Wednesday, October 8, 2008

Credit Crunch

It appears that the credit crunch problems have taken a significant turn for the worse this week, and there are now serious problems that are likely to have terrible effects on many businesses and households. Politically it is a very strange situation where politicians need to forget their normal general principles, be they from the centre-right (laissez-faire) or the centre-left (state intervention), as the situation is so unusual it is far from clear what the right thing to do is.

As a result of the apparant complete collapse in Iceland's banking system, many local Councils appear to have financial assets at risk. Earlier today I wrote to the Director of Finance at the City Council to ask:

Does the Council have any financial exposure to Icelandic banks or any other institutions affected by the credit crunch?
Are any such institutions on our approved list of banks?
Have any reviews been undertaken of our approved list of banks in light of the current financial situation?

It is unlikely there is an immediate problem - which would require some urgent clarification from the Government as to the extent of guarantees announced by the Governments of the UK and Iceland relating to deposits in Icelandic banks, but even if there hasn't been a problem so far, I think the Council (which is currently debt free) needs to look at the counterparties it is prepared to hold money on deposit with and assess the risk to the Council of possible defaults and what action can be taken to mitigate these risks.

No comments: