Salaries hit by Icelandic bank Collapse

Council salaries hit by bank collapses

Treasury urged to defer £1bn business-tax demand as this month’s payroll for hundreds of thousands of workers is frozen in Icelandic accounts

By Jane Merrick, Brian Brady and Jonathan Owen
October 12 2008

Hundreds of thousands of council workers may not be paid this month because their earnings are frozen by the Icelandic bank collapse, it emerged last night.

The Local Government Association has just eight days to avert a catastrophe, senior sources warned. The LGA has urged the Treasury not to insist on prompt payment of nearly £1bn in business taxes owed by councils, and due on 20 October, to free up cash and allow staff to be paid.

It is understood that dozens of the 100-plus local councils that are victims of the Iceland banking crisis use their accounts for the payroll of everyone from the chief executive to front line staff. Until now it was thought only capital savings, worth £840m, were locked in the failed banks. But the accounts were also used as a quick way to earn interest to pay wages.

And in a fresh blow to the banking industry, The Independent on Sunday has learned that seven councils are to withdraw a total of £2bn from British and foreign banks because they fear the crisis could claim more victims. The money will be transferred to government bonds, leaving a gaping hole in UK banking assets at a time when the Treasury is struggling to prop them up with its £500bn bailout.

Treasury officials and the Icelandic authorities said last night that they had made “significant progress” in agreeing in principal a quick payout for British investors – including local councils – who had about £4bn in the Icelandic Landsbanki’s internet bank Icesave.

The News of the World also reported that the value of Icelandic-owned assets seized by the Britain under anti-terror laws was believed to be roughly equivalent to the amount invested in Icelandic banks by British individuals and organisations.

As the economic crisis deepens, Gordon Brown will today make an unprecedented appearance in Paris before an emergency summit of eurozone leaders held by French President Nicolas Sarkozy. The Prime Minister will give a presentation on last week’s bailout, which gave the taxpayer a £50bn stake in British banks.

A No 10 spokesman said last night: “We don’t expect everyone to do exactly what we have done, but the approach we set out is probably the best kind of model.”

Following G7 finance meetings in Washington, President George Bush called for a “serious global response” to cope with the continuing plunge in markets, backing moves to buy stock in troubled financial institutions.

A local government source warned that most of the councils caught in the collapse had invested funds from revenue accounts, used to cover recurring costs such as wages and local services, in Icelandic banks – with terrifying implications for staff and clients. It is not known which councils are affected, but conservative estimates of 50 authorities would cover more than 150,000 staff.

Public-sector unions last night revealed they had written to employers laying out their “grave concerns” about the immediate impact on wages, jobs and front-line services. Unison spokeswoman Mary McGuire said: “We have asked the LGA … how much councils have deposited, and exactly what the impact is going to be in the short term.”

Haringey in north London is believed to be among those councils whose payroll is frozen, though the chief executive refused to confirm or deny this. Haringey made a £5m investment in Iceland just last week – after the nation’s first bank, Glitnir, went bankrupt. Braintree council, in Essex, has confirmed that the £230,000 annual interest from £5m of taxpayers’ money held in three failed Icelandic banks was to be spent on payroll and services.

Despite warnings as far back as July that investing in Icelandic banks was risky, Tory-controlled Winchester council deposited £1m in Heritable, a Landsbanki subsidiary, in September. Lord Oakeshott, Liberal Democrat Treasury spokesman, said: “Winchester council was grossly imprudent. I wouldn’t put them in charge of a child’s money box.”

Council leaders will meet local government minister John Healey and the economic secretary to the Treasury, Ian Pearson, later this week to appeal for more help, including a delay in the payment of business rates. More money is due to the Treasury on 6 November, the date of the Glenrothes by-election.

The shadow Local Government Secretary, Eric Pickles, said: “If the Government shows some flexibility, I am sure that most problems in regard to cash-flow will be taken care of.”

Local government difficulties

Interest rate swaps

In the 1980s, council officers, who were largely unskilled for the task, became involved in a sophisticated form of derivative known as an interest rate swap. Until 1988, when interest rates rose, councils made a tidy profit, but then huge losses were incurred. Hammersmith & Fulham council lost about £200m on investments worth £6bn, but eventually settled with many of its creditors.

Off balance sheet

Not yet a disaster, but there are plenty of critics of councils’ – and central government’s – habit of taking health care facilities and schools built through the private finance initiative off their balance sheets. The argument is that the risk of the project failing is borne by the private sector and so the project should go on its balance sheet. However, even some officials privately admit that it’s a smoke and mirrors exercise to ensure big investments do not come out of a local or central government budget.

BCCI

The Bank of Credit and Commerce International collapsed in 1991 owing more than $16bn (£9.4bn) and took the deposits of local councils down with it.

Source

Time Line To Date

7 September
US government seizes control of mortgage lenders Fannie Mae and Freddie Mac.

14 September 2007
Bank of England steps in with emergency funding to support Northern Rock.

17 March 2008
Federal Reserve organises the rescue of Bear Stearns.

17 September
US rescues insurer AIG.

26 September
US government takes control of Washington Mutual in the largest-ever American bank failure.

29 September
UK government nationalises Bradford & Bingley’s loan book.

30 September
Ireland guarantees the deposits of all savers.

3 October
Biggest ever US government bail-out plan – worth $700bn – clears House of Representatives after being rejected a week earlier.

7 October
Iceland asks Russia for €4bn loan to avoid financial meltdown.

8 October
Chancellor Alistair Darling announces £450bn rescue plan for Britain’s ailing banks. Bank of England cuts interest rates by half a percentage point.

10 October
G7 meeting in Washington agrees global rescue plan.

Source

Advertisements

One Comment

  1. This is simply another example of how we choose to work against each other as opposed to uniting in a common effort. It is clear that the entire global financial crisis results from egoistic influences, related to self and/or corporate gain, without any regard for the cause and effect impacts we are witnessing today. These same egoistic influences, whether they are exerted from the government or private sector, are certain to doom any recovery efforts to failure. It boggles the mind when we consider how hard we work to keep ourselves in conflict with each other. We each need to change our intention towards humanity or crises such as this will continue to worsen.


Comments are closed.

%d bloggers like this: