Next steps in Icelandic asset recovery

Local authority coffers should see some £1bn in inflows from failed Icelandic banks, but when the funds will arrive, and what councils will do with them next, is unsure.

The money deposited in four Icelandic banks that went bust should be returned after the country’s Supreme Court ruled that local authorities have priority creditor status. However the ruling is far from being an ending to what has already been a two-year battle.

One of the problems facing local authorities is that the assets of the Icelandic banks are still with the administrators. “At least some of the funds coming back will be denominated in Krona,” said Mark Horsfield, founding Director of treasury consultant, Arlingclose. “Banks hold assets in a wide variety of currencies, and with a disorderly failure this kind of thing is inevitable.”

Not only will the funds be in Krona and other currencies, but much of them – especially in the case of Landsbanki – have yet to be realised. Around 70% of the banks’ assets are in property around the world which the administrators will have to sell. As with any winding up, the process is likely to take a few years.

A further problem comes with the fact that Krona can only be converted with the permission of the Central Bank in Reykjavik. Five to ten percent of the £1bn is in the Icelandic currency.

“We’re hoping it won’t be long before we know when local authorities will receive the money,” said a senior source close to the court case. “Glitnir has sufficient cash to pay out in full and Landsbanki has 30% in cash. The good thing is that the local authorities have priority creditor status now.”

There is still some worry over whether the decision for the test cases will be extended to all. At Northumberland County Council, which had £23m deposited, Councillor Andrew Tebbutt, executive member of corporate resources, said: “We have heard that the test cases have been successful and we await confirmation from the winding up boards of both banks that they will apply the Supreme Court decision to the non-test cases and/or their intended next steps. Until that time it would be premature to speculate what the implications are for Northumberland County Council.” A spokesman for the London Borough of Barnet Council, with had £20m with the banks, agreed that it was waiting for the decision to be applied to the non-test cases.

Investing the money will present an interesting exercise for finance departments. Markets are arguably even more distressed than in 2008 when the Icelandic banks went bust. With Europe teetering on the edge of another banking crisis, candidates for placement of funds will have to be chosen with extreme care.

“They will probably go into UK government, the debt office, they may pay down debt and some of it might end up in the likes of Lloyds and RBS,” said Horsfield. “People are operating in extremely defensive mode and that will continue.”

The senior source added that authorities may be in for a wait: “The thing is to first get your money back. Local authorities have plenty of places they could put it, but it is fair to say that they all now have a treasury policy that has learned from previous issues.”