Monday, October 13, 2008
Scrutinising the investments
Although I have a lot of sympathy for local Councils who invested millions of pounds of public money in Icelandic banks in accordance with Government guidelines and then got their fingers burnt, today's Times points out that it is not so black and white in some cases. That is why I believe that each Council needs to be considered on its own merits and government aid given if it is required and only if no fault can be found on the part of the Council concerned.
Talking to a friend at the weekend, he pointed out that the credit ratings on the Icelandic banks shifted in an unfavourable way earlier this year. The Times confirms this. They say that on January 30, Moody’s Investors Service warned that it was planning to cut ratings on the main Icelandic banks. It downgraded the biggest, Glitnir, Kaupthing and Landsbanki, from C to C-minus a month later. In April, Standard & Poor’s raised concerns about Glitnir, downgrading it from A-minus to BBB-plus, “the lowest rating at the time of any western European bank”.
Councils claim that they were unaware of the warnings by Moody’s and S&P, following instead the more optimistic ratings by Fitch. However, Mark Horsfield, director of Arlingclose, an adviser to the public sector, said he had long been telling the 45 councils on the firm’s books of the dangers: “These banks have been getting steadily worse for quite a long time.”
That may well have been too late for some Councils who will already have committed themselves to long term investments, but any Council who invested after that date needs to justify why it did so. Clearly, any Councillor serving in an authority in financial crisis as a result of these investments needs to be asking questions:
What sort of investments did the Council have and how much was placed in each account?
When did they make them and for what period?
What advice did they take and which ratings assessment did they use?
Was due diligence exercised?
Does the Council's investment policy include a wide-range of checks on institutions before commiting money and if not, why not?
If investments were made subsequent to January 3oth 2008 then why were warnings by experts ignored?
Has a thorough review of other Council investments been instigated and money moved to safer havens? If not, why not?
I am sure that there are many other questions that need answering as well but these are the general ones that immediately come to mind.
In addition to probing due diligence Councillors will no doubt also be asking what the impact of a potential loss of investments will have on services. One paper suggested this morning that some of the investments may well have been capital and that therefore their loss would not affect service delivery. With all due respect that is nonsense.
Councils generally borrow to pay for capital projects. If they have stored that money in a high-interest paying bank until it is needed and that account is frozen they may not be able to complete the project. The Council will have to find the money from elsewhere, they will still need to pay interest on the loan and they will lose interest on the investment that will have been budgeted for as part of their revenue expenditure.
In some cases the frozen investment may be reserves which means that it is not needed straight away but there will still be a loss of income from interest. In other cases the money may be cash earmarked for salaries or other payments.
In all of these examples there will be an impact on frontline services. It is the role of scrutiny to get to the bottom of that and hold the Executive to account. Once a full picture has been built up then there may be a plea to Government to assist.
I expect a lot of emergency scrutiny committees to be convened over the next few days. If these meetings do not take place then Ministers will be entitled to ask 'why not?'
Talking to a friend at the weekend, he pointed out that the credit ratings on the Icelandic banks shifted in an unfavourable way earlier this year. The Times confirms this. They say that on January 30, Moody’s Investors Service warned that it was planning to cut ratings on the main Icelandic banks. It downgraded the biggest, Glitnir, Kaupthing and Landsbanki, from C to C-minus a month later. In April, Standard & Poor’s raised concerns about Glitnir, downgrading it from A-minus to BBB-plus, “the lowest rating at the time of any western European bank”.
Councils claim that they were unaware of the warnings by Moody’s and S&P, following instead the more optimistic ratings by Fitch. However, Mark Horsfield, director of Arlingclose, an adviser to the public sector, said he had long been telling the 45 councils on the firm’s books of the dangers: “These banks have been getting steadily worse for quite a long time.”
That may well have been too late for some Councils who will already have committed themselves to long term investments, but any Council who invested after that date needs to justify why it did so. Clearly, any Councillor serving in an authority in financial crisis as a result of these investments needs to be asking questions:
What sort of investments did the Council have and how much was placed in each account?
When did they make them and for what period?
What advice did they take and which ratings assessment did they use?
Was due diligence exercised?
Does the Council's investment policy include a wide-range of checks on institutions before commiting money and if not, why not?
If investments were made subsequent to January 3oth 2008 then why were warnings by experts ignored?
Has a thorough review of other Council investments been instigated and money moved to safer havens? If not, why not?
I am sure that there are many other questions that need answering as well but these are the general ones that immediately come to mind.
