Tuesday, March 25, 2008

Iceland in Trouble, Central Bank Raises to 15%

UPDATE II: We have a lot of posts on Iceland, use the 'Search blog' box, keyword Iceland.
29Sep08, HERE
(turn down the volume, we've got Led Zeppelin pasted in)
Original Post
This Financial Times story reminded me of a comment on a MarketBeat post.
From the FT:
Concern for Iceland grows after rate rise

Fears that Iceland could be the first country to fall victim of the global financial turmoil grew on Tuesday when its central bank abruptly increased interest rates 1.25 percentage points to 15 per cent in an attempt to restore confidence in its struggling currency and stave off a full-blown economic crisis.

The bank said “deteriorating financial conditions in global markets” had contributed to the emergency move. Confidence in the krona, Iceland’s currency, has been shattered this year because of perceived economic imbalances in the economy and fears the banking sector is in danger of collapse. The krona has weakened by 22 per cent against the euro so far this year.

The rapid weakening of the currency prompted the central bank to adopt unusually blunt language on Tuesday, warning if the decline was not reversed Iceland faced “spiralling increases in prices, wages and the price of foreign exchange”....MORE

The MarketBeat post: March 20, 2008, 4:46 pm
...People tend to worry about some far-off corner of the world causing a 20-car pile-up in the global financial system, after the Asia-led currency crises that roiled markets back in 1997. Fearful types these days are looking at Iceland, where inflation is high, the currency has been stomped of late, and it has a large current account deficit. Speculation about bank failures has investors putting big bets on default in the credit-default swaps market.


Iceland is cold.

And comment:

Financial Crookery had a short post on something called Japanese Accelerated Return Fund II (JAC.L)
and asked:
Q. When are bonds issued by stricken Icelandic banks valued virtually the same as identical instruments issued by Royal Bank of Scotland?

A. When they are valued for the purposes of comforting retail and private client stockbroker investors in structured products, of course….

Comment by Climateer - March 20, 2008 at 5:24 pm
Here's Financial Crookery:
...My example du jour is a Close Asset Management product: Japanese Accelerated Return Fund II (JAC.L). Beneath this exhilarating name hides a payoff profile which is essentially a 180 pence maximum less a 5x geared put spread on the Nikkei expiring in 2012. All well and good; the Nikkei's performance since launch may be poor, but at least investors know how the linkage works.

Where it gets interesting is that the 180 pence maximum is secured on a pool of bonds. Two of these bonds, or 33% of the gross assets of the investment, are issued by the Icelandic banks Glitnir and Kaupthing (who? who indeed). Yet the formal valuations of the bonds at 31 Dec 2007 implied these Icelandic behemoths have virtually the same credit risk as, for example, Royal Bank of Scotland....