TUESDAY PM UPDATE: Fitch Changes Iceland’s Outlook to Negative
Fitch Ratings has today revised the Outlooks for the Republic of Iceland’s Long-term foreign and local currency Issuer Default ratings (IDR) to Negative from Stable. The Long-term foreign and local currency IDRs are affirmed at ‘A+’ and ‘AA+’ respectively, as is the Short-term IDR of ‘F1′ and the Country Ceiling of ‘AA-’ (AA minus).
The Outlook revisions follow Fitch’s placement today of Iceland’s three largest banks, Glitnir Banki hf., Kaupthing Bank hf. and Landsbanki Islands, on Rating Watch Negative (RWN).
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“They will not get away with it,” thundered David Oddsson, Iceland’s central bank governor.
Iceland, you see, is the latest victim in the global financial system. Speculative attacks on the nation’s banks “give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” the governor added, as he called for an international investigation into alleged attempts to drive Iceland’s economy into the ground.
One question, notes Lex, is whether the record level of the CDS on Iceland’s largest banks actually matters. At this stage, spreads seem to have lost touch with reality as a simple indicator of default probability, and tracking the prices is more of an sport than a science.
But Fitch, on Tuesday, at least gave Mr Oddsson’s angst some underpinnings. The rating agency placed Glitnir, Kaupthing and Landsbanki on rating watch negative, despite the fact that it concedes the business fundamentals of the banks remains sound and liquidity appears comfortable.
While Fitch believes that the three banks’ liquidity is currently sufficient, diminishing confidence in the sector has increased the risk of unanticipated calls on liquidity while severely restricting funding options. Moreover, the recent sharp depreciation of the ISK and the heighted risk of a ‘hard landing’ for the Icelandic economy are likely to adversely impact asset quality and performance….
…Fitch’s review of the banks over the coming weeks will focus on the extent to which they are coping with the effects of a weakening external environment and their ability to withstand a deterioration in the domestic environment. Today’s rating action considers the banks’ increasingly restricted access to funding and potential for additional pressures on liquidity given the current negative market sentiment towards the sector, which has been compounded by the wider problems in the global financial markets.
In other words, the banks’ solvency, or a plain-reading likelihood of default, is only one input here. Ironic then, that Bear Stearns, itself engulfed by a speculative swarm, is one of those against whom Kaupthing is considering legal action, for the role it apparently played in a trip to Iceland by a group of hedge funds last January.
For those who feel a run on a country sounds far fetched, Paul Krugman at the NYT reminds us that such things really do happen. There was almost certainly, during the 1997-98 crisis, a run against Hong Kong whereby hedge funds engaged in a “double play”, shorting both the HK stock market and the currency.
The alleged plan was to put the HKMA in a double bind: it would be forced either to raise interest rates to defend the Hong Kong dollar — driving stocks down — or to devalue the currency. Either way the hedge funds thought they’d make a killing. They were, however, caught in a bear trap when the HKMA did the unexpected and bought up a large fraction of the HK stock market.
Let’s hope, adds Brad Setser, that Norway, which supposedly was shorting Iceland last time it hit trouble, has this time refrained.
After all, Norway’s government fund is meant to be at the warm and fuzzy end of the SWF spectrum.
Related links
Iceland counters alleged attacks - FT.com
Icelandic banks and CDS - Lex
