Up until last week, local government could afford to be a tad smug about the banking crisis. Councils were not only oases of financial stability, but possible, white knights, ready to ride in to save distressed housing projects. There was talk of municipal mortgages, the rebirth of council housing, the acquiring of abandoned land banks by local authorities helping to do their bit to save collapsing regeneration projects. All that has been eclipsed by the revelation that at least 108 councils had some £800m tied up in collapsed Icelandic banks. While there were plenty of private investors also attracted to the high interest the once-Triple A-rated banks offered, the news, nonetheless, has tarnished local government's image as a beacon of financial rectitude. There will be many arguments about the wisdom of such investments and, indeed, we have one letter this week from a private investor who was advised 12 months ago to steer clear of Icelandic banks. In the case of smaller districts which unwisely allocated sizeable proportions of their budgets in these banks, there will be some full and frank exchanges between council leaders and their treasurers and chief executives. Indeed, heads may well roll. But the main question is the nature of the fall-out for councils. First, investments and deposits, previously the domain of the treasurer, will now become that of the cabinet. Second, there will be greater aversion to risk, a move into bonds, and inevitably, a lower rate of return on investments meaning a poorer deal for taxpayers. One county chief executive, whose exposure to the Icelandic banks was £15m, pointed out to me last week that the previous year his council had made £5m more than expected on investments. It is hard to see that kind of return being repeated, especially in the current climate. Third, there will be the impact on budgets should the money never be restored. There will not – and should not – be either cuts in services or increases in council tax. The larger councils will have to absorb any losses while the Government may have to bail out smaller councils in the short term. They have done so with the banks, after all. Michael Burton, Editor, The MJ
