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.