Page last updated at 15:47 GMT, Tuesday, 14 October 2008 16:47 UK

Blears backs Iceland bank advice

No councils would struggle to pay staff, the government said

The government has defended its investment advice to councils who deposited 858.3m in Icelandic banks which later failed.

Communities secretary Hazel Blears said the guidance had been "prudent and sensible" and that none of those affected would "struggle" to pay staff.

The Local Government Association has demanded an inquiry into the investments made by 116 councils.

Ministers have revealed universities also have 77m in Icelandic banks.

'Strong ratings'

LGA chairman Margaret Eaton said: "This isn't the time for a blame game. This is an unprecedented situation, the extent of which could not have been foreseen.

"However, at the appropriate moment, there needs to be a full and independent inquiry to find out just how these banks continued to get relatively strong credit ratings until a few days before they went under."

The government and the LGA have set up a joint "rapid response unit" to provide financial advice to councils affected by the banking crisis.

Ms Blears said: "The government's first priority has been to do everything we can to help local authorities, along with other creditors, get back the money which they had deposited in the banks."

But for the Conservatives, shadow communities secretary Eric Pickles said: "There is a difference between light touch regulation and neglect."

In a ministerial statement, the government revealed that 12 UK universities have total deposits worth 77m in failed Icelandic banks.

But the Department for Innovation, Universities and Skills said the figure should be viewed in the context of annual turnover of 18bn.

In a separate statement, Cabinet Office Minister Liam Byrne, said charities accounted for "an extremely small fraction" of the total of 56bn invested in Icelandic banks.


Government ministers were warned about the possible collapse of Iceland's banks and the threat to depositors' cash in July, when credit rating agencies downgraded them.

Lib Dem Treasury spokesman Lord Oakeshott and Tory MP Michael Fallon, deputy chairman of the influential Commons Treasury committee, both raised the issue with ministers.

But they were told depositors would be protected by law.

Speaking to BBC News on Friday, Lord Oakeshott accused ministers of "complacency" for apparently ignoring warnings from the City.

"Alarm bells were ringing all over about the Icelandic banks and the Treasury must have been blind and deaf not to hear them," he said.

In a statement, the Treasury said it was not the government's role to advise savers and ministers had stressed Iceland had a legal obligation to pay compensation.

UK 'ignored Iceland bank warning'
10 Oct 08 |  UK Politics
Councils 'not reckless with cash'
10 Oct 08 |  UK Politics
'Progress made' in Iceland talks
11 Oct 08 |  Business

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