EXPERTS have warned that Nottingham residents could face increased council tax bills and cuts in services as a result of the Icelandic bank crisis.

Nottingham City Council invested £42m in Landsbanki, Glitnir and Heritable banks.

The council has reassured residents that there will be little impact in the short term.

But the long-term effect will depend on how much money the local authority can get back – and the Government has so far failed to guarantee the investments.

Amanda Ball, a lecturer in public administration at Nottingham Trent University, said: "It will not be easy to compensate for that kind of loss. Ultimately, if a lot of money is lost it will inevitably mean an increase in council tax and a cut in services."

Ms Ball said she did not think councils had been reckless in their lending and they had to conform to strict criteria set down by Government.

Tony Travers, an expert in local government finance at the London School of Economics, said councils would face difficulties if the cash could not be recouped.

He said: "Something has got to give. If it's not council tax then it will be service cuts. What could happen is councils borrow money for 25 years, and it takes 25 years of council tax increases to pay it off."

Councils still hope the Government will cover some of their losses but so far ministers have only pledged to assist on a case-by-case basis where authorities face a crisis – and no handouts are promised.

Professor Peter Cartwright, from the School of Law at the University of Nottingham, said: "It is difficult to tell what will happen at the moment. What could happen is the Government will try to make some kind of adjustment with local authorities in order to minimise the effect."

This could include relaxing rules on borrowing.

The Government has frozen the assets of Icelandic banks in the UK but it is unclear how quickly creditors will be paid.

When the Bank of Credit and Commerce International went down in 1991, 35 councils lost nearly £90m.

And the impact is still being felt – Wigan Council has only just received the £2m it invested with the bank more than 17 years ago.

Coun Graham Chapman, deputy leader of Nottingham City Council, said: "We genuinely think we will get some of this money back even if the Government does not step in. These banks had good credit ratings so they have a decent amount of capital."

Coun Chapman has said he anticipates the city's council tax rise next year will be three per cent, in line with the authority's medium-term plan. Looking ahead, he said extra borrowing would have a minimal impact on council tax during a 25-year period.

He added: "There are many ways of dealing with this other than the council tax. There will be tightening of budgets but the chances are we get some money back."

Meanwhile, the council has asked Nottingham North MP Graham Allen to lobby ministers over the city's position.

He said: "I am working very hard at that. I have been in touch with the Chancellor's office. We want to safeguard money that has been paid in locally. It is very important the Government get stuck in and find a solution acceptable to everybody."

charles.walker@nottinghameveningpost.co.uk