Leading article: Local authorities cannot duck their responsibilities

Icelandic insolvencies pose serious questions about council priorities

A crisis in one area – and the threat of global financial meltdown is a crisis on the grand scale – has a habit of shining an unwelcome light into recesses that might otherwise have remained comfortably dark. One such is the unheralded link that has suddenly been exposed between British money and the now near-bankrupt state of Iceland.

First, it emerged that as many as 300,000 Britons had kept savings in Icelandic banks, which turned out to be considerably less safe than houses. We then learned that several publicly funded organisations, such as the Metropolitan Police Authority and Transport for London, as well as a whole clutch of local authorities, had also been tempted by the comparatively high interest rates on offer from Icelandic banks. Their exposure is of the order of at least £938m.

Their plight seems to be worse than that of individual savers. For while they now have a pledge from the Chancellor that they will be reimbursed, and the Government will take on the complicated business of suing Iceland, the local authorities have received no similar assurance.

All this raises serious questions, some of which have answers, and others of which thus far do not. At any one time, local authorities will have money on deposit; there can be no complaints about that. But the sums of money many authorities chose to place in Iceland will look quite substantial, and not only to hard-pressed council tax-payers. As several letter-writers to this newspaper ask today: if they had this much on deposit, why does council tax rise so inexorably and why do councils routinely claim penury in the face of very modest requests? Is the balance between spending and deposits in the interests of the taxpayers?

Given that so many councils, we now discover, kept money in Icelandic accounts, it might also be asked where else they have funds stashed away. What might they have lost on more speculative, market-related investments? We suspect many councils will now be reviewing their holdings. That might look like bolting the stable door, but it would be a sensible thing to do.

Which brings us to some bigger questions. Why did local authorities and others deposit money in Iceland and was that decision reasonable? As one council finance official said yesterday in their defence, the councils followed Treasury advice that surplus money should be invested in such a way as to deliver the highest return for taxpayers. Iceland, as individual savers had also discovered, offered high rates, along with the top, AAA credit rating.

But should councils really be chasing high interest rates abroad, rather than investing less ambitiously, but more visibly, closer to home? And even if this was central government policy, should council treasurers not have transferred funds out of Iceland when questions were first raised about its banks several months ago? Council treasurers, like the bulging ranks of council officials generally, are pretty well paid these days – better paid often than their national counterparts. They now look as naive as the individual, amateur savers. They must accept their responsibility as stewards of the public purse.

Not for the first time, however, another villain of the piece appears to be the whole self-perpetuating system of credit rating. Individual savers and council treasurers alike consoled themselves with the high ratings enjoyed by Icelandic banks. As with Lehman Brothers, though, those ratings turned out to be fatally misleading. This system is now discredited – in every sense of that word.