When the value of two of the largest investment banks in the US, Lehman Brothers and Merrill Lynch, collapsed on Wall Street yesterday, the credit default swaps (CDS) for the Icelandic commercial banks increased.
Lehman Brothers requested a moratorium for its mother company yesterday, and JPMorgan Chase took over Merrill Lynch, Morgunbladid reports.
Chairman of the Central Bank board of directors Davíd Oddsson said the news of Lehman’s bankruptcy is of great significance. “This indicates a crisis in the international financial market.”
“Access to loan capital, which has been limited for the entire system, will not become any easier in the near future, perhaps not for a long period of time. It will create distrust in the financial system,” Oddsson concluded.
The debt of Lehman Brothers amounts to almost ISK 55,700 billion (USD 612 billion, EUR 430 billion). Investors tried to sell the bank’s debentures yesterday and buy debentures issued by more solid financial institutes.
Then the CDS of debentures in the US and Europe increased by 25.7 percent and 26.8 percent respectively. As a consequence, the CDS of Landsbanki Bank increased by 8.02 percent, Kaupthing Bank by 5.16 percent and Glitnir Bank by 2.97 percent.
The Icelandic banks have all participated in the issuing of debentures with Lehman Brothers. However, Gudni Adalsteinsson, managing director of Kaupthing’s treasury, said Lehman’s bankruptcy will not have a great impact on the bank.
In regards to the impact Lehman’s bankruptcy and Merrill Lynch’s fate will have on the Icelandic economy, Adalsteinsson said it will delay the upswing which people have been waiting for although the banks will not suffer extensive losses.