Councils demand ratings agency probe

The Local Government Association (LGA) has called for a government probe into the credit rating agencies, slamming them for their high ratings of the Icelandic banks "right up until a matter of days before they went into administration".

The LGA represents the 116 councils who have £858m tied up in the Icelandic banks, which collapsed this month. It yesterday demanded an inquiry into agencies Moody's and Fitch, which rated the credit worthiness of the banks including Glitnir, Kaupthing and Landsbanki in the run up to the crisis.

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Margaret Eaton, chairman of the LGA, said: "No council should rely solely on credit agencies and must use their financial nous. But there must be confidence in credit ratings as councils continue to invest billions of pounds in a whole range of financial institutions."

She added that the LGA's analysis dispelled the myth that many councils were investing recklessly after credit warnings were issued.

The government yesterday stood by its advice to local councils that invest millions in the Icelandic banks. Speaking at question time in the House of Commons, communities secretary Hazel Blears said the government's guidance was "prudent and responsible". She added that the government and the LGA had set up a "rapid response unit" to advise the local authorities affected.

"The government's first priority has been to do everything we can to help local authorities, along with other creditors, get back the money," she added. The minister will today meet the (LGA) to help the authorities "struggling with these issues".