(Updated 14:00): At a time when Lancaster City Council faces swingeing cuts in its funding from the government, it's good to learn that is is still expecting the return of the majority of the £6 million caught up in the Icelandic banking collapse back in October 2008 – although exactly when remains unclear.
All told, when Iceland's three biggest banks - Glitnir, Landsbanki and Kaupthing - and their UK-licensed subsidiaries such as London-based Heritable Bank all collapsed in October 2008, they held deposits of up to £900 million from English local authorities.
The cause of the Icelandic banking collapse has been ascribed in part to Iceland's deregulation of the banking industry in 2001. After the three banks were privatised in 2003 they went on a borrowing spree, mostly in Europe. The strategy proved catastrophic.
As we reported in 2008, Lancaster City Council invested some £6 million in high interest Icelandic banks - but those investments were not covered by the then Labour government's guarantee to cover personal account losses following the collapse. The national Guardian featured a list of councils that were caught up in the fallout, and most are only now beginning to see resolution of the matter after a long-running legal battle.
As well as the City Council, locally Lancashire County Council invested £10m with Landsbanki.
Icelandic banks agreed to refund local authorities whose assets were frozen after a long-running legal battle to ensure local authority cash tied up in the 2008 collapse in November 2011. Failed Icelandic bank Glitnir agreed to to repay UK councils some £186m lost by 50 councils in March 2012.
|Details of Lancaster City Council's liabilities as a result of the Icelandic bank collapse, published back in June|
City Council documents released in June 2013 (PDF link) indicated the expected recovery of some £5.98m of monies invested - but there still seemed uncertainty as to when this money would be returned.
The most recent public update on the situation was reported to the Budget and Performance Panel last month (PDF Link), major changes to report. The Council still expects to recover around £6 milion equivalent to the value of the original investments. A fourth distribution from Landsbanki had been made since June regarding the Council’s investment, representing 5.23% of the original claim, of which 53.9% has now been recovered.
|Details of Lancaster City Council's liabilities as a result of the Icelandic bank collapse, published back in October|
Elsewhere in the UK, some councils, such as Wiltshire County council recently confirmed they have finally seen much of their investment returned.
The Local Government Authority recently announced it had helped councils recover a further £21 million of taxpayers' money deposited with Landsbank.
The latest payment took to £225 million the amount recovered from the failed Icelandic bank since the LGA secured priority creditor status for local authority depositors. Councils are expecting to recover all of the £414 million originally deposited, with additional payments expected in future instalments over several years.
The recovery of monies owed is complicated, not helped by Iceland's ongoing financial battle with Britain on the matter reported by The Guardian in October.
Channel 4 reported back in 2009 how councils were originally tempted to put cash into the Icelandic accounts by interest rates of more than six per cent, but some faced criticism that they should not have been risking taxpayers' money in the banks so late into 2008, after concerns had been raised earlier in the year.
They invested following strict national guidelines - but while some authorities stopped putting taxpayers' money into the high-interest accounts months or years before the Icelandic banks collapsed, some were still depositing cash in October 2008, the month the institutions fell, a C4 survey revealed.
Councils defended the deposits on the grounds that they regularly review and invest millions of pounds of council taxpayers' money, and need to spread the risk throughout various institutions. Many made healthy returns from Icelandic investments before the collapse.
The Local Government Association called for an independent inquiry into credit rating agencies. It wanted to find out why the Icelandic institutions were being given high ratings "right up until a matter of days before they collapsed".
These agencies, whose opinions can have a huge impact on a country's financial viability, seem to continue to prove pretty inept as not only did some not predict the Icelandic banking collapse but they have proven remarkably slow at predicting the country's economic recovery, too.
Icelandic journalist Sigrún Davíðsdóttir noted earlier this year that from 100% of GDP in 2004 these three banks grew to roughly ten times the Icelandic GDP in mid-2008, shortly before they collapsed in October 2008. No one – and least of all the rating agencies – seemed to wonder how sustainable their growth was and why three banks from a tiny island with no history of banking could out-earn foreign banks despite borrowing at a relatively high cost.
"In the sorry saga of the Icelandic attempt at becoming a centre of international finance, the rating agencies played a rather dismal role," he argued. "This story was carefully traced in a 2010 report by a special investigative commission set up at the behest of the Icelandic Parliament."
In October 2008, the Council's Chief Executive Mark Cullinan stated that at the time of making the investments, which had been expected to mature in 2009, the banks concerned were reputable institutions with high credit ratings.
"As part of its investment strategy Lancaster City Council currently has a portfolio totalling £24million spread across a number of financial institutions," he explained.
"The amount invested can vary daily, given that the Council can reasonably expect between £200 to £250million passing through its bank accounts in any one year. The Council uses the investment income generated to help fund its annual budget in providing services.
"Around £6million of the current portfolio is invested in three Icelandic banks.
"At the time of making these investments, the banks concerned were reputable institutions with high credit ratings.
"Although all the institutions the council has invested in are rigorously scrutinised prior to being chosen, given the current unprecedented crisis in the global banking market, interim measures have now been put into place to give even greater protection to our cash balances," he continued. "These measures include keeping any future investments with highly rated institutions based in the UK or Ireland, where Government has now given guarantees for any such investments made."
• The 2013/14 Treasury Management Progress Report outlines the Council's investment strategy and details of funds owed by the Icelandic banks (PDF)