Thursday 13 November 2008
Barnet Council. Up the proverbial creek. Paddle missing.
At the special council meeting on 4th November to discuss the Icelandic banking crisis, LibDem councillor Monroe Palmer tabled an amendment calling on the Cabinet Resources Committee to revise its Treasury management policy to “prioritise the security of capital, rather than striving for the very highest interest rates available.”
In response, council leader Mike Freer said: “Even basic accountants will know, if you get a rate of interest below inflation, your capital is eroded. That is not a sensible move.”
Two days later, interest rates fell by 1.5% to 3% - substantially below the rate of inflation. Yesterday, the Governor of the Bank of England let it be known that he will allow interest rates to fall to zero if necessary. That’s good news for home owners with mortgages, but rather bad news for Barnet council with £328 million cash on deposit.
Our capital is now being eroded and, thanks to those wise people who chased the higher interest rates (seemingly oblivious to the higher risk they carried), the rate of erosion is set to increase significantly in the weeks and months ahead.
The council cannot refinance its long term loans taken out at higher rates of interest because the capital is frozen in Iceland - possibly lost.
Does anyone still think the council has been sensible in its investment strategy? No doubt Mike Freer will say, as he always does, that the interest rate collapse could not have been foreseen. But this is precisely why the council should not have been so utterly reckless with our money in its investment strategy.
Barnet adopted a high risk strategy which worked for two years but has now backfired. Monroe Palmer’s proposed amendment calling for a low risk policy, which the Conservatives blocked with their majority, did not actually go far enough. A sensible council would have adopted a no risk investment policy.
Councils should not be playing the financial markets. Investing surplus cash on a short term basis until it is required is sensible. But Barnet council borrowed specifically to lend, which is simply unforgivable.
Even now, with a gaping £28 million hole in its finances, the council says “There is a risk of the Council becoming too risk averse in its response to this situation, and not achieving budgeted deposit income. In the past two years, the Treasury Management Strategy has delivered £26m interest earnings across all funds to support the council budget.”
Has the council not learned anything about risk?
At least we now know the real reason for their dangerously cavalier attitude to investments. The council actually budgeted for investment income in order to run basic services. Mike Freer has acknowledged that this income was used to hold down the rise in council tax last year. Being so reliant on interest rates is hardly a sensible way to run a council.
But even if we get our £28 million back, with base rates now collapsing, the council cannot possibly meet its interest target for the current year. So will services be cut, will council tax go up or, like Gordon Brown, will Mike Freer allow borrowing to go through the roof leaving future generations to pick up the bill for his folly?
Many of us had high hopes when Cllr Freer became leader. We thought he would be ruthless on cost cutting by eliminating waste and bureaucracy. Instead he borrowed recklessly, gambled and lost. Mike, you can sit in your ivory tower blaming everyone else for this debacle, but in the eyes of the public, you are a busted flush.