Barnet council leader Mike Freer has hit back at accusations of financial mismanagement after the Icelandic banking collapse.
Barnet is set to lose £27.4 million from fixed-term investments in Glitnir and Landsbanki banks if British and Icelandic governments fail to agree a bailout plan.
The figure amounts to £83 for every resident in the borough and represents eight per cent of the £328.8m deposited by the council in banks and building societies around the world.
Only Nottingham invested more pounds per person than Barnet, at £150 per resident.
At least 116 authorities have invested in Icelandic banks. But the Government has refused to treat them in the same way as individual savers and guarantee their savings.
Responding to criticism from Labour and Liberal Democrat councillors, and pressure group TaxPayers’ Alliance, Conservative leader Mr Freer stressed that ratings for the banks by the financial experts Moody’s and Fitch’s were “good” until September.
He said: “No council could have reasonably foreseen the collapse of Iceland’s banks in what once were safe deposits.
“Councils have been actively encouraged, and indeed praised, by Whitehall to undertake investments of this kind. “The Government must take immediate action to identify the scale of the problem and provide certainty for councils and taxpayers.”
A council spokesman said there would be “no immediate impact” on council services or the council’s ability to pay bills, pensions or salaries.
But Susie Squire, campaign manager at the TaxPayers’ Alliance, was adamant Barnet should not have invested the money.
She said: “The taxpayers of Barnet will be shocked to find out their hard-earned money has been risked in this way.
“If the council had enough money to stash millions in savings accounts, it should have been making tax cuts.”
Lib Dem councillor Wayne Casey outlined concerns about the large sums borrowed by the council in the same year it invested in Icelandic banks.
In 2006 to 2007, the council borrowed £110m, putting its total debt at £215.5m. The Icelandic investments were made between November 2006 and September 2007.
Mr Casey said: “If the council wasn’t investing borrowed money, it must at least have been a sum earmarked for paying back our borrowings.
“If this money was extracted from taxpayers, it is just as bad.
“Council tax is raised to spend on services, not to speculate in the markets. If residents want to invest money they can do it themselves.”
The council stressed the money was not borrowed to invest.
Investments over the past three years generated in excess of £25m, reducing the tax burden on average by £220 per household, a council spokesman said.
Professor Ephraim Clark, a lecturer at Middlesex University specialising in political risk analysis, believes Barnet should have pulled out of the contract earlier.
“The basic theory of finance is that if you are getting very high returns, then the risks are very high too,” he said.
“If Barnet is risk averse, which it should be if it is dealing with other people’s money, then it should have got that money out a couple of months ago, when it became apparent that European banks had purchased those lethal American securities.”
But withdrawing the money early was not a viable option, according to the council, because it would have resulted in “severe and unquantifiable penalties”.
The LGA is calling for a Government inquiry into how credit ratings agencies continued to give Icelandic banks high credit ratings until days before they went into administration or receivership.