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When did your cash go to Iceland?

By Lewis Hannam

Updated on 20 February 2009

Huge differences in when councils risked putting cash into doomed Icelandic banks have been unearthed by Channel 4 News online.

While some authorities stopped putting taxpayers' money into the high-interest accounts months or years before the Icelandic banks collapsed, some were still depositing cash in October last year, the month the institutions fell, our survey reveals.

The details, obtained via Freedom of Information requests to all 104 councils with money in Icelandic banks, emerge as one expert warns that the chances of local authorities recouping a significant amount of their £900m frozen in the failed banks is becoming "less and less likely".

How much did your council invest?

To see a full list of when your council last put money into Iceland click here (.pdf).
Click here to see how much money your council has frozen in Icelandic banks (.pdf).

In October last year Iceland's three biggest banks - Glitnir, Landsbanki and Kaupthing - and their UK-licensed subsidiaries, all collapsed. They held deposits of up to £900m from English local authorities.

Administrators in the UK and Iceland are trying to recoup money for creditors by raising cash from the banks' remaining assets, although as councils are not "retail" depositors they are not guaranteed any return. A Landsbanki creditors' meeting was set to take place in Iceland this morning, where those with money frozen were hoping for a clearer picture of what was going on.

In recent years councils were tempted to put cash into the Icelandic accounts by interest rates of more than 6 per cent, but they faced criticism that they should not have been risking taxpayers' money in the banks so late into 2008, after concerns had been raised earlier in the year.

North East Lincolnshire council, according to our survey the last English authority to put money into Iceland - £1.5m in Landsbanki on October 3 2008 - told Channel 4 News it did not receive an update from its external advisors in time to inform its decision. It is now only making new investments via the Government Debt Management Office.

Havering council, which put £2m into the Heritable Bank on October 1, told Channel 4 News it was informed of the ratings downgrade by advisors Sector Treasury Services after the final deposit was made. It said none of its investment guidelines had been broken.

Overall, two councils made their final deposits in October last year, 24 in September, nine in August, eight in July, three in June and five in May.

"Markets are very unforgiving. In reality they are not as stable as people once imagined."
David Scott, cabinet member for finance, Ealing council

David Scott, cabinet member for finance at Ealing council, said authorities could have seen the warning signs, and stopped putting money in sooner.

His authority decided to stop investing in Icelandic banks in February last year, after a "negative watch" rating from the credit rating agency Fitch. Dozens of councils continued to deposit after Ealing made its decision, as each authority sets its own investments policy.

Mr Scott told Channel 4 News: "I suppose other councils kept putting money in because they didn't have their eye on the ball enough, or were just generally unaware. Markets are very unforgiving. In reality they are not as stable as people once imagined.

"We have a very strict policy, we make sure we are very comfortable with the institution - rather than just the interest rates - before we make a deposit.

"Part of the problem could also have been the level of resources that the smaller authorities have to monitor this sort of thing."

Councils have defended the deposits on the grounds that they regularly review and invest millions of pounds of council taxpayers' money, and need to spread the risk throughout various institutions. Many made healthy returns from Icelandic investments before the collapse.

The Local Government Association has also repeated its calls for an independent inquiry into credit rating agencies. It says it wants to find out why the Icelandic institutions were being given high ratings "right up until a matter of days before they collapsed".

How Icelandic banks were rated

To see how Fitch's credit rating agency rated Icelandic banks throughout 2008 click here (.pdf) and for Moody's Investors Service click here (.xls).

The details show that while some ratings were lowered in early 2008, there were no consistent warnings until October.

But Fitch, used by dozens of councils, defended itself by saying it first raised concerns about Icelandic banks two and a half years before the collapse.

A spokeswoman said: "We first warned of systemic risk in the Icelandic banking sector in March 2006. The agency has expressed similar concerns in frequent market commentary and rating actions since then.

"Ratings do not constitute recommendations to buy, sell, or hold any security, nor do they comment on the suitability of any security for a particular investor. Fitch does not provide financial advice of any kind."

"When I talk to people in government in Iceland they say every time they look at the assets list they are worth less and less."
Willem Buiter, former member, Bank of England's Monetary Policy Committee

While the debate continues as to who might be to blame for decisions to put money in fragile banks, one expert suggests councils' hopes of getting the £900m back are diminishing by the day.

Willem Buiter, a former member of the Bank of England's Monetary Policy Committee, told Channel 4 News: "The banks have a balance of assets - and it depends what they are worth. When I talk to people in government in Iceland they say every time they look at the assets list they are worth less and less. It is looking less likely.

"I don't think they are going to get much money back - unless the government bails them out, which they should not do of course. I would not bet on any recovery."

Councils have been told by government that they don't need to take account of money frozen in Icelandic banks when they set this year's budgets, but next year any lost money will be back on the Town Hall balance sheets.

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