Panic begins to spread among charities as scale of losses sinks in

Panic begins to spread among charities as scale of losses sinks in

A British government delegation will meet Icelandic officials and bankers today in an attempt to protect UK depositors from the collapse of the islands' banking system.

The talks, involving lawyers from the Treasury, Financial Services Authority and the Bank of England, comes as the crisis threatened to tear a hole in the finances of numerous British charities from the Samaritans to Cats Protection. Across the sector potential loses rose to an estimated £120m with at least 20 charities affected and the Association of Chief Executives of Voluntary Organisations (ACEVO) admitting that "panic" was spreading.

Paul Palmer, professor of voluntary-sector management at Cass Business School, said that in a worst-case scenario, charities could lose £1bn. Yesterday he was among charity leaders at a crisis meeting with Paul Myners, minister for the City, who disappointed charities by failing to offer government cover for their losses. Myners said the Treasury would work with the Foreign Office and the Ministry of Justice to try to retrieve deposits.

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In Reykjavik, the delegation will try to ensure that all UK creditors can make claims as quickly as possible and to set a timetable to lessen the impact of a situation that is worsening by the day.

"The government has taken decisive action to support this process, including freezing assets in Landsbanki [one of Iceland's biggest banks]," a Treasury spokesman said. "We continue to work closely with the Icelandic government to ensure this is resolved as quickly as possible."

The Samaritans said it was monitoring "very closely" the £1.5m it had invested in Kaupthing Singer & Friedlander, which went into administration this week. At least one charity had all its reserves in Icelandic banks and five more had more than 50%, said ACEVO, which described the situation as "extremely bad".

"Charities, unlike local authorities, can go bust and if you lose a fifth of your reserves you are in trouble," said Stephen Bubb, chief executive. "I am picking up a real sense of panic from charity chief executives about where this is going."

The Icelandic crisis puts a new squeeze on finances in the voluntary sector, which is already suffering from falls in donations as a result of the wider credit crunch. At the same time, demand for services is rising as economic conditions worsen. Several charities have reported the loss or threatened loss of grants and agreements with local authorities, which in turn have lost money deposited in Icelandic banks.

On Thursday the Local Government Association said local authorities stood to lose £798.95m from deposits in Icelandic banks. That figure is set to rise when council leaders meet Treasury officials next week to demand emergency aid. Losses faced by London boroughs, Transport for London and the Metropolitan Police Authority rose to £219m yesterday.

Ministers said they may relax borrowing rules for local authorities to allow them to mortgage assets such as town halls. Worst affected are Kent county council and Nottingham city council, which have £50m and £41.6m respectively in deposits with Glitnir Bank, Landsbanki and its UK subsidiary Heritable. TfL has £40m deposited with Kaupthing Singer & Friedlander.

Many of the largest charities appear unaffected by the Iceland crisis, which has sparked criticism that smaller charities were "seduced" by the high returns offered by Icelandic banks when professional fund managers saw them as too risky. Oxfam, Cancer Research UK, Action Aid, RNLI, NSPCC, the National Trust, Action for Children and Save the Children told the Guardian they had no investments with the stricken banks.

"It is very difficult for charities desperate for income to do their good work not to be affected by slick advertising campaigns," said Michael Quicke, chief executive of CCLA, which manages £45bn for charities. "CCLA does not have any funds with the Icelandic banks ... We were concerned how Iceland with its very small population acquired so many assets internationally and it was clear the capacity of a central bank to stand behind a country's banking system is limited by the tax base of the population."

The Cats Protection charity confirmed yesterday that it had £11.2m deposited with Kaupthing Singer & Friedlander. "The day-to-day care of our cats is unaffected," said a spokeswoman. "The deposits held by KSF were earmarked for long-term projects only and to provide a safety net in case of real emergencies."

Naomi House Children's Hospice in Sutton Scotney, near Winchester, has £5.7m of deposits invested with KSF, while the Physiological Society in London confirmed that it had £523,000 invested with the same bank.

guardian.co.uk © Guardian Newspapers Limited 2008