Frozen Assets?

KM Group political editor Paul Francis answers the key questions about why tens of millions of pounds of taxpayers money in Icelandic banks could be at risk.

Question: If councils cannot recover their cash, what will be the impact?

Answer: KCC says that in the short term, there are no immediate problems either in terms of continuing to provide services or paying staff and meeting pension payments. It also emphasises that in the context of its overall investments, the £50million equates to about 10 per cent of the total. However, in the long term, any organisation that loses £50million cannot credibly claim that there will be no repercussions. It is just too early to say what they may be. Other councils have smaller sums and say any consequences will be minimal.

Question: If councils have this all this spare money, why can’t it be used to keep council tax bills down?

Answer: This is not 'spare cash’ that councils have tucked away in a safe and are not spending. Some does come from their reserves but much of it is money they get in the form of grants and income from business rates and council tax - money that is used to pay for day-to-day services and for things like paying salaries. Investing sums over short periods before councils need to spend it offers them a way of generating income - and they claim, actually helps keep bills down.

Question: Was it wrong to invest in these banks?

Answer: Councils have done nothing wrong in the sense that they have simply operated within rules and guidelines set down by the Government. Broadly, these say that councils should spread their investments widely to avoid being exposed. However, the government does not dictate which institutions councils should plough their money into - that is a decision for councils, who rely on expert advice from professional ratings agencies they appoint.

Question: If other councils were concerned about Icelandic banks and got out, why didn’t KCC and others?

Answer: Several councils appeared to have doubts about the wisdom of investing in Icelandic banks and some in Kent opted to withdraw up to a year ago. KCC insists its advice up until relatively recently was the banks remained a safe bet. But as with any investment, there is always an element of a risk. The issue is whether KCC and others ought to have seen the warning signs regardless of what their own advisers were telling them.

Question: Why couldn’t these councils withdraw their money earlier?

Answer: KCC and others say they were locked into deals that meant they had to have their money invested over a period of time. In KCC’s case, its deals were due to expire at the end of this month. Even if they had wanted to, they say they could not have got their money out and had they done so, would have suffered financial penalties.

Question: What happens now?

Answer: For the moment, no-one knows. Treasury officials are continuing talks with the Icelandic government to reach a solution to the crisis and reach an agreement which would see councils get their money back.