Town halls call on Chancellor to ensure financial stability

LGA press release - 9 October 2008

Council leaders are today calling on the Treasury to ensure financial stability in the eventuality that a small number of local authorities get into financial difficulties, following the crash of Icelandic banks.

The current estimate from the Local Government Association, which represents over 400 councils in England and Wales, is that at least 45 councils had deposits in affected banks. The LGA is expecting to have an overall estimate of councils affected and total deposits by the end of the day (Thursday).

Until the Chancellor makes a decision on guaranteeing local government deposits, the LGA is calling for councils to be allowed to defer making business rate payments to central Government, if they need to borrow because they cannot access funds placed in banks that go bankrupt.

No councils are experiencing cash flow problems at the moment, but confidence in the system needs to be recovered.

The LGA yesterday wrote to the Chancellor seeking urgent reassurance that he will protect local authority deposits in the Icelandic bank Landsbanki in the same way as personal deposits.

Prudent financial management means that councils put their money into a diverse range of banks to make sure that any risk is spread to minimise the impact of problems in the financial markets.

Councils also followed very clear Treasury guidance sent out in March 2004 which stated that councils should “seek the highest rate of return consistent with the proper levels of security and liquidity.”

Cllr Margaret Eaton, Chairman of the LGA, said: “Councils are not experiencing immediate cash flow problems at the moment, but allowing a certain breathing space for a small number councils that could be affected is necessary and needed.

“These would be temporary, short term measures until the Chancellor can reassure councils that their deposits are protected in the same way as personal assets. Allowing councils to keep money collected from business rates would help to raise millions of pounds to help plug any short term cash flow problems.

”Prudent financial management means that councils put their money into a diverse range of banks to make sure that any risk is spread to minimise the impact of problems in the financial markets. Town halls invested in Landsbanki as a reputable bank with a solid credit rating.”

Author: LGA Media Office, 0207 664 3333

Notes to editors:

Paragraph 15 (page 4), paragraphs 20-21 (page 5) and pages 7 and 8 states that:

The guidance recommends that priority should be given to security and liquidity. However, that does not mean that authorities should ignore yield. It will be appropriate to seek the highest rate of return consistent with the proper levels of security and liquidity.

Full guidance at this link:  http://www.local.odpm.gov.uk/finance/capital/data/lginvest2.pdf

Cllr Margaret Eaton is speaking on behalf of all councils in Engalnd and Wales of all political parties.