Editorial: The Iceland affair has been an unfortunate distraction

The accelerating pincer movement of falling donations and increasing demand has been bad enough for the voluntary sector, but the news that some charities have also lost thousands or even millions of pounds in failed Icelandic banks has made matters significantly worse.

Hardest hit, obviously, are those directly affected by the losses. But all charities will now to some extent be linked in the public mind with the kind of ill-judged investment earlier associated mainly with local authorities. Donors are unlikely to be impressed.

As the news broke last week, it quickly became clear that charities that had lost money in Iceland were - with a handful of exceptions - desperate not to be identified. Cats Protection and Naomi House Children's Hospice were among the few to volunteer the fact that they had been caught. Presumably those keeping quiet are hoping that compensation, either from UK taxpayers or from an eventual seizure of Icelandic assets in the UK, will arrive to limit the reputational damage before they are required to say what has happened in their annual accounts. This silence extends to the survey being conducted by the umbrella bodies to discover, on behalf of the Government, which charities have suffered and would therefore qualify for compensation: names will not be revealed.

This reticence is understandable, but is it wise? Which charity is more likely to retain the confidence of its stakeholders in the longer term - the one that owns up now to poor judgement and pledges to do better in future, or the one that has the news seep out later and ends up looking evasive and less than transparent?

The brighter side is that the sector can at least be reasonably confident that the charities affected will not lose their investments altogether. If the Government is going to make sure local authorities do not suffer for their poor judgment over Icelandic banks, it would be very difficult in political terms for it to avoid doing the same for charities. One problem is that this affair might make it more difficult for the sector's leaders to persuade the Government to come up with an emergency financial package that could help the sector to escape the aforesaid pincer movement. In that sense, Iceland has been an unfortunate distraction from the more important business in hand.

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