £55m made over the past year and spread between different institutions and, like the councils it oversees, it has stressed its commitment to ‘maximise returns on its working reserves'. In the short term, there is the prospect of a whole series of inquiries, ranging from MPs in the Communities and Local Government select committee, an investigation by the National Audit Office, and an internal review by the Audit Commission. The LGA is also still pressing for the Financial Services Authority to launch a review of shortcomings in the credit rating system for the banks, while local authorities themselves are overhauling their own investment strategies and will be looking to the Chartered Institute of Public Finance and Accountancy and the Government for new guidance on financial management to rebuild public confidence. Local government has, of course, had its share of financial problems in the past, with the collapse of the Bank of Credit and Commerce International and the Municipal Mutual Insurance in the early 1990s, but the Icelandic situation has to been seen in the context of an unprecedented global financial crisis. Michael Kitts, a partner in local government practice at PricewaterhouseCooper, predicts some difficult decisions, and says: ‘This is still early in the budget process for councils and it is already clear that they are facing pressure from a number of different areas. ‘There has been a maelstrom of events that no-one could have predicted. I suspect most councils will already be looking closely at their treasury-management systems and asking what improvements can be made and what lessons can be learned.'

Title

FINANCE

Chilling effects of the Icelandic Saga

SUBSCRIBE TO CONTINUE READING