While the UK Government has guaranteed every penny of deposits for Britain's 200,000 plus savers who have money saved in the now nationalised Icelandic bank Icesave, local councils may not be so lucky and millions of pounds of taxpayers' money could be lost.
A handful of local councils in Britain decided to invest money collected in council tax payments in the Icelandic bank's savings accounts
, which were offering competitive returns, but if no compensation is made then the taxpayer will be left picking up the pieces in the form of higher council tax bills so that local town halls can recoup their losses.
Owned by Landsbanki, which has been nationalised, Icesave deposits are guaranteed by the Icelandic government which has said in no uncertain terms that, due to the global economic crisis, the money does not exist to refund UK savers, forcing the Chancellor to bring calm by guaranteeing the £4.5billion of UK depositors' money himself.
However, the Chancellor has not made clear whether or not the same assistance will be extended to local councils that made the bad decision to put taxpayers' money into the online savings accounts
provider. The guarantee only extends to retail accounts, and does not apply to institutional investors such as councils.
Westminster is among those councils which face losing taxpayers' money, with £7million saved in Landsbanki, and £10million in its subsidery Heritable Bank. A number of local authorities in England and Wales will suffer losses from the collapse of the Icelandic banking system. Other councils that reportedly stand to lose out include Barnet which has £20million invested in Icelandic banks, and Kent which has £50million invested.
Town halls invested in these banks as per their guidelines to maximise interest rates and spread the risk, so the Local Government Association is calling on the Government to extend the same level of protection to local councils, "who have prudently managed council tax payers' money" as it is to the taxpayer.
Cllr Margaret Eaton, chairman of the Local Government Association, said that the LGA is "seeking an assurance from the Chancellor that councils’ assets will be protected in the same way as personal assets. Town halls invested in Landsbanki as a reputable bank with a solid credit rating."
While this may affect council's long-term finances, Cllr Eaton continued, she does not think it will impact on local services due to the safeguards which are in place.
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