Iceland Contagion May Spread Far And Wide

[Methinkshe]

Iceland contagion may spread far and wide

As Iceland goes, so go the Baltics, the Balkans, Hungary, Turkey, and perhaps South Africa. All are living far beyond their means, plugging the gaping holes in their accounts with fickle flows of foreign finance. All have let credit grow far above the safe "speed limit", some exceeding 50pc a year.

Iceland's precarious economy is a warning to other deficit nations about breaking the safe credit 'speed limit'

For Iceland, the high-wire act of the last five years may have finally reached its limits. The central bank was forced to raise interest rates to 15pc this week in an emergency move to halt the collapse of krona, which has fallen 18pc since mid-March.

The country's all-conquering banks - led by Kaupthing, Glitnir, and Landsbanki - have pushed the asset base of the Icelandic banking system to a world record of eight times GDP, tapping the global capital markets to launch Viking raids across Britain, Scandinavia and beyond.

This spigot of easy credit has now been turned off. The spreads on Icelandic bank debt have risen above 800 basis points, near levels seen in Bear Stearns' debt before the Federal Reserve's rescue. Which raises a thorny question: Is the Icelandic government - which presides over an economy the size of Bristol - big enough to underpin its encephalitic banks if push ever comes to shove?

"There are clearly limits to what the government can do," said Paul Rawkins, an Iceland expert at Fitch Ratings. "If the government tried to raise billions in the markets it would damage its own credit worthiness. In any case, these debts are in foreign currencies. The central bank has just $2bn (£1bn) in reserves," he said.

The banks insist they are well capitalised, with enough liquidity to tide them through to 2009. If the credit crunch subsides, the issue will never be put the test.

But Iceland is more than just a Nordic hedge fund masquerading as a country. It is also the first of the deficit states to succumb to investor flight, sending an early warning signal of potential troubles across a great swathe of Eastern Europe and the Mediterranean.

Turkey is first in line for any stress test, said Neil Schering, an East Europe expert at Capital Economics.

"I wouldn't want to keep any money in the Turkish lira: the puzzle is how it has stayed so high for so long. There are huge imbalances in the economy. The current account deficit is nearly 8pc of GDP, and the chief prosecutor is trying to shut down the government," he said, referring to last week's court move to ban the ruling Islamic AKP party, as well as the president and prime minister, for alleged breach of the country's secular laws.

Turkey has a foreign debt of $276bn. The Istanbul bank YapiKredi says Turkish companies may have great difficulty raising some $48bn of fresh loans needed this year to stay afloat.

Until now the country has been the darling of the yen 'carry trade', offering irresistible yields to Japan's army of investors. But the yen's surge in recent weeks has played havoc with these flows. The unwinding of yen positions has undoubtedly been key factor in the sudden capital flight from Iceland this month.

Fitch said countries that run current account deficits above 10pc of GDP for any length time almost always come to grief. East Asia's debt crisis in 1997 erupted before any state reached double digits. Iceland's deficit is now 16pc of GDP. Latvia is at 25pc, Bulgaria 19pc, Georgia 18pc, Estonia 16pc, Lithuania 14pc, Romania 14pc and Serbia 13pc. The region will need $337bn in foreign loans this year.

Borrowing in foreign currencies was all the rage in the heady days of the credit bubble. Most mortgages in Hungary over the last two years have been in Swiss francs, with the Balkans and Poland not far behind. This is now turning into slow torture. The franc has risen 5pc against the euro since October. The real level of the debt is ratcheting up.

The foreign debts have reached 122pc of GDP in Latvia, 101pc in Estonia and 73pc in Lithuania, mostly in euros. For now the debtors are shielded by fixed exchange rates in Europe's ERM system, but this could make the shock even worse should the currency pegs start to snap.

"It's all looks like a pretty ugly cocktail," said Mr Schering. "The good side is that the Baltic banks are not exposed to toxic mortgage securities, and a lot of them are owned by foreign banks, so they are protected."

