Mark Wallace Mark Wallace of the Taxpayers Alliance says urges caution

Discussion of the public finances this has rightly focussed on the Budget and its horrifying predictions of £700 billion of extra public borrowing in the near future. In local government, though, there was more news regarding the £1 billion of taxpayers’ money at risk in the collapsed Icelandic Banks.

In brief, the administrators of Heritable, the British institution owned by Landsbanki, have estimated that the bank’s creditors could get 80% of their money back. That’s better news than many had feared, given that early estimates had placed the figure closer to 10%, but it would be wrong to get carried away at the news or to let the people responsible for the investment itself off the hook.

Even if taxpayers were to get 80% of all their Icelandic deposits back, that would still represent the loss a large proportion of the original capital, and an extended period in which no return is achieved at all on the money.

Indeed, the Ernst and Young report itself states that to get a 70% return from investments in Heritable councils will have to wait until the end of 2010. To get that headline 80% return they will have to wait until the end of 2012. That means four years without any interest return on any of that money on top of the loss of 20% of the capital.

Even if that 80% refund rate is achieved on investments in Heritable by 2012, it must be remembered that Heritable only holds a minority of the taxpayers’ money tied up in Iceland. There is around £300m in Heritable, but there is another £360m in Landsbanki itself, £200m in Glitnir and several millions more in other institutions.

For example, Kent County Council, which has been widely reported as having £50 million in Iceland, only has £18.3 million of that money in Heritable, with the rest invested in Glitnir and Landsbanki. It is important to know what shape the other banks’ assets are in before we can draw any meaningful conclusions about the chances of getting back the rest of the money.

Heritable’s administrators have reported now because as a British subsidiary they are legally bound to do so. The domestic Icelandic banks have no such requirement, and even after Ernst and Young’s announcement they have been decidedly cagey when asked to clarify their state of health. Kaupthing have said that they hope investors will get at least 50% of their money back by 2012, which is decidedly
worse than Heritable’s 80%.

Should the other banks prove to have more complex finances or worse problems than Heritable, which seems fairly likely given the fact that the latter was targeted mainly at the British market whilst the others
had a web of international and Icelandic deals, then the problem could be far more serious.

Despite the positive spin being put on this news, taxpayers still have a lot to worry – and a lot to be angry – about. It is understandable that councils are keen to trumpet the possibility that they might save
80% rather than 8% of their original investment, but no matter how much we get back there must still be full, open investigations into what went wrong and who is responsible for this spectacular failure.

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