Local authorities poured almost £100m into Icelandic banks for nine months after being warned about the risks of investing in them.

Town hall leaders have claimed that they were told of the dangers only a few weeks ago, leaving them with little time to react.

The councils were told months ago that the banks were being downgraded by credit rating agencies because of fears about their stability, but they still invested another £93m until last Monday when the main Icelandic banks were nationalised.

It is unclear what will now happen to the councils’ £1 billion investments.

Big investors included Dorset county council, which made six loans worth £28.1m to the Landsbanki bank, and Heritable, its UK subsidiary, between April and August. Norfolk county council invested £17.5m this year, including a £5m loan to Glitnir, another bank, on March 20.

The details emerged yesterday as a delegation from the Treasury went to Reykjavik. It made what it called “significant progress” in talks with the Icelandic authorities on accelerating payouts to individual British savers who have an estimated £1 billion in Icesave, a subsidiary of the now nationalised Landsbanki.

Officials expect payments to private savers to begin in about a month. The move does not affect investments made by councils, businesses, charities and other organisations.

Councils have been lobbying the government for help in recovering their money from Iceland, but their position will be harmed by the news that they missed the warnings.

On January 30, Moody’s Investors Service warned that it was planning to cut ratings on the main Icelandic banks. It downgraded the biggest, Glitnir, Kaupthing and Landsbanki, from C to C-minus a month later. In April, Standard & Poor’s raised concerns about Glitnir, downgrading it from A-minus to BBB-plus, “the lowest rating at the time of any western European bank”.

Councils claim that they were unaware of the warnings by Moody’s and S&P, following instead the more optimistic ratings by Fitch.

However, Mark Horsfield, director of Arlingclose, an adviser to the public sector, said he had long been telling the 45 councils on the firm’s books of the dangers: “These banks have been getting steadily worse for quite a long time.”

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