Ed Parker, head of Fitch for Eastern Europe, said the agency had already downgraded Latvia to BBB+ and issued a further alert in January. Turkey is even lower at BB-.

"There's now a risk of psychological contagion from Iceland. People are starting to look more closely at all these countries. The deficits were easy to fund in times of abundant liquidity, but we think the global credit crunch is going to make it a lot harder," he said. "The history of financial crises suggests that it can be dangerous to think 'it's different this time'."

Icelandic stakes in UK Plc

Baugur (investment company)

Mosaic Fashions, Coast, Karen Millen, Oasis, Odille, Principles, Shoe Studio Group, Warehouse, Whistles, Jane Norman, MK One, All Saints, House of Fraser, Booker, Iceland, Woodward Foodservice, Julian Graves and Whittard of Chelsea, Hamleys, Aurum, Goldsmiths, Mappin & Webb, Wyevale Garden Centres, Watches of Switzerland, Debenhams, Woolworths, French Connection, Moss Bros

Arev (investment company)

Aspinal of London, Blooming Marvellous, Cruise, Duchamp, Hardy Amies, GHOST, Jones Bootmaker, Limeys, Linens 'n Things, Mountain Warehouse, Unisport

Kaupthing (investment bank)

Singer & Friedlander, Somerfield

FL Group (investment company)

Inspired Gaming Group, House of Fraser

Landsbanki (investment bank)

Icesave

Bjorgolfur Gudmundsson (Icelandic billionaire)

West Ham Football Club Box Label DT

[Furby]

Good article.

Iceland really is no more than a large town - in terms of population. Lovely country though and lovely people, they seem to have their focus in life on the things that really matter - family, education, health etc. and i guess they will always have the more traditional industries to fall back on - fishing and aluminium processing.

Glad i don't have a mortgage in Reykjavik though and it must be a worrying time for Wet Sham fans. Pity. Hahaha....

F

[Icantbelieveitsnotbutter]

last chance to buy overpriced oversupplied poorly built and completely unnecessary appartments and property in a host of exciting new markets before their economies and currencies vanish into the mist.

Anyone got a view on how many of those punters from here and Ireland raised debt in £ or € to buy fiat currencies - that's going to be a painful trade.

[dreamOn120k]

LandRover went east yesterday, what chance Turkey and Iceland get bailed out by Russia in exchange for a switch in allegiance?

I don't think there has been enough focus on how world political and military power is going to shift in this whole credit saga.

[Andy Jones]

I closed my Iceave account an hour ago. It took 35 minutes of holding to get through to a customer advisor. It usually is very quick - I think they were very busy. Opening or closing accounts I do not know...

Northern Rock is having my savings business.

ANDY

[Methinkshe]

LandRover went east yesterday, what chance Turkey and Iceland get bailed out by Russia in exchange for a switch in allegiance?

I don't think there has been enough focus on how world political and military power is going to shift in this whole credit saga.

Good point - there are going to be massive political upheavals and shifts in power - akin to a series of earthquakes as opposed to the slow movement of tectonic plates.

Recognising this is a different matter from predicting the outcome, though. You could be right that Russia takes advantage of these shifts; I certainly wouldn't dismiss the possibility.

[Paddles]

Any suggestions as to how one can short the Turkish Lira?

[OLDFTB]

LandRover went east yesterday, what chance Turkey and Iceland get bailed out by Russia in exchange for a switch in allegiance?

I don't think there has been enough focus on how world political and military power is going to shift in this whole credit saga.

If Turkey does switch allegiance then they can wave goodbye to their EU apllication.

[Guest An Bearin Bui]

LandRover went east yesterday, what chance Turkey and Iceland get bailed out by Russia in exchange for a switch in allegiance?

I don't think there has been enough focus on how world political and military power is going to shift in this whole credit saga.

