Minister for Local Government
| Date of statement | 27 October 2008 |
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1. In the week beginning 6 October 2008, a number of Icelandic banks went into administration. Acting on the advice of the Bank of England and the Financial Services Authority, the Government took action to safeguard the interests of UK creditors of these banks. It quickly became clear that many local authorities were among those who had deposits in those banks.
2. I met the Local Government Association (LGA) leaders on Thursday, 9 October with my colleague the Economic Secretary to the Treasury. We met again on Wednesday, 15 October. We made clear that the Government was not offering guarantees for local authority deposits in these banks. We agreed that, once the LGA had completed its urgent survey of local authorities, we would work together to assess the position and the issues arising on a case-by-case basis. For the small minority of authorities that might be facing severe short-term difficulties we also agreed we would work together to offer appropriate assistance. The Joint Statements issued following these meetings are available below:
3. The Local Government Association reported on Friday, 17 October that 123 authorities have deposited £919.6m in Icelandic banks and their UK licensed subsidiaries; and it has published a full list of 104 LGA member councils that have told the Association that they have deposits in these banks, totalling £778.7m. It is important to stress that this is not money that is lost, it is money which is at risk. It is too early to say how much will be recovered.
4. The Government's first priority has been to do everything it can to help local authorities, along with other creditors, get their money back. The Chancellor of the Exchequer acted quickly to freeze the UK assets of Landsbanki and, on 17 October, the Bank of England provided a short term secured loan of up to £100m to the London branch of Landsbanki, which will help to ensure an orderly wind down for Landsbanki and maximise returns to UK creditors.
5. Following conversations between the Chancellor and Icelandic Prime Minister, officials from the Treasury and Bank of England travelled to Iceland on 22 October to have further discussions with the Icelandic authorities. The aim of these discussions is to agree a mechanism whereby the Icelandic government can honour its obligations to UK depositors and ensure the fair treatment of UK creditors. The recent round of discussions has ended but talks are not over and will be continued in the very near future. In relation to the banks in administration in the UK - Kaupthing Singer & Friedlander and Heritable - we are working to ensure that deposits are recovered as quickly as possible. The Local Government Association has opened discussions with the administrators, Ernst and Young. The LGA reported on 14 October that, in broad terms, the administrators considered that the value of the book value of the assets of each business appeared to be of the same order of magnitude as the liabilities, but that the recoveries for the local authorities would be dependent on the final level of actual realizations.
6. Second, the Government and the Local Government Association acted to establish, as a matter of urgency, whether any local authority may face severe short-term difficulties. Thirteen authorities initially indicated to the LGA that they might face such difficulties. We therefore offered finance experts, paid for by central government and drawn from local government itself, to work with these authorities. The role of these experts is to act as a rapid response team, offering to work with the authority to:
7. Twelve of these thirteen authorities are in England, and one is in Wales. Local government in Wales is a devolved matter, and the Welsh Assembly report no approaches from any Welsh authority for assistance.
8. Finance experts worked with three of these authorities during the week beginning 12 October. The authorities are:
9. Each of these authorities has made public the conclusions of that work. The councils concluded, in each case, that there is no short-term cashflow problem which would affect the delivery of key services, the payment of staff or its ability to meet contractual commitments. This was confirmed by the experts who worked with them. Each authority is taking steps to handle the possible medium-term implications.
10. We are grateful to those local authorities that responded rapidly to make available experienced and expert financial staff to provide this peer support to other local authorities.
11. In the case of Wyre Forest, the Government is offering further expert financial and management support to work with the authority, which we will fund. In the case of Uttlesford, we have indicated that we are prepared to consider an application for capitalisation, which we would consider as part of the normal process for capitalisation applications. We will also pay for further expert support to these and other authorities - led by the local government sector itself, and using professionals from local government - if the authorities wish to take up this offer.
12. We have also examined the position of the other nine English authorities who had initially indicated to the LGA that they might face severe short-term difficulties, through
13. In the case of five of these authorities, this process has led the council itself to conclude (as with Tamworth, Uttlesford and Wyre Forest), that there is no short-term cashflow problem which would affect the delivery of key services, the payment of staff or its ability to meet contractual commitments; and this has been confirmed by our examination. These authorities have confirmed that, at this stage, they do not wish to take up the offer of further expert support. These authorities are:
We expect the process of local government re-organisation in Northumberland to help the authority to deal with the financial challenges that they face.
14. We will continue to monitor the position of these five and all authorities with the LGA. We will do this by looking with experts at data of the kind set out in paragraph 13 above. This may identify a further small number of authorities for which expert support would be appropriate. In all cases we have said that we are willing to fund such support.
15. In the four remaining English authorities, financial experts are working with the Councils to undertake an assessment similar to that undertaken in Tamworth, Uttlesford and Wyre Forest. This is support requested in confidence by the authority itself. Accepting this support does not imply that there are serious financial difficulties in those authorities and it is no reflection on the capacity of the authorities to manage finances effectively. However, it is important to undertake the assessment outlined in paragraph 7 to establish with confidence the current position in each of these councils. I intend to protect the confidentiality of these councils at this stage but I will report the outcome of the assessment and names of these authorities once the work is complete, together with an indication of any further support we can offer as required - as we have now done with Tamworth, Uttlesford and Wyre Forest.
16. I am grateful to the LGA for the role they have played, and their hard work in assessing the initial situation and arranging further support for local authorities.
17. This is the position as it stands. However, this is a fluid situation; and we expect it to change, as administrators are clearer about the prospects of authorities getting their deposits back and as authorities prepare their budgets for the coming year.
18. The third area for action is for affected authorities to consider the potential medium term impact of any losses. Until the scale of loss from Icelandic banks is clearer, it is not possible to say what the impact on the budgets of affected authorities might be in the next financial year and beyond. However, affected authorities will need to consider how to handle this, in preparing their budgets for 2009-10 and their medium term financial strategies. The Chartered Institute of Public Finance and Accountancy (CIPFA) will be publishing professional advice to local authorities about the accounting aspects of the current situation and the factors they need to take into account in setting their budgets for 2009-10. I aim to ensure that the advice should be available in time for authorities' budget discussions. In the meantime, the LGA and the Government have publicly stated that we encourage all authorities to continue operating investments in accordance with the guidance on investments issued by the Government.
19. We will keep Members of Parliament updated on progress.
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