A couple of days ago, the Resourceful Bear Blog pointed out an article entitled “Is Iceland the Canary in the Mineshaft of Global Financial Contagion?” The article addresses some serious financial issues that, if true, neither bodes well for the small, island nation, nor for the rest of the banking world.
The aforementioned article says that Iceland a Nordic hedge fund masquerading as a country with carry trades that are now unwinding and causing investment flight. Interest rate hikes and currency devaluations are now raising inflation; a credit freeze is also in effect due to highly leveraged bank portfolios gone bad. To me, it sounds like a grim situation.
There is also further news of the rising cost to protect the bonds of Iceland’s three biggest lenders from default. One alarming statistic is that “The financial sector’s net $35.3 billion of debt represents 211 percent of the country’s gross domestic product.”
Investment Application
The Resourceful Bear has some suggestions for investment application in this situation. Similar to previous advice, he suggests that one invest in the gold ETF GLD and use your margin to short any of Iceland’s three largest banks, which are Kaupthing, Glitnir, and Landsbanki.
I’ve already looked and none of these banks are traded on the major American exchanges. However, my broker Tradeking does allow me to buy Kaupthing (available on the pinksheets), but I can’t sell it short. Ho hum. It would be cool to sell short these Icelandic banks, but opportunities abound with pretty much any major financial institution these days.
The writer should make his/her homeworks before publishing similar statements. Icelandic Banks, particularly Kaupthing, has no exposure whatsover to ‘highly leveraged bank portfolios gone bad’ and hasn’t suffered any loss from prime-mortagages securities… non performing loans in 2007 were below 1% of total loans… and there are no elements for asserting that Iceland is a ‘hedge fund’ masquarated as a Country.
Probably the author should invest his/her valuable time questioning how UBS, Bear Sterns and Societe Generale have diligently applied risk management procedures…