Oct. 4th, 2008

peterbirks: (Default)
When I read the FT on a Saturday these days, I have to make pen marks on matters that in ordinary times would be page one new, but, in these exciting times, get relegated to the bottom right of page 8.

For it was there that the FT reported that "Reykjavik seeks to shore up its currency".

When the news that Fortis has been nationalized in the Netherlands doesn't make the front page, perhaps it's unsurprising that a little island best know a few decades ago for cod fishing gets relegated to the inside pages, but Iceland, in this case, is actually interesting.

It was a bit annoying to see that Robert Peston of the BBC spotted this as well and banged it on his blog this afternoon; but, so it goes.

Last Monday, Iceland nationalized its third-largest bank. Ig Iceland's other two banks get into any knod of trouble (and, given the fact that Kaupthing can't issue new debt for love nor money at the moment, this must be seen as likley), then you might think that Iceland might have to bail them out as well. After all, isn't that what governments worldwide are doing?

Trouble is, the capital required to bail out Iceland's three banks is, er, nearly 10 times Iceland's GDP. And so we have the situation that I alluded to when referring to the US bailout -- a situation where a developed nation might default.

Iceland treasuries are noew trading on the credit default market at a level way below that which AIG was trading at only a year or so ago. It's 15% top insure $10m in five-year Iceland government debt (in case you were wondering, it's 65% to insure Kaupthing debt, which is why it won't be raising any new capital anytome soon) plusa the $500k a year premium on top.

Icealand's commerce minister said that Icealnd was seeking "a large loan" from abroad. Yes, well, thhat's all to the good, but that's what Northern Rock wanted. And it's no use saying "but we're a country, not a company", because, in this case, the lenders are quite likely to say "sorry, talk to someone who gives a shit".

As Peston astutely observed, Iceland has in effect been www.hedgefund.gov for the past decade. because you got a good interest rate, it took in a lot of money on carry trades. This allowed it to buy up lots of companies abroad (many of them retail operations in the UK, including Hamleys) with borrowed cash. If we hit a period of serious asset deflation, it's hard to see how Iceland.Gov can get through it.

I observe just in passing that as recently as a couple of weeks ago the personal finance pages were still listing Kaupthing Bank as offering one of the best interest rates. This kind of irresponsibility in the personal finance sections is little short of frightening.

One of the writers in the FT Money section, David Stevenson, confessed that he had failed "overtly" to mention the counterparty risk entailed in buying listed structured products. By "overtly", he means "not at all", at least, not so far as I can recall. Then again, he isn't alone. Personal finance sections recommended split capital zeroes for years before the whole caboodle imploded. Permanent Interst Bearing Shares (PIBS) were recommended, despite the fact that they offered little premium over far safer investments, because the capital was considered absolutely safe. Tell that to the buyer of a Bradford & Bingley PIB.

What's frightening is that the bollocks is still being propounded. In this week's edition Ellen Kelleher quotes Lucien Cook, the director of residential research at Savills, without any question, saying that prices in the south of England will return to their 2007 peak by 2012. Well, Cook might be right. And I might win next year's WSOP Main Event. But to quote this without question is disingenuous and lazy at best, and downright dangerous at worst. Still, Ellen also quotes Melanie Bien, a director at, oh yes, Savills Private Finance, as saying that "reserving a rate in advance buys you peace of mind". This refers to "lock-in" options under which some lenders allow borrowers to reserve deals months before a house deal actually goes through.

Peace of mind? How can this woman be quoted without question here? If I had "locked in" my deal with Mortgage Express five months ago, thhat would have got me stone-fucking nowhere.

On the front page, Matthew Vincent, the boss of the personal finance section of the FT, quotes the British Banker's Assocation (not, you might note, a particularly unbiased body) as saying that the new £50,000 guarantee is fine because it covers 98% of UK accounts.

What the BBA (and Mr Vincent) fail to point out, that it might cover 98% of accounts, but it only covers 60% of the money. If people with more than £50,000 decide to move their money out of the banking system en masse that's one hell of a lot of liquidity disappearing down the tube. And there's nowhere else at the moment that the banks can borrow from.

Thanksfully there are parts of the FT, not often read, that give you a clearer indication of what is going on. Even within the Personal Finance section the excellent Merryn Somerset Webb had a piece this morning saying that "All this optimism is getting me down". Merryn, perhaps alone amongst personal finance writers, has sptted that you can hardly call it a bear market bottom because everyone has thrown in the towel, when half the personal finance writers in the country are saying that now is the time to buy "because everyone has thrown in the towel". Spot on, Merryn. She predicts a small bounce until the end of the year on the back of this ill-founded optimism, and then a much tougher time next year.

Annd, just in case you were feeling slightly cheerful, you only had to turn to page 29 of the main section, the "markets" part, which casually points out that long-term lending was still virtually non-existent. Dollar three-month Libor is now 4.33%, up from 3.76% a week ago. Thre month sterling is in the mid six per cents still. This compares to two percent overnight rates. These spreads are literally unheard of and are causing not a few experienced economists to scratch their heads and say "what the fuck would Keynes make of THIS?". But it's really a case of KISS.

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