Nottinghamshire's Icelandic saga

Another misleading claim today about the attempts by local authorities to recover the money they lost when the Icelandic banking system went bust in the crunch.
If you remember, local authorities across the country had invested vast sums in Icelandic banks which were offering returns on investment accounts which seemed too good to be true when you factored in the size of the economy underneath them.
The Nottingham Building Society had reached that conclusion in 2006, placing its treasury investments elsewhere.
Unfortunately, councils continued to put money into Iceland because the investment rules they adhered to never included a measure of the size of a banking system relative to an economy – and Iceland’s was way out of proportion with the ability of its lender of last resort (i.e., the Icelandic government) to meet all liabilities if the banks went belly up.
Local authorities looked no further than the credit ratings of the banks. Hindsight tells us this wasn’t a rigorous enough analysis, as we now know the ratings agencies had unhealthily close relationships with the banks at the time.
Among those left standing at the altar was Nottingham City Council (which had more than £30 million in Iceland) and Newark and Sherwood District Council, which had a more modest £2 million.
Newark and Sherwood has sought to suggest today that it has now got back 80 per cent of its money.
What it neglects to say is that it has almost certainly lost money in the process.
How? Two reasons – the money was put into an interest-bearing account and never received any, so an investment under-performed. Secondly, any sum of money frozen in an account for any length of time loses money through depreciation. Newark & Sherwood’s £2m went on deposit in January 2008, so that’s four years of value eaten away by inflation.
There will also have been some exchange rate costs, because the £2m was held in a variety of different currencies, ranging from sterling to euros.
So the council may have got back 80 per cent of the original capital sum, but because it is now worth less than it was they will never get back the 2012 equivalent of £2m unless some interest-based compensation is paid.
Local authorities and the Local Government Association have sought to suggest that we needn’t worry about this unfortunate episode because their brave battle to get the money back will result in recovery of all the cash.
That’s disingenuous. Cash, perhaps, but value? Almost certainly not.
These were poor investments and you can’t get away from the irony of Nottingham City Council continuing to invest in Iceland when a financial institution less than a mile away had concluded it no longer made sense to do so.
Councils fell victim to a poor set of rules and a tendency to believe that if they were following the same rules as everyone else nothing was likely to go wrong.
I’m not aware that any council or the LGA ever crash-tested these investment rules. Have they done so with what are presumably amended and improved guidelines?
As for Newark & Sherwood District Council, it invested in Iceland expecting to receive a measureable amount of interest. Its council minutes (where information about the refund is contained) don’t say what that sum was.
The council will get some interest – 3.35 per cent will be paid on the remaining £356,000, which is currently held as Icelandic krona in Iceland. That won’t match the losses, though.
Councils need to be straight about this because pretending a problem has been solved helps no one. They were far from alone in making expensive mistakes during the boom – the professional financial institutions which organised these investments were guilty of incompetence of historic proportions.
Councils are custodians of public money and we expect them to use it wisely. So what safeguards are in place now? And are they absolutely sure these safeguards are effective?