Friday, January 30, 2009


Oh, Iceland. Looking back on the explosion in Icelandic bank and sovereign CDS spreads in late March of last year, these blog posts by Paul Krugman (well, ok, the second is just a quote from the Financial Times, but I like digging at Krugman anyway) look pretty hilarious.

Is Iceland the victim of a financial conspiracy? ... One interesting point: it appears that the Icelandic authorities particularly suspect Bear Stearns. I'll be keeping an eye on this.
What started as an alcohol-fuelled evening has become a full-blown investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsson, director-general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumours about the Icelandic banks and financial system in order to profit from it”.
Ah yes, of course, barely-alive Bear Stearns shorted Iceland and took down the whole country. It had nothing to do with bank capitalization over four times GDP and leveraged out the wazoo...

Although, I admit, I did/do believe that the correlation of sovereign CDS with bank CDS was a bit ridiculous, and the crux of the argument turned out to be exactly why the country has in fact not yet defaulted on its sovereign debt: Defaulting on maybe 15 billion in sovereign debt that comes due over the next two decades isn't going to put a tiny dent into a hypothetical bailout of the banks. It's just not feasible, so why pay the political cost to do it? It's a huge sacrifice to cut off all possibility of eurozone membership to save a few billion out of 80 billion lost. Then again, that's what I was saying when 5 year CDS spreads were bouncing around 300 bps, and they since jumped to almost 1000, so not very useful information...