Icelandic Banks - Support for local authorities

Letter from John Healey, Minister for Local Government to the Select Committee

Summary

1. In my briefing for MPs on 27 October, I said that I would keep Members of Parliament updated on the impact of the Icelandic bank failures on local government in England, and the support that we have offered to the affected authorities.

2. As I outlined in my previous update, after a number of Icelandic banks went into administration in the week beginning 6 October, the Government and the Local Government Association (LGA) acted to establish, as a matter of urgency, whether any local authority might be facing severe short-term difficulties.

3. Twelve authorities in England initially indicated to the LGA that they might be facing such difficulties. We offered external financial experts, paid for by central Government and drawn from local government, to work with these authorities.

4. Finance experts worked with three of these authorities during the week beginning 12 October - Tamworth, Uttlesford and Wyre Forest - all of whom made public the conclusions of that work: that there was no short-term cash flow problem which would affect the delivery of key services, the payment of staff or their ability to meet contractual obligations.

5. We have now finished our examination of the other nine authorities who had initially indicated to the LGA that they might face severe short-term difficulties.  This involved:

• an examination of data which local authorities publish or provide to Government in the normal course of events (e.g. on levels of reserves; the potential loss of interest for the remainder of this financial year as a result of deposits in Icelandic banks; and other indicators of financial robustness); and, where further detail was required
• discussions between the authorities concerned and financial experts drawn from local government. 

6. I said in my update on 27 October that this examination had been completed for five of the nine authorities, confirming that they were not facing unmanageable short-term difficulties. All of these authorities said that they did not wish to take up our offer of further expert support.

7. In the case of the other four authorities - and one further authority which requested a review - external finance experts from local government visited the authority and undertook an assessment similar to that conducted in Tamworth, Uttlesford and Wyre Forest.   The authorities are:

• Bassetlaw
• Cheltenham
• East Staffordshire
• Reigate and Banstead
• West Lindsey

8. This has confirmed that, in each case, there are no short-term cashflow problems which would affect the delivery of key services, the payment of staff or the authority's ability to meet its contractual obligations. I understand that all of these authorities are making public the conclusions of these assessments.

9. I have made clear that the Government will pay for further financial expert support - led by the local government sector itself, and using professionals from local government - to any authority who wanted to take up the offer.  Wyre Forest has taken up this offer of support, and West Lindsey has said that it would also like to do so.  I have indicated to Uttlesford that we are prepared to consider an application for capitalisation, and they have just submitted their application.

10. We have confirmed to Reigate and Banstead that, following a reduction in the estimate that they originally made for their National Non-Domestic Rates (NNDR) payments for 2008-09, it appears that they could submit an adjustment to the provisional amount now, rather than need to wait until the end of the financial year. 

11. Other authorities may also want to submit such an adjustment (known as an NNDR2 claim) if they have evidence that they are eligible for a reduction. It is important to be clear, however, that this does not mean that the Government will permit any authorities to defer their business rate payments.

12. As a result of our assessment exercise, I am now satisfied that none of the 104 English councils who said to the LGA that they had investments in Icelandic banks are facing severe short-term difficulties as a result of the failure of the banks.  However, we will continue to work closely with the LGA to monitor the situation; and we stand ready to fund further financial expert support for authorities who need it.

13. The Government's other priority continues to be to do everything that it can to help local authorities, along with other creditors, to get their money back. The Treasury is pursuing high level discussions with the Icelandic Government, to ensure that a mechanism is agreed whereby the Icelandic Government can honour its obligations to UK depositors and ensure the fair treatment of UK creditors. On 19 November, the International Monetary Fund (IMF) approved a $2.1 billion loan to Iceland.  One of the main objectives of the IMF-supported programme now agreed is to safeguard international financial relations by implementing a sound banking system strategy that is non-discriminatory and collaborative.  The UK Government fully supports the IMF's loan and welcomes Iceland's commitments to ensuring the fair and equitable treatment of depositors and creditors in Icelandic banks.
 
14. A local authority delegation attended creditors' meetings for Glitnir and Landsbanki on 13 and 14 November. In relation to the banks in administration in the UK - Kaupthing Singer & Friedlander (KSF) and Heritable - the LGA is in discussions with the administrators. Ernst and Young issued a Statement of Proposals to Creditors for KSF on 14 November, and will be holding a meeting for those creditors on 1 December.   They also issued a Statement of Proposals to Creditors for Heritable on 20 November; and will be holding a meeting for those creditors on 9 December.

15. The key area for action now will be for affected authorities to consider the potential medium-term impact of any losses, and to decide how they will tackle this in preparing their budgets for 2009-10 and their medium-term financial strategies.

16. In this context, I am confident that the clear professional advice that the Chartered Institute of Public Finance and Accountancy (CIPFA) published for councils on 19 November to help them deal with the accounting implications of their investments in Icelandic banks will assist. I appreciate the speed with which this document has been written, so that local authorities will have it in good time for the budget decisions that they need to make over the coming weeks.  I have arranged for a copy of the CIPFA Bulletin to be placed in the Library of the House.

17. As we made clear in the joint statement between the Government and the Local Government Association on 9 October, we encourage all authorities to continue to operate investments in accordance with the established guidance on investments issued by the Government.