From the Financial Times:
Cool under fire: Iceland takes the fight back to finance
On a gloomy North Atlantic evening in January, a group of international hedge fund managers gathered in the stylish bar of 101 Hotel in downtown Reykjavik at 8pm for a drink before dinner. They had been flown to Iceland by Bear Stearns, the US investment bank that two months later had to be rescued. Bear had organised the excursion to discuss the bizarre state of Iceland’s economy. What transpired at this dinner has entered into legend within Iceland’s close-knit financial community.
An executive who works with a big Icelandic bank recalls: “Upon entering the bar I was approached by one of the hedge fund managers. He informed me that all people in this party – except for him, of course – were shorting Iceland.” The executive says the fund manager described Iceland’s profit-making potential as the “second coming of Christ”.
“As dinner progressed – some people actually decided not to eat at all but just sit at the bar – and more drinks were downed, the conversation and questions started to get more hostile and short positions openly declared,” the executive says.
What started as an alcohol-fuelled evening has become a full-blown investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsson, director-general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumours about the Icelandic banks and financial system in order to profit from it”.
...The country has the second highest interest rates in Europe after Turkey’s 15.25 per cent and its current account deficit puts it in the same league as volatile, high-growth economies in the Baltic and central and eastern Europe. Banking-sector borrowing is also high by international standards.
But these outwardly negative numbers, as Halldor Kristjansson, chief executive of Landsbanki, points out, require further analysis. The current account deficit, for example, is set to contract sharply once exports from new aluminium smelters start in the next few months. This will alleviate pressure on the krona and bring inflation back to within the central bank’s target range next year, it is forecast. Interest rates are expected nearly to halve to about 8 per cent in 2009 as economic growth slows to under 4 per cent....MUCH MORE