Not much unites the Arctic outpost of Narvik and the sunshine state of Florida. Except their troubled finances – courtesy of the US housing bust. On Thursday, Florida temporarily froze redemptions from its state-run Local Government Investment Pool, a $17bn money market-like facility for local districts, to prevent a run on deposits.

It followed news that Narvik and three other remote Norwegian towns had lost a bundle on investments in complex securities sold by Wall Street and undone by the credit turmoil.

A recurring feature of financial crises is the news that supposedly conservative local finance officials have invested public money in the more esoteric end of the markets. In Florida, it emerged earlier this month that the LGIP contained some supposedly high-grade mortgage- backed securities, purchased from the likes of Countrywide Financial, that had been downgraded. On Thursday state officials highlighted $1.5bn of securities as being at risk. One whiff of subprime exposure was enough to cause Florida’s Orange County to withdraw the $360m it had in the LGIP. Other districts followed suit, and $10bn – 37 per cent of the pool – was withdrawn in the space of two weeks.

The local implications are bad enough. Unlike the larger Orange County, some smaller districts will have a big chunk of their liquid funds tied up in the LGIP.

There are broader ramifications to consider. That localities in places as far apart as Florida and Norway have been burnt by the housing-related credit squeeze in the US is a reminder of the potential for contagion. More importantly, it shows how the problems are still spreading slowly through the financial system. With new bombs continuing to go off in unlikely places, it looks increasingly clear that the credit crisis still has a way to run – and plenty more opportunity to inflict damage on the real economy.

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