The geopolitical dimension to this credit crunch is very interesting alright. The crunch is mainly spreading out from Western developed economies like the US and UK but the contagion is spreading to all the satellite economies associated with them. This will definitely change the status of client states like Turkey and Iceland, Turkey being the one with the most implications for politics since it already has one foot in the "Islamo-fascist" camp and is sore over having been refused admission to the EU for so long.

The longer this credit crunch goes on, the more it is starting to look like the West's version of the financial crises of the 1990s that devastated a lot of mid-ranking / emerging economies like Thailand, Argentina and Indonesia and transition economies like Russia. I think some of the assumptions about growth and economic power in the world are going to be severely challenged in the next few years. It'll interesting to see how the citizens of the US and UK will react - most are spoilt middle-class types who've never known anything but plenty and pampering from their governments. They assume it's their god-given right to have a higher standard of living than 90% of the planet's population whereas in countries like Russia, Thailand etc people didn't have such a sense of entitlement.

The pressure on politicians to find scapegoats will be huge which could lead to some nasty international mud-slinging. Does anyone else think a movement towards protectionism could take off?

[Icantbelieveitsnotbutter]

Any suggestions as to how one can short the Turkish Lira?

Forward spot rate with your bank, have to put up a margin, and with rates higher than here, you will fix forward at the interest rate differential, so currency has to decline by more than the annualised interest rate differential before you make money.

[Bardon]

It'll interesting to see how the citizens of the US and UK will react - most are spoilt middle-class types who've never known anything but plenty and pampering from their governments. They assume it's their god-given right to have a higher standard of living than 90% of the planet's population whereas in countries like Russia, Thailand etc people didn't have such a sense of entitlement.

I think these glorious citizens will soon be shitting BRICS

[Methinkshe]

The geopolitical dimension to this credit crunch is very interesting alright. The crunch is mainly spreading out from Western developed economies like the US and UK but the contagion is spreading to all the satellite economies associated with them. This will definitely change the status of client states like Turkey and Iceland, Turkey being the one with the most implications for politics since it already has one foot in the "Islamo-fascist" camp and is sore over having been refused admission to the EU for so long.

The longer this credit crunch goes on, the more it is starting to look like the West's version of the financial crises of the 1990s that devastated a lot of mid-ranking / emerging economies like Thailand, Argentina and Indonesia and transition economies like Russia. I think some of the assumptions about growth and economic power in the world are going to be severely challenged in the next few years. It'll interesting to see how the citizens of the US and UK will react - most are spoilt middle-class types who've never known anything but plenty and pampering from their governments. They assume it's their god-given right to have a higher standard of living than 90% of the planet's population whereas in countries like Russia, Thailand etc people didn't have such a sense of entitlement.

The pressure on politicians to find scapegoats will be huge which could lead to some nasty international mud-slinging. Does anyone else think a movement towards protectionism could take off?

Yes, I do. And it will begin in the US if a Democrat is elected President - quicker if Obama than if Clinton. I think McCain would hold out against protectionism, though.

[DrGUID]

I'm quite bullish on Turkey, I think it has good prospects. I can see Iceland going badly wrong though, although if global warming takes off it could be in a good location.

The future's clearly moving eastwards though. I've been to Hong Kong and Japan in the last year and it is astonishing how far advanced and civilised the places are. It's good to see so many young people working hard and getting on in life, in my home town the youths get their kicks by drinking stella, verbally abusing commuters and lying down in front of buses .

I will be giving serious thought to moving eastwards in the next few years as my working life is so Internet based these days I could live anywhere.

[dances with sheeple]

I'm quite bullish on Turkey, I think it has good prospects. I can see Iceland going badly wrong though, although if global warming takes off it could be in a good location.

The future's clearly moving eastwards though. I've been to Hong Kong and Japan in the last year and it is astonishing how far advanced and civilised the places are. It's good to see so many young people working hard and getting on in life, in my home town the youths get their kicks by drinking stella, verbally abusing commuters and lying down in front of buses .

I will be giving serious thought to moving eastwards in the next few years as my working life is so Internet based these days I could live anywhere.