In addition to probing due diligence Councillors will no doubt also be asking what the impact of a potential loss of investments will have on services. One paper suggested this morning that some of the investments may well have been capital and that therefore their loss would not affect service delivery. With all due respect that is nonsense.
Councils generally borrow to pay for capital projects. If they have stored that money in a high-interest paying bank until it is needed and that account is frozen they may not be able to complete the project. The Council will have to find the money from elsewhere, they will still need to pay interest on the loan and they will lose interest on the investment that will have been budgeted for as part of their revenue expenditure.
In some cases the frozen investment may be reserves which means that it is not needed straight away but there will still be a loss of income from interest. In other cases the money may be cash earmarked for salaries or other payments.
In all of these examples there will be an impact on frontline services. It is the role of scrutiny to get to the bottom of that and hold the Executive to account. Once a full picture has been built up then there may be a plea to Government to assist.
I expect a lot of emergency scrutiny committees to be convened over the next few days. If these meetings do not take place then Ministers will be entitled to ask 'why not?'
Comments:
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Any portfolio should have a variety of investments; if its your own personal portfolio they you can take "risks", if it's the publics portfolio of investments, then if you take risks you've got to be held to account if things go pear shaped.
Clearly over the past six months or so, there have been signs in the financial markets, the likes of the privatisation of Northern Rock was a clear sign that all was not well.
I'm not sure why Local Authorities and Police Authorities in England and Wales have invested in an Icelandic Banks, couldn't they invested in British Banks, or Corporate Bonds issued by British Companies?
Why weren't they keeping an eye on the Standard and Poor's rateing for these investments - they are accountants after all handling these investments.
The letter to the Wales Audit Office is in the Post.
Clearly over the past six months or so, there have been signs in the financial markets, the likes of the privatisation of Northern Rock was a clear sign that all was not well.
I'm not sure why Local Authorities and Police Authorities in England and Wales have invested in an Icelandic Banks, couldn't they invested in British Banks, or Corporate Bonds issued by British Companies?
Why weren't they keeping an eye on the Standard and Poor's rateing for these investments - they are accountants after all handling these investments.
The letter to the Wales Audit Office is in the Post.
# posted by 
: 10:39 AM
: 10:39 AM
A very sensible post which echoes the comments I made on Radio Wales on Friday morning. There can be no blank cheque for local government. It is quite clear from today's Western Mail that Caerphilly ,for example, invested over £15 million as late as July this year. This raises serious questions about the advice given by the council's financial advisers and the reaction of members and officers to this advice. The Leader of the Council claims that he knew absolutely nothing about the investments. I believe him but the real issue is that he should have known and again this raises serious questions about the effectiveness of the cabinet system in local government.Leaders and cabinet members in many authorities are now full time politicians earning considerable sums of money. I would have expected regular reports regarding council investments to have been given to at least the cabinet member for finance and the Leader. You are also right when you state that there will be a knock on effect on budgets. At the minimum the interest from these investments will not be available. Given the recent difficult settlement from the Assembly for local government and the fact that capping of council tax at 5% seems to be the order of the day,cuts seem to be inevitable.
# posted by : 10:41 AM
: 10:41 AM
I'm not sure why Local Authorities and Police Authorities in England and Wales have invested in an Icelandic Banks
As Cllr Aled Roberts pointed out yesterday, speaking to an emergency motion at Welsh Liberal Democrat autumn conference at the weekend, there are all sorts of pressures, direct and indirect, from central government to use balances to provide income from interest. Icelandic banks, of all Treasury-approved institutions, gave some of the highest interest rates available at the time.
It should be said that Cllr Roberts, LibDem leader of Wrexham council spoke disinterestedly. Wrexham, on independent advice, had got out of its Icelandic investments in good time.
As Cllr Aled Roberts pointed out yesterday, speaking to an emergency motion at Welsh Liberal Democrat autumn conference at the weekend, there are all sorts of pressures, direct and indirect, from central government to use balances to provide income from interest. Icelandic banks, of all Treasury-approved institutions, gave some of the highest interest rates available at the time.
It should be said that Cllr Roberts, LibDem leader of Wrexham council spoke disinterestedly. Wrexham, on independent advice, had got out of its Icelandic investments in good time.
There is now a suggestion that STS, a division of Capita, acts as an advisor on these matters to some councils. I would be grateful for more information this.
Where does JJ, with his knowledge of Local Government thing the money will be coming from? Serious question - increased council taxes?
While I understand that Bridgend CBC pulled out of Icelandic Banks roughly a year ago (when it was a Lib Dem run coalition), similar picture in Wrexham, as highlighted by Cllr Frank Little above; so there shouldn’t be too much of an effect on the Council Tax payers in Bridgend, except the police have been caught out as well.
