In These New Times

Council deposits in low interest Treasury accounts have soared as finance directors sacrifice high returns for safety, following the Icelandic banking crash.

Local Government Chronicle

26th February, 2009

Figures obtained by LGC reveal councils are continuing to place billions of pounds in the Debt Management Account Deposit Facility (DMADF) as commercial banks are deemed too risky.

In the wake of the freezing of Iceland accounts, council deposits in the facility jumped from £1.9bn in September to £8.7bn in October. It appears councils are continuing to shun commercial banks, with £7.9bn being deposited in the DMADF in January — seven times the level of a year earlier.

The account, run by the Treasury’s Debt Management Office, carries the government’s sovereign AAA rating — the highest available security, making it particularly attractive in troubled times. Interest rates offered by the DMADF track the secured market rate, which can be below the Bank of England 1% base interest rate.

Institute for Fiscal Studies deputy director Carl Emmerson said: “Clearly local authorities have decided to go for a lower risk and lower expected return approach to looking after their taxpayers’ money.

“We can expect councils to have a little less to spend in future, with a lower return, but we can also be more certain that they don’t suffer large losses.”

Earlier this month the Local Government Association said that councils across England could already expect to be more than £600m worse off than last year because of the interest rate cuts.

PricewaterhouseCoopers local government partner Chris Buttress said: “The figures indicate that local authorities have reacted to the market conditions by moving to shorter-term investments that are more flexible. With interest rates so low, they are not making good returns elsewhere and are opting for the security the government offers.”

Barking & Dagenham LBC chief executive Rob Whiteman said: “Because interest rates are so low, many authorities will be trying to restructure debt, holding money in DMADF while they do so.”