Merrill Lynch issues warning on Icelandic banks Skip to content

Merrill Lynch issues warning on Icelandic banks

“Icelandic banks – Not What You are Thinking” is the headline of the main story on daily Morgunbladid’s front page today. It borrows the title of a new report on the Icelandic banks just issued by the international financial services company Merrill Lynch.

Morgunbladid reports that Merrill Lynch claims that both Fitch’s Ratings and Moody’s have failed to take certain systemic risks into account when issuing their credit ratings for the Icelandic banks. Merrill Lynch believes that the banks should be rated “BBB” instead of “A,” as currently is the case.

Merrill Lynch says that because of their heavy reliance on short term financing there is considerable uncertainty as to whether or not the Icelandic economy will land softly when the current boom draws to a close and market perceptions change. To compensate for that risk, the Icelandic banks should be paying higher rates than they currently are.

The report observes that the Icelandic banks already pay higher rates than other European banks with the same credit rating.

The report states that the Icelandic banks should be compared to banks in emerging markets rather than Europe, because the systemic risks of the Icelandic economy have more in common with emerging markets than the stable European markets.

Merrill Lynch also draws attention to the degree of cross-ownership between Iceland’s banks and Iceland’s largest companies. It observes that the banks often co-invest with their shareholders and sometimes provide both equity and debt financing. According to Morgunbladid, Merrill Lynch describes these transactions as “risky.”

Morgunbladid quotes anonymous “experts” saying it remains to be seen if the risk premium of the Icelandic banks’ debt will rise further and if the Icelandic banks are ready to stomach deteriorating terms. Morgunbladid also quotes certain “experts” expressing doubts that the banks will be able to continue to finance themselves to the degree they require.

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