The Financial Supervisory Authority in Iceland and launched an official investigation into allegations against international hedge funds. There are currently rumors circulating of attacks being made against the Icelandic stock market by hedge funds.
Whist this is going on, one of Iceland’s leading banks, Kaupthing, is currently deliberating as to whether they will initiate legal action against one of the U.S.’ leading banks, Bear Stearns, for their part in organizing a trip to Iceland for senior hedge fund employees in January.
According to analysts, these dual moves are indicative of the growing aggravation of Iceland’s government with the ostensible attacks from international banking groups on the Icelandic stock market and currency, the krona.
Authorities are redoubling efforts to educate international investors about the economy in Iceland, using presentations and road shows as tools in their bid to counter the attacks.
The economy in Iceland has recently seen an extraordinary boom, which has resulted in a macroeconomic imbalance. This shows in the current deficit in account of 16% of GDP in 2007. Annual inflation is also showing signs of the imbalance, as it is sitting at 8.7% whilst the central bank’s target is actually 2.5%.
All of these issues are further complicating the current Icelandic economy, which is having to deal with main banks using disruptive leverage techniques which are having adverse effects on the confidence of investors. Stocks are also declining due to these factors, which is raising inflation at the same time as sending the currency lower.
In a bid to aid the current situation, the central banks last week brought in an interest rate rise of 1.25% to help alleviate some of the financial pressure. This brings the interest rate to a record high of 15%.
Regardless of the current tensions in the economy in Iceland, they are still running with a budget surplus and the government managed to reduce the deficit from 26% in 2006. When juxtaposed with other markets and banks internationally, Iceland’s banks are robust and highly capitalised.
Kaupthing is currently being advised legally on the possible misuse of the market by Bear Stearns after they arranged for a trip to Iceland last January which three Bear employees attended and four employees from hedge funds.
The dominant Icelandic bank will be have the ability to subpoena e-mails and telephone records from Bear Sterns and the hedge funds involved, if they do undertake legal action. DA Capital Europe, King Street, Merril Lynch GSRG, and Sandelman Parnters, being the four hedge funds in question.
Friday saw the central bank chief, David Oddsson, say that Iceland was the indented prey of an attack on the Icelandic economy, and that brokers were attempting to destroy the financial system of the country.
Tags: European Economy News, European Union News by Elisha Sanders
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