He told the communities and local government select committee that councils needed to take responsibility for past investment decisions.
Asked if capitalising the liabilities was an option, Mr Healey said: “The short answer is no. Local authorities are informed investors and should take responsibility for the investments they take.
“All the local authorities with money in Iceland have been able to maintain commitments to staff and services - no local authority has fallen over because of Iceland.”
Local Government Association Liberal Democrat group leader, Richard Kemp said the government was making “a serious error” and council services could be affected, especially those of district councils.