Charities, stores, bars, fire brigade – all losers in Iceland collapse

Official estimates suggested that British councils and charities had invested 1 billion in Icelandic financial institutions – money that is now frozen and may be lost due to the collapse in confidence in the country's banking system.

In total, UK investors are understood to have about 8 billion in Icelandic banks and institutions.

Yesterday it emerged that Strathclyde Fire and Rescue Board had 3 million invested in Iceland and two unnamed English health foundation trusts had 2 million invested.

In all, more than 100 councils – eight from Scotland with deposits of 45.5 million – as well as police forces, fire services and transport authorities, have hundreds of millions of pounds invested in Icelandic financial institutions.

The animal charity Cats Protection had the most invested of any British charity, with 11.2 million of deposits in Kaupthing Singer & Friedlander. But it was just one of hundreds of charities from across the UK that have invested money in Iceland.

Private investors are covered by the UK government's guarantees but other bodies, such as councils and charities, are not.

The UK government warned charities and other public sector organisations yesterday that it was not able to offer any guarantees over the money invested in Iceland.

UK Treasury officials started crisis talks in Reykjavik yesterday morning with their Icelandic counterparts in an attempt to get as much of the British money back as possible.

Iceland's prime minister, Geir Haarde, attempted to cool the war of words with the British government last night.

He said: "We will honour our obligations. We need some support from the UK authorities in order to be able to do that in a proper way."

But with its economy in turmoil, its currency sliding and its stock market suspended, Iceland is in a very precarious state.

Icelandic depositors can get access to their money, but British organisations cannot – something the Treasury officials are trying to rectify in their crisis talks. However, it also emerged last night that the UK government had been warned of impending problems in Iceland back in July.

Lord Oakeshott, the Liberal Democrat Peer, said he raised the issue of a possible Icelandic bank collapse in a written question to a minister.

Pat Watters, the president of Cosla, the Scottish council umbrella body, said he was confident that no frontline services in Scotland would be affected because the money would have come from capital projects and the reserves.

And David Parker, the leader of Scottish Borders Council, which has 10 million invested in Iceland, said he was sure the council would get at least some of its money back.

He said he expected some money back – from the Icelandic authorities, from the assets of the bank frozen by the UK government or from the UK Treasury itself.

"I am confident it will not affect our budget, at least for this year," he said.

Scottish government officials are checking with every public sector body in Scotland to find out if any are affected, even indirectly, by the crisis.

There are fears that some councils may not have their own money invested in Iceland but might be relying on private companies to build schools and hospitals and this money could be coming from Iceland, so this could be under threat.

A spokesman for the Scottish Government said last night that officials had no knowledge of any more public bodies affected by the crisis but more would be known after a full audit was completed, probably early next week.

Mr Watters stressed yesterday that the Icelandic banks were "triple A rated" by the regulators, which is why councils felt their money was safe.

John Swinney, the Scottish finance secretary, said he wanted assurances from the UK government that all council deposits in Icelandic institutions would be afforded the same protections and guarantees, regardless of whether they were Scottish or English.

The UK government has said that only those facing the "most severe difficulties" would receive any support.

Mr Swinney said: "I will take forward discussions with affected Scottish local authorities directly with the Treasury to ensure that council resources and council taxpayers' interests are protected at this time of uncertainty."

Senior figures in Scottish councils decided to seek a joint meeting with the Westminster and Scottish governments, and the Scottish Secretary, Jim Murphy, later agreed to this.

Mr Murphy said: "I have agreed with Cosla to convene a meeting at the Scotland Office in Edinburgh on Wednesday morning to which the Scottish government will of course be invited."

The body representing the voluntary sector in Scotland is seeking a meeting with Mr Murphy on the wider impact of the credit crunch.

A spokeswoman for the Scottish Council for Voluntary Organisations said: "We are currently investigating how many of our members have been affected."

From cod to cash, sinking economy takes countries into stormy waters again

BRITAIN and Iceland have endured strained relations in the past, but most disputes have been about fish, not finance.

Over the past few decades, the UK has fought three small wars over fishing limits – the so-called Cod Wars.

Now, though, diplomatic problems have been caused by the virtual collapse of Iceland's banking system.

Iceland's repeated expansion of its fishing grounds and its aggressive methods of protecting territory led Britain to deploy navy warships and the intervention of Nato.

Trouble flared in 1958, in 1961 and 1975. Britain was forced to back down eventually and respect Iceland's 200-mile exclusion zone after Reykjavik threatened to close an important Nato base.

The traditional fishing ports of Hull, Grimsby and Fleetwood suffered hugely as a result.

Now the dispute is over money. Gordon Brown has publicly declared Icelandic actions in shutting down its banking system "effectively illegal" and "unacceptable" and Iceland's prime minister, Geir Haarde, has expressed annoyance that the UK used anti-terrorism legislation to seize assets in Britain of one of the Icelandic banks.

The UK government is angry that Iceland is not prepared to compensate British investors equally, but is protecting its domestic savers first.

This part of the dispute refers to internet bank Icesave. Britain received no assurance that a legal agreement for equal treatment would be honoured.

Icelanders, however, are dismayed that the British government acted under the Anti-terrorism Act. Westminster decided it had to take steps to protect its own UK savers and seized assets of Icesave's parent bank, Landsbanki.

The language in the first few days of the row was incendiary, with both prime ministers going public with accusations against the other. But yesterday, after UK Treasury officials arrived in Reykjavik and started discussions with their Icelandic counterparts to find a way forward, the tone became more conciliatory.

Iceland warning in July

MINISTERS were warned of looming problems in Iceland in July.

Liberal Democrat peer Lord Oakeshott said he had raised the issue of a possible Icelandic bank collapse in a written question to a Treasury minister in the summer.

A former pension fund manager and former director of Warburg Investment Management, Lord Oakeshott was told the Financial Services Authority was monitoring the situation and there was no cause for concern.

"Alarm bells were ringing all over about the Icelandic banks and the Treasury must have been blind and deaf not to hear them," said the peer.

It also emerged that Brighton and Hove Council had been suspicious of the interest rates being offered by Icelandic banks. The council considered them too good to be true and withdrew its deposits with the institutions.

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