Yes, British councils were right to invest in Iceland


6:49 pm - October 10th 2008

by Dave Osler    


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ICELAND has – to use the technical term employed by trained economists – gone tits up, and such staid bodies as Tonbridge and Malling Borough Council and West Yorkshire Police Authority are suffering the collateral damage.

Incredibly, Gordon Brown has responded by invoking anti-terrorism legislation, although rumours that he has asked his friend Dubya to add the Reykjavik pariah regime to the Axis of Evil remain unconfirmed.

Perhaps the prime minister is simply a bit spooked that his Icelandic counterpart is called Geir Haarde; when you think about it, that is probably pronounced not dissimilarly to Keir Hardie, and names just don’t get any more Old Labour than that.

Strange, too, that the government feels able to guarantee the deposits of individual British savers exposed by the Icelandic banking crisis, yet cannot extend such largesse when public sector money is at stake.

After all, the total sum at risk is less than a measly billion quid. To put it another way, that represents less than one quarter of one percent of potential expenditure on this week’s bank bailout.

For some reason, this morning’s newspapers are full of outcry about what UK councils are doing investing in Iceland anyway. The answer to that seems quite simple; they were seeking the best returns for the council tax payer, which is exactly what they should be doing. Remember, Iceland’s leading banks offered high rates of interest and enjoyed AAA credit ratings. Sounds fair enough to me.

Are the critics seriously maintaining that those good folk who cheerfully pay whatever shocking sum Ceredigion demands for a Band D semi would have been better off if their dosh had been in the safekeeping of Northern Rock or Bradford & Bingley?

Is the argument here that if a local authority is going to put its nest egg in a bank that is fated to go bust, it might as well patronise a British bank that is fated to go bust, if only on patriotic grounds?

Mind you, I suppose it’s a good job that Town Halls are nowadays largely populated by apolitical drongos rather than the much more ideologically-driven men and women that held such office once upon a time.

Circa 1983, Lambeth would have converted whatever cash it was able to get its hands on into Banco de Nicaragua Solidarity Campaign high income bonds, and try to pass this off as being in the best interest of its impoverished electorate.

Westminster and Wandsworth would likewise have opened up secret police supersaver accounts in Santiago, in a concrete expression of solidarity with the monetarist torture merchants that were running the show in Chile back then.

Come to think of it, when Militant Tendency was running Liverpool City Council back in the 1980s, didn’t it cook up some half-arsed scheme that ransomed every parking meter in Scouseland to Union Bank of Switzerland, in exchange for a £30m loan at an extortionate rate of interest? Still, if I remember rightly, at least Team Degsie repaired council houses with the money.

The question – then as now – is what degree of risk local authorities should be allowed to take. On balance, I think it is preferable that they should be permitted to act responsibly, both when investing and when borrowing, rather than forced to stick everything in a piggy bank.

Even seemingly responsible actions can blow up in people’s faces, of course. But at least councillors can be replaced at the ballot box if the voters decide that they are incompetent pillocks. That’s more than can be said about investment bankers.

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About the author
Dave Osler is a regular contributor. He is a British journalist and author, ex-punk and ex-Trot. Also at: Dave's Part
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Story Filed Under: Economy ,Local Government

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Reader comments


I laughed out loud at this.

Great post.

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For some reason, this morning’s newspapers are full of outcry about what UK councils are doing investing in Iceland anyway. The answer to that seems quite simple; they were seeking the best returns for the council tax payer, which is exactly what they should be doing. Remember, Iceland’s leading banks offered high rates of interest and enjoyed AAA credit ratings. Sounds fair enough to me.

What he said.

2. diogenes1960

In February, Moody’s Investors Service cut its ratings on all the major Icelandic banks. Landsbanki’s long-term rating was downgraded “in light of the weaker credit environment.”

In May, Fitch, another agency, cut the ratings of Glitnir Bank and Kaupthing Bank. Standard & Poors said it had only rated one Icelandic bank, Glitnir, and had cut its rating from A- to BBB+ in April.

Martin Winn, a spokesman for the agency said: “We have been highlighting a growing risk about the Icelandic banking system since February 2007. The rating BBB+ is very high risk for a Western European bank.”

Those warnings were passed on to many local council financial managers, prompting some to stop investing in Iceland.

Many of the authorities were – as I understand it – tied in to long term investment agreements as well. By April – when it was becoming apparent that Iceland’s banks and economy were struggling (features on CHannel 4 news, The Economist &c) some authorities were contractually bound to keep going – or, if they withdrew funds, risked heavy penalties. It is suggested that one Scottish council had one month left on the investment plan. Any criticism made of the authorities needs to take the circumstances of individual investments into account.

