Belt-tightening council bosses have warned they could have to dip into their reserves after the government refused to allow them to borrow up to �10m to cover losses caused by the collapse of Icelandic banks.

Belt-tightening council bosses have warned they could have to dip into their reserves after the government refused to allow them to borrow up to �10m to cover losses caused by the collapse of Icelandic banks.

Norfolk County Council, which is looking to make �115m worth of savings over the next three years, was hit by the collapse of Iceland's banks last year - with �32m invested in three banks.

Last month the council hit a snag in getting that cash back after one bank, Glitnir, said it would treat councils as general unsecured creditors, in contrast to other banks which have agreed to give them priority status, which meant councils would only get back about a third of the cash invested in that institution.

County Hall, which has �7.5m invested in Glitnir, said then its forecasts for how much it could recover had fallen from �29.3m to �23.6m.

The authority asked the government if it could make a long-term borrowing of just over �10m to cover the possible losses - only to be refused permission because other councils were in bigger trouble.

But leaders were quick to stress the refusal would not affect the authority's proposals for a lowest ever council tax increase of 1.9pc.

Ian Mackie, cabinet member for finance and performance, said: “We sought permission from the government before Christmas to effectively borrow up to �10.2m on a long term basis to cover potential losses relating to funds deposited in Iceland.

“We have now learned that our request has been refused because available resources must be targeted at councils in other parts of the country in the very greatest need.

“While this is disappointing, we have always had other options available to us and these include the possibility of covering any loss in the short-term by drawing from our reserves which stand at almost �44m.

“We will be informing councillors shortly about the government's decision, but there will be no impact on the budget for 2010-11 and nor will there be any need to increase the recommended level of council tax.”

But Mr Mackie said the council remained optimistic it would yet get back the cash it had tied up in Glitnir Bank.

The blow comes at a time when Norfolk County Council keeping a particular close eye on its financial planning, with a controversial finance package looking to plug a �115m funding gap between now and 2013.

The only other councils in Norfolk which lost out because cash was invested in the Icelandic banks were Breckland District Council, with �12m and Great Yarmouth Borough Council, with �2m.

A spokesman for Breckland District Council said the authority had not asked the government for a loan to cover its losses, while nobody was available at Great Yarmouth Borough Council.