Ian Cuddy

(Latest article for Public Sector Forums.)

A whole year has passed since almost £1 billion of local government money was sucked into a financial black-hole following the collapse of the Icelandic banking system.

So how are things faring with the battle to recoup the cash trapped in frozen Icelandic bank accounts?

Over to the Local Government Association, which has been co-ordinating the efforts of all the 128 UK local authorities who invested £954 million in Iceland (with individual sums ranging from £1m to £50m).

A few weeks ago, to mark the first anniversary of the Icelandic meltdown, the LGA announced some £70m of the £1bn sum had been repaid to councils so far, with 'at least' a further £30m expected by the year end. These initial payments came from the UK-based Heritable and Kaupthing Singer and Friedlander (KSF) banks, which according to government research, together account for around 40% of the total invested by local authorities.

As for the monies tied into the other two failed institutions, Iceland-based Giltnir and Landsbanki, the possible outcomes are more uncertain. The LGA said that councils were 'confident' the banks would have funds to repay councils, but 'were awaiting the conclusion of the winding-up process by the Icelandic authorities'. However it insisted: 'We fully expect that we will get the lion's share of this money back.'

Feeling the Heat

The LGA's announcement came days after it sent an update on the Icelandic situation to the Chief Executives of the affected councils. This including a copy of a letter dated 8 September to Local Government Minister Rosie Winterton, stating that 'while we continue to believe that our members will receive the majority of their deposits back, there remains considerable uncertainty about overall recoveries and timescales'.

In the letter, the LGA warned that government regulations allowing councils to defer the impact of any potential Icelandic losses would not cover budgets for 2010-11, which councils are due to begin work on imminently.  It estimated that according to a recent survey of LGA members, 'overall losses to English authorities would be in the region of £140m'.

While a 'very significant' proportion of this £140m would be absorbed by councils, said the LGA, a 'smaller number' of authorities would face 'significantly difficulty' in budgeting for losses. The minister was informed the LGA research suggested some councils expected losses 'could be as high as 20% of expected revenue expenditure for 2010-11'.

A further development last month came in the form of the Chartered Institute of Public Finance & Accountancy (CIPFA) issuing further guidance indicating a possible reduction in the percentage of Landsbanki loans likely to be recoverable. CIPFA estimated councils would recoup around 80% from Heritable, but advised the amount KSF would be able to repay could be as low as 50%. 

A Chill Wind Blows

Meanwhile the administration and wind-up of Landsbanki and Glitnir continues with, in the case of the latter, the LGA's legal advisers having, it is understood, until 26 November (originally 30 October 2009) to submit claims on behalf of all the councils. The most recent guidance suggests a 100% recovery from Glitnir by March, though some remain skeptical about the likelihood of this.

The outlook appears somewhat less positive for Landsbanki, where councils made the largest amount of Icelandic investments, some £364m.  In May, the forecast for repayment from Landsbanki was scaled down from 95% to 83%.  However, under recently-enforced Icelandic legisation, councils can now claim interest due up to 22 April 2009, with latest legal advice to authorities suggesting they use the Icelandic penalty rate of interest at 22%. This should potentially help to reduce the impact of the reduction by around half.

While the estimated recoveries from Landsbanki and Glitnir are relatively high, the treatment of councils as preferential depositor creditors is considered crucial. PSF has seen documents suggesting that without preferential status, recovery estimates for these two banks could fall to 33% for Landsbanki and 40% for Glitnir.  As the LGA stated in its letter to councils:

'We remain hopeful that whatever option is agreed, it will not ultimately impact on local authorities if preferential creditor status is confirmed. Current information continues to suggest that there are sufficient assets to repay depositors in full.'

Another factor to bear in mind is that debts with Glitnir and Landsbanki have now been translated into Icelandic krona, as at 22 April - when the rate was approximately 191 krona to the pound. As the rate today is around 204.2 krona, this will have an impact on the amount that local authorities will eventually receive. Councils must hope that Icelandic exchange rates continue to move in their favour.

Doubtless to be continued...