4. dreamingspire

Scott, those yapping LA people seen and heard on broadcast media who defended their decisions not to move funds out of Iceland (where they were able to without significant penalty) claimed they took the best advice and that credit ratings for the Icelandic banks had only gone down a few days before they crashed. They should have kept quiet, and then at least we would not have seen their incompetence – the warnings were there a long time ago, so the advice was not the best, and credit ratings (always lagging behind the truth, I hear) had been falling for some months.
“apolitical drongos” may have replaced ideologues in Town Halls, but some of them clearly lack competence – and those failed advisers should be sued.

Let´s not forget that earlyer this summer the Icelandic goverment applyed to buy 5 billjon dollars from the federal reserve to increase it’s foreign currency stock, preparing for downswings. (The banks hand grown many times the icelandic budget) Federal Reserve said no and left the country in dire straits. That is how this all started. Investors started to pull out, the banks could not refinace and get loans, the first one tipped, and the goverment took it over to save the savings and the state thereby took over the dept also. Same happened to the Landsbanki.

KB bank, was still standing firmly untill Mr. Brown whent far ahead of him self and declared terrorist sactions on Iceland and abused that legislation grossly. He has not seen the end of that. By this, he has also put the british savings in turmoil and general trust in the British banking system. This kind of unpredictability will send Britis banks further down th same tracks in international context. Nothing was wrong at the time, the bank had full assets. He is going to be prooved monumentaly wrong, and what he did was a terrorist act against his own.

He has no clue at all what he is dealing with or how these things act.

The man is a moron, and you must get rid of him quickly to avoid further damage.

An advice from an Icelandic Citizen.

What even when they’ve renewed Kerry Katona’s contract?

7. Mike Smithson

I have to say that this is absolute rubbish. The fact that the Icelandic banks were offering interest rates well above the norm should have set the alarm bells ringing. Poor credit risks find that the amount they pay for borrowing is higher. You get the extra return because of the extra risk involved – it’s as simple as that.

To hide behind the credit ratings agencies is not enough.

I’ve just retired and a significant part of my income comes from the interest I get from my lump sum. It was very tempting to follow the Icelandic route because the I would have got was a quarter to a third more which would have added significantly to my monthly income.

That got me worried and fifteen minutes on Google convinced me that it was a rubbish idea.

Why the council officers did not do the same beggars belief.

8. dreamingspire

Sometimes I think council officers live in a dreamworld. And its our money that pays them (and our money that they may have lost – but today we hear that we have frozen more Icelandic assets than the estimated uncovered deposits).

Are the critics seriously maintaining that those good folk who cheerfully pay whatever shocking sum Ceredigion demands for a Band D semi would have been better off if their dosh had been in the safekeeping of Northern Rock or Bradford & Bingley?”

Yes. In both cases, all depositors (whether retail or commercial) received all their money back, because the banks were illiquid but not technically bust. It is unlikely that this will be the case for the Icelandic banks. As has been highlighted elsewhere, the Icelandic banks didn’t enjoy AAA credit ratings, and it has been clear since March that the Icelandic financial system was at (even) high(er) risk than elsewhere.

There may be some individual cases where councils were bound by long-term schemes that were negotiated before the level of difficulty facing the Icelandic financial system became clear, but that won’t apply in the vast majority of situations.

Also, “Strange, too, that the government feels able to guarantee the deposits of individual British savers exposed by the Icelandic banking crisis, yet cannot extend such largesse when public sector money is at stake.” – what the fuck d’you think it’d be using to bail out the councils, other than reallocating other public seector money? Magic beans…?

Incredibly, Gordon Brown has responded by invoking anti-terrorism legislation…

It’s interesting how this has been commented on, particularly by the mainstream media and some politicians. It’s as if they think the title of the legislation or the circumstances under which it was introduced have anything to do with how it will be applied once on the statute book. The particular part being used to freeze the money does not mention terrorism. What matters is what the law itself says.

One problem with the Act was that it received inadequate scrutiny while going through Parliament – particularly as the UK was in emergency mode after the terrorist attack on the USA in September 2001. Indeed I’m struggling to find evidence of any debate over the freezing orders in particular.

Some legislators suggested there were a few clauses that would be more appropriate in another bill, say the Proceeds of Crime Bill, which was going through Parliament at roughly the same time, and commented on the lack of time allowed by the Government and its supporters for debate. (Indeed, the Conservatives, the Liberal Democrats, the PC, the SNP, the DUP, the UUP, and 15 Labour rebels joined in a Commons vote against the timetable – unfortunately they were beaten by over 330 Labour MPs.)

(note I make no comments about the merits or otherwise of using it to freeze assets in Iceland.)


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