Monday, 20 October 2008

Is Iceland just the tip of the iceberg?


In 2006, Barnet council took out long terms loans of £40 million “to take advantage of the very low market rate loan available at that time.” (See paragraph 9.3.2 of the report to Cabinet this week)

The report continues: “Earmarking borrowing in this way to a capital project is not the norm….and the action was taken to protect the council from higher borrowing rates expected in 2008 and onwards (i.e. when the actual capital expenditure would be incurred). This prediction on interest rates has indeed occurred…”

However well intentioned the plan, this statement is an admission that the council was speculating on interest rates. The council uses the word “prediction”. The Thesaurus on my computer offers the word “guess” as an alternative.

Whilst interest rates did initially rise, they are now falling again. Our beloved Prime Minister Gordon Brown told Parliament today: “... with interest rates low and falling, inflation expected to come down over the next year, these underlying economic indicators - particularly interest rates - make us stronger than at any other previous downturn.”

Falling interest rates might be good news for some sections of the economy, but could they spell further disaster for Barnet Council, even if we eventually get back the money frozen in Iceland?

The council claims justification for their investment strategy because for two two years they made a ‘profit’ on the interest rate differential. But if rates continue to fall, will the council be paying more in interest than it is receiving, given that some of the big loans taken out were at fixed rates?

How much more of our money is at risk?

We need to know who made the decision to borrow all this money. Who authorised it? What kind of risk assessment was carried out? If it was this easy to make a profit, then we would all be doing it!

It seems as if the council was relying on alchemists for devising its investment policies, and we will be left to pick up the bill for their reckless folly.

11 comments:

Rog T said...

David,

The quote from the council about interest rates being expected to rise, shows that Freer's quote that no one could predict the credit crunch is not true. Higher interest rates are the governments way of squeezing the economy to dampen down economic activity. In other words, the council expected the bank of England to make borrowing more expensive. This is done to slow down spending and to restrain the property market.

Mike Freer used the phrase "no one could predict the credit crunch" with reference to the problems for the builders of the Stonegrove regeneration. It is now 100% clear that the council did expect a credit tightening. The only dispute would be the scale of it. Knowing a tightening was coming, surely the council should have reviewed it's own investment policy. They remind me of many friends of mine who like a flutter. They proudly boast when laughing boy wins at 7-1 but never tell you about the 8 times they lost.

Don't Call Me Dave said...

Rog

Barnet’s only defence is that it was not alone in risking taxpayers money in this way. But the fact that most councils either got their money out in time, or did not invest in Iceland at all, proves that this was an entirely avoidable situation.

When the dust eventually settles, there will have to be an independent investigation into the processes that allowed this to happen. Irrespective of whether Barnet recovers some, all or none of our money, legislation must be introduced to stop councils acting in a risky and reckless manner with taxpayers money.

One of the most shocking aspects is that at least £30 million of loans were taken out on the instructions of the Borough Treasurer. How can an unelected officer be allowed to have so much power? Such decisions should only be taken with the authority of the Cabinet - and only then if they are subject to scrutiny

Anonymous said...

What you mean you don't know who makes the financial decisions being a know it all and everything! I am shocked!

Alison said...

"But the fact that most councils either got their money out in time, or did not invest in Iceland at all, proves that this was an entirely avoidable situation."

Clearly not given my own council (Harringey)invested £37million a week before this whole debarcle! In fact there are over 111 Councils with money in Icelandic banks.

And my understanding is that at any time the Scrutiny committee can ask to see how the Council is depositing its money and where and no one has. I am sure it is members of all political parties who have that power, although I am not 100% sure.

Don't Call Me Dave said...

Dear Alison

Barnet does not have a monopoly on doing stupid things! Even the Audit Commission, who are supposed to ensure that councils are not reckless with our money, had invested £10 million in Iceland, making it impossible for them to now carry out an independent investigation.

111 councils may have invested in Iceland - which means that approx 300 did not!

I agree with you entirely that this is precisely the type of activity which scrutiny committees should be monitoring. What I find rather alarming is that the decision to borrow such large sums of money did not need to be scrutinised. The decision was taken using an Officer DPR (Delegated Powers Report). Under the council’s Constitution such reports cannot be called in for scrutiny. If the decision had been taken using an Officer DPR in conjunction with a Member, it would have gone before the Cabinet and then the Cabinet Overview & Scrutiny Committee.

danfhope said...

Re: Allison

One would have thought that the Council's Audit Committee (with real powers) would have taken a bigger interest. All of the Finance Officers are regularly before it and it takes a large interest in 'risk management'.

Anonymous said...

i'm shocked. a whole article and comments and no mention of barnet football club or underhill. found another fox to chase?

Don't Call Me Dave said...

Dear Anon

Important as the Underhill issue is, the potential loss of £28 million of our money is even more so, much as the council would like to ignore public debate on the matter.

Rog T said...

David,

I'm pretty sure that the anon post is just a ruse to distract us all from the fact that Freer & co lost £27.5 Million quid. Rather like all of the nonsense press releases on the council's website.

Anonymous said...

The London Borough of Haringey, the Audit Commission and lots more.

I didn't have any money in Iceland-perhaps I should volunteer to do the investigation....

Don't Call Me Dave said...

Dear Anon

I already have the results of the investigation.

“We’re not to blame. Not us guv. We didn’t do anything wrong. It was the other fella.”

Wage rises and trebles all round!