The Icelandic króna fell 4% yesterday in the wake of a Merrill Lynch report on the Icelandic banks. The Icelandic stock market finished lower as shares of the banks and several other investment companies depreciated. The ICEX-15 index of the 15 largest companies on the Icelandic Stock Exchange closed down 3.3%. FL-Group was down 5%, Straumur-Burdarás down 4.6%, Landsbanki down 4.5%, Íslandsbanki down 4% and Kaupthing down 3.3%.
The Merrill Lynch report coincided with a release of new figures for Iceland’s current account showing a larger than expected deficit in 2005.
The turmoil in the Icelandic market spread worldwide as traders fearing a broader sell-off retreated from several other emerging markets.
“Heat Is On for Iceland Banks – Credit-Squeeze Fears Hit Lenders’ Shares, Widen Bond Spreads,” reads a headline in the Wall Street Journal today.
“Icelandic krona heads sell-off,” reads another headline in today’s Financial Times.
In Iceland’s media today there is extensive coverage of yesterday’s events.
Icelandic National Broadcasting Service, RÚV, reported on the record current account deficit. It quoted Ásgeir Jónsson, lecturer in economics at the University of Iceland, saying that the factors underlying the ISK 164 billion trade deficit last year are mainly heavy industry projects, expansion in the real estate market and private consumption. RÚV also observed that investment income abroad is increasing and counteracts in part the substantial trade deficit.
A headline of a front page story in Morgunbladid reads, “Approximately ISK 1,230 billion payable until 2008.” According to Morgunbladid, this is the figure that Merrill Lynch estimates that the Icelandic banks will have to pay their short term creditors over the next two years.
According to Morgunbladid, the “days of easy money are over” for the Icelandic banks.
According to Morgunbladid a substantial part of the profits of both Landsbanki and Kaupthing (KB-Bank) in 2005 were one time capital-gains from equity investments. Without these profits the banks’ results would have been less impressive. Of the three large banks, Kaupthing, Landsbanki and Íslandsbanki, only Íslandsbanki achieves a return of more than 10% if gains from the stock market are excluded.
Morgunbladid also reports that the spreads of the Icelandic banks’ debt widened yesterday in the international credit markets.
On the front page of its weekly business section, published every Thursday, Morgunbladid observes that the Icelandic króna has depreciated 10% since the beginning of the year.
The banks’ reaction was mixed.
In its daily 4:30 pm newsletter Kaupthing called the Merrill Lynch report “arrogant”. Kaupthing voiced concern over the “negativity” in international coverage of the Icelandic financial markets which could lead to higher borrowing costs and said its impact would not be “isolated to the banks” but would also “affect the financing costs of Icelandic families and businesses.”
In its daily bulletin “Vegvísir” Landsbanki said Merrill Lynch’s report contradicted a report on the Icelandic banks which Landsbanki published last week.
The research department of Íslandsbanki said the Merrill Lynch report would have a negative impact on the banks and possibly make it difficult for them to raise capital in the international markets.
In Iceland, markets were quiet at noon today and both the króna and the stock market held steady, the króna and the shares of the main banks declining only slightly.