UK councils at risk in Icelandic bank failures

Dozens of local authorities are facing the prospect of losing hundreds of millions of pounds after it was revealed that many had sizeable deposits with the failed Icelandic banks Landsbanki and Kaupthing.

Alistair Darling, the Chancellor, announced yesterday that the Government would be guaranteeing all private savings in the Icelandic banks Kaupthing Edge, Icesave and Heritable Bank. But he stopped short of providing guarantees for local authorities and businesses which have money with the banks.

One authority alone – Kent County Council – has £50m deposited in Landsbanki and its UK subsidiary Heritable, as well as Glitnir Bank. Alongside Kent, Westminster City Council confirmed it had £17m tied up in Icelandic accounts, while other exposed councils include Havering in east London (£12.5m), Sutton in south London (£5.5m) and Ipswich Borough Council. The total for authorities in the capital has been estimated at £200m by the umbrella group London Councils.

The Conservative Party said it had identified a London authority with exposure of £40m, and three others with deposits of around £20m to £25m in Iceland, as well as a county council in the South-east with investments of £30m. Dozens of other councils are also thought to have some money with Landsbanki, Heritable or Kaupthing.

The Local Government Association assured the public that no council would run into immediate difficulties as a result of the Icelandic banks' collapse. However, it called on the Government urgently to guarantee all council money, claiming that, in the longer run, these funds would be vital to keeping frontline services running.

One senior town hall official said: "It is astonishing the Government is prepared to bail out irresponsible banks and yet, despite following Treasury guidance, councils and the taxpayer are being told to whistle in the wind."

The Tories said they had identified nine councils with deposits worth £163m in Icelandic banks. The Liberal Democrats' communities and local government spokeswoman, Julia Goldsworthy, said: "This is council-taxpayers' money at risk and these funds are essential for local services."

Although the deposits of individuals with Icesave, Kaupthing Edge and Heritable Bank have been guaranteed by the Government, Icesave customers may have to wait weeks for their money. While the Treasury persuaded the Dutch bank ING Direct to take over the deposits of Kaupthing Edge and Heritable Bank on Monday, the structure of Icesave meant such a deal was not possible.

Yesterday evening, the Icelandic Prime Minister, Geir Haarde, said the assets of Landsbanki should be enough to cover all deposits in Icesave, and said it was working with London to return savers' money. The Financial Services Compensation Scheme said savers with Icesave should check fscs.org.uk for news. ING Direct said Heritable and Kaupthing Edge customers should have access to their accounts again within days.