Icelandic banking collapse 'should have been seen'

Thursday 11th June 2009

The warning signs over the Icelandic banking collapse were there for English councils to see, an influential committee of MPs has argued.

According to the communities and local government select committee, local authorities should have paid more attention to warnings issued over the country's economy as far back as 2006.

Around £1 billion from over 100 local authorities was lost when Landsbanki and other Icelandic institutions went under last year.

In September 2008, when councils were told Icelandic banks had seen their credit ratings downgraded, some authorities continued to invest.

An over reliance on treasury management advisers contributed to the losses, the report found, as some services "have been shown to be variable and, in some cases, inadequate".

"Responsibility for local authorities' investment decisions lies, and must continue to lie, with the local authorities themselves," the MPs added.

Richard Kemp, vice chair of the Local Government Association (LGA), said: "This report clearly shows that councils were largely let down by the organisations that they were relying on to provide up-to-date and accurate advice."

Due to the high interest rates available from the Icelandic banks over the last two years compared to less risky government bonds, councils that invested three per cent or less of their total investments in Icelandic banks have not lost out financially from the episode, the report noted.

However, authorities who tied up more of their cash in Iceland - in some cases more than ten per cent - have lost out.

"This is as a direct result of the failure to diversify their investment portfolios adequately," the report said.

The LGA said councils expect to get up to 90 per cent of the money back and many have already overhauled the way they invest.

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