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3 Nordic Banks Help Iceland Prop Up Currency
Mark Landler
FRANKFURT — In a show of Nordic solidarity, three central banks in the region have ridden to the rescue of Iceland, lending the island emergency credit of up to 1.5 billion euros ($2.3 billion) to shore up its swooning currency and forestall a broader economic collapse.
The unusual collaboration is intended to calm the turbulence that has buffeted Iceland since the beginning of the year, when rumors of a banking crisis led speculators to bet against the country’s currency, the krona.
The central banks of Sweden, Denmark and Norway announced the plan Friday, in the form of swap agreements that would give the Central Bank of Iceland access to as much as 500 million euros from each of them.
“In times of uncertainty and turmoil, the central banks have a responsibility to cooperate,” Stefan Ingves, the governor of Sweden’s Riksbank, said in a statement.
Iceland’s krona surged nearly 5 percent against the euro after the news, reversing a slide of as much as 26 percent this year. Analysts welcomed the agreement, saying it would provide Iceland with much-needed assistance in its efforts to steady its currency and its image in global markets.
“The chances are good that this will be a turning point for Iceland,” Fridrik Mar Baldursson, a specialist in finance at Reykjavik University, said. “It should increase confidence in Iceland and make it easier for the government of Iceland to borrow money at a reasonable rate.”
Officials in Iceland said they did not expect to draw on the swap agreements to defend the krona in currency markets. But the mere fact that the money is available, analysts said, will help ease the crisis of confidence that has enveloped Iceland’s heavily indebted financial sector.
The funds will almost double the foreign-exchange reserves held by the Central Bank of Iceland. The central bank’s thin reserves had been a cause for concern because the Icelandic state had pledged to support the country’s banks if they defaulted on their foreign loans.
“Although the government said it would stand behind the banks, the authorities needed to show they had the resources to back that up,” said Paul Rawkins, a senior director and expert on Iceland at Fitch Ratings in London. “This is a very concrete demonstration of that.”
On May 9, Fitch cut the credit ratings of two of Iceland’s largest banks, Glitnir and Kaupthing, citing their vulnerability to a “hard landing” of the economy. In April, it placed Iceland’s sovereign debt on a negative credit outlook — a move that Mr. Rawkins said would stand for now.
“There’s still a lot of uncertainty out there,” he said.
Even after the central bank raised interest rates to a record 15.5 percent in April, the krona continued to slide against the euro. Inflation rose to an annual rate of 11.8 percent, the highest in 18 years.
Iceland, a country accustomed to booms and busts, probably cannot escape an especially painful adjustment this time, as it digests years of heavy borrowing from abroad. Public and private economists differ mainly on the length and depth of the contraction.
“The feeling here is that the economy has come to a very sudden stop,” Professor Baldursson said. Automobile importers, he noted, are leaving shipments of cars on the docks rather than transferring them through customs, for fear of finding no buyers in this country of 307,000.
Still, Iceland’s banks, often described as the likely trigger for a collapse, appear to be in a less precarious position. The spreads on credit default swaps for the banks — essentially bets that they would go bust — have narrowed, suggesting investors are less worried about the possibility.
Glitnir Bank was recently able to raise capital in Norway and has held preliminary talks with international investors about taking a stake in the bank. Shares of all the major banks rose Friday.
“We’ve already seen a degree of turning in the situation,” said Richard Portes, an economist and expert on Iceland at the London Business School. “People are waking up to the fact that these are well-run banks.”
Mr. Portes said the amount of credit provided by the Nordic central banks could probably be increased, if necessary. The important thing, he said, was that Iceland not be tempted to go after speculators, who many Icelanders think targeted the krona to try to destabilize the banks.
“There’s no point putting foreign exchange reserves into defending a currency, if the markets are going in the wrong direction,” he said.
www.nytimes.com/2008/05/17/business/worldbusiness/17iceland.html