MINISTERS have rejected a bail-out for the city council and other authorities with cash frozen in collapsed Icelandic banks.
The Government insisted the cash was not lost but "at risk", and said it was too early to say how much money would be clawed back from the failed institutions. Until the scale of the loss was clearer, it was also not possible to predict what the impact would be on future council budgets.
Plymouth has £13million locked up in three collapsed Icelandic banks.
Ministers said yesterday there was no evidence local authorities had acted "recklessly" in investing in the banks.
City council Cabinet member Ian Bowyer called on the Government to guarantee councils' deposits in British banks, which would allow councils to invest with confidence and help the banks' cashflow.
On a daily basis we're trying to manage down the risks", he said. "We've set a limit to the amount of money in overseas banks, but in this global economy banks we look on as British aren't necessarily so – like Abbey, which is owned by the Spanish Santander Group."
Mr Bowyer, Cabinet member for budget and revenues, said: "There's a high degree of risk around the British economy at the moment so there's no certainty that our banks are as safe as houses.
"We're confident that the impact on Plymouth in this financial year will be minimal and we'll be able to manage it, but next year and in subsequent years I suspect the impact will be greater.
"We'll obviously lose interest on the city's money as a result of taking a more cautious approach to investing."
Communities Secretary Hazel Blears told a Commons select committee 123 local authorities had a total of £920million in the collapsed institutions, but insisted: "This is not lost. It's at risk."
She insisted investment advice provided by the Government had been "entirely proper" and local authorities were "informed investors" adding: "You're not talking about an old woman with money under the bed."
A delegation from the Treasury, which seized the UK assets of the collapsed Landsbanki institution, has visited Iceland to discuss how deposits could be protected. The UK has also given the Icelandic firm a £100million loan, secured against those frozen assets, to allow it to keep operating while a solution is found