Spending watchdog linked to Iceland

The government's watchdog that polices spending across the public sector itself placed millions of pounds in Icelandic bank accounts, Whitehall sources claimed last night.

The Audit Commission refused to deny it had up to £10m frozen in Reykjavik as news of its deposits spread.

Civil servants were yesterday joking that they should send in a "crack taskforce" to sort out the commission, which was set up to "promote value for taxpayers". The revelation will be a huge blow to the credibility of the body, which is the self-proclaimed champion of austerity within central and local government.

A spokeswoman for the Audit Commission said she could not comment. "We're putting together a statement for tomorrow," she said. "I'm not in a position to confirm anything at the moment."

The admission will bolster the defence of other public bodies - such as councils, police authorities and housing associations - that argue their decision to save in Iceland was good practice.

Wyre Forest district council last night admitted it was one of three councils identified by the Local Government Authority as financially vulnerable because of the Icelandic meltdown.

Plymouth city council, which has £13m tied up in three Icelandic banks, said it planned to borrow an extra £9m to cover its budget shortfall. Uttlesford district council confessed to placing £2.2m with Icelandic banks - more than a fifth of its annual budget. Emergency teams of finance experts have been sent to the trio of local authorities to help with their immediate cashflow difficulties.

Financial specialists are also helping another 10 councils thought to be at risk, although the LGA insisted there would be no job losses or cuts to frontline services.

After the nationalisation last week of Glitnir, Landsbanki and Kaupthing, it emerged that 116 local authorities had placed £858m in deposits in these Icelandic banks.

John Healey, local government minister, met LGA leaders yesterday to discuss the crisis.

In spite of the UK government freezing £4bn of Landsbanki assets last week, it is not yet clear how much compensation will be due for those whose money has been frozen in Reykjavik.

Alistair Darling, chancellor, has guaranteed the estimated £4.5bn of savings by individuals who have UK accounts with Icesave, Landsbanki's internet subsidiary. However, institutions trying to recover their deposits will be placed in a queue with other creditors.

"The government continues to work with the Icelandic authorities to ensure a fair deal for all UK depositors," ministers said last night in a joint statement with the LGA. "The government and the LGA will continue to work with the administrators and the Icelandic authorities to get the best and most rapid resolution of the situation."

The LGA has advised any council with serious cash problems to refuse to pass on business rates to central government. But this is likely to prompt an angry reaction in Whitehall.

Opposition parties have led calls for the government to reveal the full list of councils that have money frozen in Iceland. Eric Pickles, shadow local government minister, urged ministers to put numbers "out in the open" to prevent people from being "unduly concerned and worried about cuts in services and reliability".

Some councils have blamed ratings agencies for failing to downgrade Icelandic banks quickly enough as the situation deteriorated. The agencies say they gave sufficient explicit warnings.

Julia Goldsworthy, Liberal Democrat, said: "I think people will be very concerned that initially we were told that no council had done anything reckless and no one would suffer short-term problems, and now we are being told that some people might."