While South Wales Police have possibly lost £7 million (population covered by the South Wales Police Authority is around 1¼ million people, loss will be much smaller per head of population £5.60), it does mean that Council Tax payers in Bridgend County could still be picking up a bill.
We have seen a decrease in the amount of funds that WAG have decided to give to the 22 local authorities in Wales, many LAs were probably relying on these reserves in these Icelandic Banks to balance the books.
While I understand that Bridgend CBC pulled out of Icelandic Banks roughly a year ago (when it was a Lib Dem run coalition), similar picture in Wrexham, as highlighted by Cllr Frank Little above; so there shouldn’t be too much of an effect on the Council Tax payers in Bridgend, except the police have been caught out as well.
While South Wales Police have possibly lost £7 million (population covered by the South Wales Police Authority is around 1¼ million people, loss will be much smaller per head of population £5.60), it does mean that Council Tax payers in Bridgend County could still be picking up a bill.
We have seen a decrease in the amount of funds that WAG have decided to give to the 22 local authorities in Wales, many LAs were probably relying on these reserves in these Icelandic Banks to balance the books.
# posted by : 2:32 PM
: 2:32 PM
To answer Frank councils who appoint external Treasury advisers do so via the procurement process. Contracts are normally for 3 years. Sector is one of the firms involved .Others include Arlingclose, Butlers and Sterlings. Most authorities publish each year a public report on Treasury management for their cabinet or executive board which often includes a list of the counterparties that the councils has decided to invest with. Most spread their money around. One English district, for example, has about £5million invested in 5 building societies. The fact that some councils are not involved with Icelandic banks has nothing whatsoever to do with the politcal complexion of the councils concerned. I doubt if any councillor in either Bridgend or Wrexham would have taken much interest in where the money was invested. As for the future in terms of council tax rises and cuts.Even before all of this the settlement was pretty poor. To make matters worse since last year was the run up to an election many councils would have artificially kept down the council tax increase. Others would also have postponed unpleasant cuts until after the election. Hence the street lighting cuts in Powys which are now being implemented. My view is that on a council by council basis many will face council tax increases close to the 5% capping limit and cuts. Given the long term outlook for public expenditure the next few years could be very difficult for local government. The problem unfortunately for many is made worse by the fact that they are so small and their room for manoeuvre is often pretty limited. It was far easier to manage cuts in a council the size of Mid Glamorgan than Merthyr.
# posted by : 4:43 PM
: 4:43 PM
Banking crisis: Councils 'ignored warnings over Icelandic banks'
Daily Telegraph 9th Oct.
Local government leaders have argued that councils could not have foreseen the risks involved in the Icelandic financial sector when they invested public money.
But The Daily Telegraph has established that some local government managers did act on warnings from international credit ratings agencies that the Icelandic banks were becoming less secure.
In February, Moody’s Investors Service cut its ratings on all the major Icelandic banks. Landsbanki’s long-term rating was downgraded “in light of the weaker credit environment.”
In May, Fitch, another agency, cut the ratings of Glitnir Bank and Kaupthing Bank. Standard & Poors said it had only rated one Icelandic bank, Glitnir, and had cut its rating from A- to BBB+ in April.
Martin Winn, a spokesman for the agency said: “We have been highlighting a growing risk about the Icelandic banking system since February 2007. The rating BBB+ is very high risk for a Western European bank.”
Those warnings were passed on to many local council financial managers, prompting some to stop investing in Iceland.
Hat Tip: Liberal England.
Daily Telegraph 9th Oct.
Local government leaders have argued that councils could not have foreseen the risks involved in the Icelandic financial sector when they invested public money.
But The Daily Telegraph has established that some local government managers did act on warnings from international credit ratings agencies that the Icelandic banks were becoming less secure.
In February, Moody’s Investors Service cut its ratings on all the major Icelandic banks. Landsbanki’s long-term rating was downgraded “in light of the weaker credit environment.”
In May, Fitch, another agency, cut the ratings of Glitnir Bank and Kaupthing Bank. Standard & Poors said it had only rated one Icelandic bank, Glitnir, and had cut its rating from A- to BBB+ in April.
Martin Winn, a spokesman for the agency said: “We have been highlighting a growing risk about the Icelandic banking system since February 2007. The rating BBB+ is very high risk for a Western European bank.”
Those warnings were passed on to many local council financial managers, prompting some to stop investing in Iceland.
Hat Tip: Liberal England.
# posted by : 8:38 AM
: 8:38 AM
In addition to making cuts in services, there are otherways that Local Authorities have of creating revenue. NPT was well known for its Private Traffic Wardens, and the revenue that raised.
Selling off Council Houses / offloading to agencies like V2C may be one option for cash starved LAs in Wales, in addition to selling off land.
As JJ pointed out, WAG have capped Council Tax rises to 5% their coffers have been drained by the Icelandic Banks fiasco, they will have to raise money somehow.
Selling off Council Houses / offloading to agencies like V2C may be one option for cash starved LAs in Wales, in addition to selling off land.
As JJ pointed out, WAG have capped Council Tax rises to 5% their coffers have been drained by the Icelandic Banks fiasco, they will have to raise money somehow.
# posted by : 8:45 AM
: 8:45 AM
It is now clear from reading the financial press that the excuse given by some councils that the credit ratings for Icelandic banks were good is beginning to unravel. Standard and Poor's only ever rated one Icelandic bank Glitner and this was downgraded to BBB+ with a negative outlook. It was the lowest credit rating of any bank in Western Europe.In March both Fitch and Moody's were already warning of systemic risk in the Icelandic banking system. In 2004 the Treasury rules were changed to allow councils greater freedom with regard to investment. But there was still an emphasis on security and liquidity before rate of return. Many councils also have rules which limit any investment to about £3million in any one financial institution. I can only assume that those councils that have invested millions were motivated by the desperate need to gain revenue for this year's budget and a belief that in a modern economy banks never go bust. In the future all councils must ensure that the annual Treasury management report is not just nodded through. It should be handed over to either the Audit Committee or the Corporate Resources scrutiny to ensure that the Council's finance officers know that they will have to justify their actions in a public forum. This process will also help all councillors to build up their knowledge of local government finance. As the old NUM slogan rightly argued 'Knowledge is Power'. Without the knowledge you might be in government but you are not in power.
# posted by : 8:45 AM
: 8:45 AM
Jeff Jones said: Most authorities publish each year a public report on Treasury management for their cabinet or executive board which often includes a list of the counterparties that the councils has decided to invest with.
Maybe the Audit Committee should see this as a matter of course. The drawback is that the names of counterparties will probably change through the course of the year.
Maybe the Audit Committee should see this as a matter of course. The drawback is that the names of counterparties will probably change through the course of the year.
One of the problems in local government which external auditors often point out in their management letters is that local government is pretty poor when it comes to risk assessment. In today's LGC Essex CC points out that its revised risk policy ruled out any investing in Icelandic banks. Essex points out that as well as agency ratings, councillors have to take into account separate assessments of individual orgainsations' financial strength and the support available to them if they fail. Too may councils have also given Finance officer delegated powers in my opinion. It might have made sense in the old committee system . It make no sense what soever with the introoduction of cabinet systems in local government. I was amazed to be told that in Bridgend council yesterday the Finance Officer and not the cabinet member made a statement on the whole issue. Treasury reports should be given to cabinets on a quarterly basis and the electorate have the right to know where their money is being invested.
# posted by : 12:23 PM
: 12:23 PM
"....I was amazed to be told that in Bridgend council yesterday the Finance Officer and not the cabinet member made a statement on the whole issue. Treasury reports should be given to cabinets on a quarterly basis and the electorate have the right to know where their money is being invested."
Totally agree with you Jeff.
Now a quote from the Aberafan and Neath Lib Dems blog following yesterday's council proceedings in Neath Port Talbot:
"...Firstly, there was no direct answer to the question tabled by Cllr Keith Davies, about the whereabouts of the council investments not placed with Icelandic banks already named. The council has something over £80m on deposit, £20m of which we now know to be frozen in Icelandic bank deposits, either off-shore or in UK subsidiaries. Where is the other £60m+ deposited? There was no direct refusal to answer the question, just an evasion each time it was put. It was implied, but not directly stated, that Cllr. Davies will receive an answer in writing. We are not holding our breath."
;-)
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Totally agree with you Jeff.
Now a quote from the Aberafan and Neath Lib Dems blog following yesterday's council proceedings in Neath Port Talbot:
"...Firstly, there was no direct answer to the question tabled by Cllr Keith Davies, about the whereabouts of the council investments not placed with Icelandic banks already named. The council has something over £80m on deposit, £20m of which we now know to be frozen in Icelandic bank deposits, either off-shore or in UK subsidiaries. Where is the other £60m+ deposited? There was no direct refusal to answer the question, just an evasion each time it was put. It was implied, but not directly stated, that Cllr. Davies will receive an answer in writing. We are not holding our breath."
;-)
# posted by : 9:11 AM
: 9:11 AM<< Home
