Page last updated at 16:21 GMT, Thursday, 16 October 2008 17:21 UK

Q&A: Council funding at risk

What has happened?

Local authorities and other public bodies across the UK fear they may have lost substantial amounts of money they had invested in Icelandic banks which have now collapsed. This could lead to cuts in frontline services if the government can not get the money back.

How much money is at stake?

According to the Local Government Association, 116 councils have deposited more than 858m in the failed banks. In addition, public bodies - such as police forces and transport authorities - have a further 100m in Icelandic banks while charities are believed to have 120m in such accounts. Some universities and NHS Trusts are also affected - Oxford University has 30m in the banks.

Which local authorities are worst affected?

Nine councils put more than 20m each into Icelandic banks. The largest deposits include 50m by Kent County Council, 42m by Nottingham City Council and 32.5m by Norfolk County Council. Elsewhere, Transport for London invested 40m while police authorities had about 95m invested. The Audit Commission, which monitors local government spending, deposited 10m itself.

Why did they put money into these banks?

Like any organisation, councils have to put their money somewhere. But they were encouraged by the government to maximise returns from their money to help keep council tax bills down. This led them to banks, such as those in Iceland, which offered high rates of interest.

Have councils behaved recklessly?

They say no. They argue they were following sound financial advice and have called for an inquiry into why credit agencies failed to spot weaknesses in Iceland's banks earlier. They also insist they put their money in a large number of banks, spreading their risk. The government is backing them up - but one local council points out it closed its account with an Icelandic bank last year amid concerns that the institution in question was accumulating too much risk.

What is the government doing to help them?

A "rapid response unit" is looking at the budgetary problems of individual councils. Financial experts are being sent to three authorities - Uttlesford in Essex, Wyre Forest in Worcestershire and Tamworth in Staffordshire - thought to be at most risk. But Tamworth has said it has not requested any assistance and has no "immediate problems". It is hoped councils and other public bodies can recover most of the 300m sitting in UK branches of Icelandic banks but the same does not apply to funds held in Iceland itself. Ministers have declined to guarantee the public money in the same way they have done for private savers.

Will council tax bills rise, or bins stop being collected?

There are fears about the impact on frontline services, particularly for smaller councils with limited budgets. Money used to pay staff wages and pensions may also be at risk although councils have insisted vital services will not be hit. But ministers are under pressure to ensure any financial shortfall does not lead to cuts in services or a hike in council tax bills. Opposition parties have called on ministers to help councils by allowing them to defer payment of business rates and supporting their debt payments.

In full: Councils facing losses
16 Oct 08 |  UK Politics
Q&A: Council funding at risk
15 Oct 08 |  UK Politics
Crisis-hit Icelanders stay cool
08 Oct 08 |  Business
Councils 'not reckless with cash'
10 Oct 08 |  UK Politics
120m scheme 'funded by Iceland'
09 Oct 08 |  North East/N Isles

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