A troubled Icelandic bank is holding £4 million of Colchester Council’s money.

Borough finance chiefs were attracted by high interest rates to make the deposit at the start of September – before the crisis facing Landsbanki was known.

Iceland’s second-biggest bank has since been nationalised, with Icelandic ministers looking to rescue the country’s financial system.

Colchester Council’s resources portfolio-holder Paul Smith, a former banker, said the £4 million was less than one per cent of the council’s net worth.

But he added: “I don’t like losing 40p if I can help it. The situation is very unclear at the moment.

“When the money was placed with them on September 1 or 2, it fully met our investment guidelines but that is not the case today.

“It is not due for repayment for a couple of months, hopefully by then things will be resolved.”

In the UK, more than £500 million of savings invested in Landsbanki subsidiary Heritable Bank have been taken over by Reading-based bank ING Direct.

Meanwhile, the Treasury has agreed to guarantee individuals’ savings after the company’s internet arm Icesave defaulted and saw its UK assets frozen.

The Local Government Association has called for deposits made by councils also to be protected.

Chancellor Alistair Darling said: “I know the position of local authorities – I think they’re in a slightly different position in that they are more of an informed investor.”

  • More in today's Gazette