Page last updated at 15:12 GMT, Thursday, 16 October 2008 16:12 UK

Audit chiefs have 10m in Iceland

Audit Commission head Michael O'Higgins

The watchdog conducting an inquiry into local authorities' decisions to invest in Icelandic banks has admitted it has also got £10m tied up in the country.

The Audit Commission's job is to ensure that £180bn of public sector spending provides "value for taxpayers".

It said it deposited £5m in Landsbanki in April this year - and a further £5m in July in Iceland's Heritable Bank.

The commission said the deposits were in "full compliance" with their guidelines "on prudent investment".


The admission is embarrassing for the body established to ensure greater efficiency and value for money in the delivery of public services.

Despite concerns at the time of its last investment about the strength of Iceland's banking sector, the commission insisted it only banked with "top rated institutions".

"Given the size of the financial calamity that has happened in the global economy, spreading your assets over 11 different institutions, it's quite probable that you are going to get hit on at least one of them," said the commission's chairman Michael O'Higgins.

The contagion from Iceland is spreading across the public sector day by day
Eric Pickles
Shadow local government secretary

Asked whether it would be difficult to give a judgement on the prudence of councils who invested money, given that it had also invested in the banks, he said: "I can see that it looks awkward but the question is: Were the policies prudent and were the policies followed? And those are two questions we can examine."

The Local Government Association says 116 councils, police and fire authorities in England and Wales had invested £858m in Icelandic banks, money which is now at risk after the turmoil in the country's economy and the banks' nationalisation.

It has also emerged that Oxford University has £30m worth of funds in three Icelandic banks.

The university authorities said no deposits were made in the last 18 months and it had sufficient cash reserves to cover the requirements of colleges.

Questions raised

The Audit Commission said that it did not expect its own investments - which account for about 4% of its annual turnover - would affect its future operations or staffing.

However, it has launched an internal review into how the deposit decision was taken and says it expects the National Audit Office, which audits its finances, to hold a separate inquiry.

The commission said when it invested the money the two banks had strong credit ratings and as a public body it was "obliged to maximise returns on its working reserves".

Stephen Jones, Director of Finance for LGA, Margaret Eaton the Chairman of Local Government Association and Paul Coen the Chief Executive of LGA
Council leaders have met ministers to discuss help for the worst affected authorities

Shadow local government secretary Eric Pickles, said "the silence from Whitehall is deafening" on the scale of British investments.

"The contagion from Iceland is spreading across the public sector day by day. We need greater openness from ministers about the true scale of bodies affected - including which housing associations and local PFI schemes. "

Questions about the position of the Icelandic banking sector were already being aired in Parliament, as well as in the City, in July.

It emerged on Wednesday that three councils with money in Icelandic banks potentially face "severe" short-term financial problems and ministers have sent a team of financial troubleshooters to assess their position.

Two of those named - Uttlesford in Essex and Wyre Forest in Worcestershire - have stressed that they do not have any immediate concerns over maintaining services.

A third council, Tamworth borough council in Staffordshire, has denied being in any immediate financial difficulty, after being advised it was to receive a visit from the finance experts.

Council leader Jeremy Oates said: "I am shocked about hearing an emergency team is being sent to us. We neither asked for or need one."

Talks between ministers and local authority leaders over help for ten further councils with possible difficulties will continue on Thursday.

The government has pledged to do all it can to help recover public money in Icelandic banks although it has declined to offer a blanket guarantee similar to that for individual deposits.

The row between the UK and Icelandic governments over the banking crisis show no sign of dying down despite a trip by UK officials to Iceland last weekend to try and defuse the situation.

Reykjavik has hired a British law firm to examine a possible lawsuit against the UK after the Treasury froze the UK assets of Landsbanki, one of the nationalised banks.

Iceland's prime minister accused the UK government of using counter-terrorism laws to freeze the assets and has since complained to Nato about the UK's actions.

Gordon Brown last week described Iceland's unwillingness to fully guarantee UK deposits in Icesave, a branch of Landsbanki, as "unacceptable" and "illegal".

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