Ah... the fondly remembered energy of youth.

[Paddles]

I'm quite bullish on Turkey, I think it has good prospects. I can see Iceland going badly wrong though, although if global warming takes off it could be in a good location.

The future's clearly moving eastwards though. I've been to Hong Kong and Japan in the last year and it is astonishing how far advanced and civilised the places are. It's good to see so many young people working hard and getting on in life, in my home town the youths get their kicks by drinking stella, verbally abusing commuters and lying down in front of buses .

I will be giving serious thought to moving eastwards in the next few years as my working life is so Internet based these days I could live anywhere.

Fair point, but I'd avoid Romford if I were you.

[Minos]

Any suggestions as to how one can short the Turkish Lira?

Buy Turkish Delight.

[huw]

If Turkey does switch allegiance then they can wave goodbye to their EU apllication.

and their NATO membership

I think it's most unlikely, personally -- if nothing else the CIA wouldn't allow it

[Disillusioned]

I closed my Iceave account an hour ago. It took 35 minutes of holding to get through to a customer advisor. It usually is very quick - I think they were very busy. Opening or closing accounts I do not know...

Northern Rock is having my savings business.

ANDY

I'm a bit surprised that you caused yourself so much trouble when it's far simpler if you just log in and transfer the money out. You can even select CHAPS as an option.

Subject to the account Terms & Conditions, it is possible to close your account online. Select Make a Transaction page and follow the on-screen instructions. You should enter the full balance of your account when prompted and then confirm that you wish to close your account by clicking the tick box. Your full balance, including any interest accrued but not yet applied to your account will be transferred by BACS to your selected account within 4 business days. You must remember to print out your final statement at this stage.

This method is far better on the blood pressure and grey hairs IMHO!

[Methinkshe]

Hang on a minute! There's a whole chunk of this thread just gone missing...

I posted a stack more than this.....

Edited to add:

Just look at the post times;

Apparently between 12.44 and 3.22 nothing was posted.

Well I damn well posted and it's been deleted.

Anyone care to explain what's going on?

Edited March 27, 2008 by Methinkshe

[crash2006]

Any suggestions as to how one can short the Turkish Lira?

uk IR = TL IR + (E1 -E2 / E2). or R =R * which is the equalibrium = which means no money to be made.

Edited March 27, 2008 by crash2006

[thefinalbear]

Well I damn well posted and it's been deleted.

Anyone care to explain what's going on?

The chilling effect of a D notice my friend..............attempting to cause panic with mere words? tut tut...

[A.steve]

Any suggestions as to how one can short the Turkish Lira?

http://www.babypips.com/

N.B. I'm not saying that it is a good idea (or otherwise) but it illustrates how to take positions on forex - if you want to.

Not for the feint hearted, me thinks.

[Methinkshe]

The chilling effect of a D notice my friend..............attempting to cause panic with mere words? tut tut...

What's Google cache and that kind of stuff? I'm too computer illiterate to know but I think that posts could be sat there...couldn't they?

I tried to do a load of backs to retrieve my posts that I think were deleted and when I got to where they should have been I just got a blank.

Maybe I'm being paranoid but I know there were more posts to this thread than currently appear.

Is there a hacker type person out there who could help to retrieve them?

[CviewUK]

Iceland and the European Union

From Wikipedia, the free encyclopedia

http://en.wikipedia.org/wiki/Iceland_and_the_European_Union

[Nicolaj]

What's Google cache and that kind of stuff? I'm too computer illiterate to know but I think that posts could be sat there...couldn't they?

I tried to do a load of backs to retrieve my posts that I think were deleted and when I got to where they should have been I just got a blank.

Maybe I'm being paranoid but I know there were more posts to this thread than currently appear.

Is there a hacker type person out there who could help to retrieve them?

sorry can't help you out...

ur not being paranoid...big brother

I've had this problem before(not on this site)...I save my posts now on my pc..

what ever it was you wrote...you touched a nerve

Edited March 27, 2008 by Nicolaj