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  • From: bob ford <bobford79 AT yahoo.com>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] Iceland -shortages, inflation, today's paper
  • Date: Sat, 4 Oct 2008 07:47:20 -0700 (PDT)

I read a list where a man from Iceland has been posting for a little while.
This is not from him, but from a news site in today's papers. But, according
to him, not only has the Icelandic currency lost half its buying power in the
past year (60% in the past month), but they are actually having problems
importing items, including to the food markets. Iceland has always had a
culture of frugality and strong savings.
***************************************************************************


Iceland: When Too Big to Fail Becomes Too Big to Rescue

by: Felix Salmon

posted on: October 04, 2008 |

We know that credit ratings agencies made enormous errors over the past few
years when it came to rating structured products. And of course it's never
easy to rate leveraged institutions, like banks, which are susceptible to
runs. But what about the more conventional credits, like sovereigns?

Last year, Moody's briefly gave all of Iceland's major banks, including
Glitnir, a triple-A rating, on the grounds that if they ever got into
trouble, the Icelandic government would bail them out. After much ridicule,
Moody's changed its mind. Clearly, it was silly to treat Iceland's banks as
though they were just as creditworthy as the sovereign.

Fast-forward to today, and Iceland has indeed bailed out Glitnir. But here's
the thing: Iceland's credit default swaps are now suggesting that the
sovereign itself is a distressed credit.


Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a
year to protect 10 million euros ($13.8 million) of bonds.


This is not how triple-A sovereigns behave. It's as though the analysts at
Moody's (MCO) were only able to see one step ahead, and not two: They could
anticipate that Iceland would bail out its banks, but they couldn't
anticipate that when a tiny country bails out a bank whose assets vastly
exceed the country's own GDP, then the sovereign itself loses much
creditworthiness. One scary datapoint: The assets of Kaupthing Bank amount to
623% of Iceland's GDP, which is possibly why its own credit default swaps are
trading somewhere over 2500bp.

How bad can things get in Iceland? Here's what one local emailed Tom
Braithwaite:


They are fighting powers that they are powerless to fight. It's like tackling
a storm raging in the sea with a teaspoon.

The main supermarket can't get imported goods because they have no currency.
The shops are half empty. One of the store managers has advised people to
start hoarding. We're running out of oil. And winter came last night - about
a month early.


Received opinion has it that if Iceland backstops the Icelandic banks, then
the other Nordic countries, or someone, will backstop Iceland. Which might be
true: we'll find out "very soon". But there's no news yet.

http://seekingalpha.com/article/98477-iceland-when-too-big-to-fail-becomes-too-big-to-rescue








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