More than 100 local councils, police authorities and fire services in Britain stand to lose up to £1billion in savings account deposits as a result of the collapse of the Icelandic banking system.
A number of UK charities, including children's hospices, reportedly have £25million at risk in the Icelandic savings accounts
that, offering high interest rates, drew in thousands of UK savers.
In order to calm personal depositors who feared for their savings after the collapse of Landsbanki and its British savings arm Icesave, the Government has said that it will guarantee 100 per cent of their deposits, although it is unlikely they will see their money this side of Christmas.
But there are doubts over whether Gordon Brown will extend the protection to include organisations affected by the Icelandic banking system's collapse. Those affected include the Metropolitan Police Force, which has £30million invested in an Icelandic bank. The Metropolitan Police Authority told Channel 4 News at Noon that it is "urging the government to guarantee local authorities and police authorities against any potential losses."
Some charities have reportedly lost up to a fifth of their reserves; Stephen Bubb, chief executive of Acevo, (the Association of Chief Executives of Voluntary Organisations), is urging the Chancellor Alistair Darling to extend the protection to include the charity sector.
In total, the Local Government Association has found that 107 local councils have almost £8million frozen in Icelandic savings accounts, the UK's police authorities have £130million, and Transport for London has £40million, none of which might ever be seen again after the Icelandic Government has said that it is not able to honour its own compensation scheme for UK savers.
Except in sever cases, The Chancellor Alistair Darling has so far refused to protect organisations that stand to lose millions in taxpayers' money if the Icelandic Government does not change its mind.
There are fears that, in light of recent events, some local governments will withdraw savings they have with UK savings providers and put them into more secure Government bonds, thus causing a run on the British banks. The councils of two top London councils – Westminster and Kensington and Chelsea – are already considering this option, according to The Times.
The losses to local councils, which have invested money collected in council tax payments in Iceland's banks until they need it, could also cause a hike in council tax rates as a method of recouping the money, seeing taxpayers paying twice over.
While some local councils acted to withdraw taxpayers' money from the Icelandic banking system when national credit agencies raised warnings about its stability, some local government leaders are arguing that more should have seen the problem coming, and acted irresponsibly with public money.
Local governments in England and Wales receiving £70billion a year from the Government, and raise an additional £25billion from council tax, to pay for local services such as schools and roads. They invest the money in a number of different banks to spread the risks, but they have been accused of going against Government guidelines and choosing a high interest rate over a bank's security and credit rating.
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