Saturday, October 11, 2008

A warning about Icelandic banks from March

The argument that local authorities could not possibly have known that keeping their reserves in Icelandic banks was risky is becoming harder and harder to defend.

Here is Simon Watkins writing on on 16 March 2008:

But the real horrors are in Iceland.

Credit insurance for debts at Iceland's biggest bank, Landsbanki, is priced at 610 points while that for Kaupthing is priced at a hair-raising 856. Given that these two have taken billions in UK retail deposits, it may be a sobering thought for savers to consider where they are putting their cash. These banks are now seen as the most unsafe in the developed world.

Of course, no one can be sure that disaster looms for anyone, but the figures on credit default swaps show clearly where investment professionals think the big risks are.

You have been warned.

An interesting question to ask is whether councils would ever have made such risky investments if they had not been under pressure from the Audit Commission to maximise returns.


Chris K said...

Don't know how many of the 300,000 savers in Icesave would know a credit derivative if it slapped them in the face - or even council finance officers.

Many more of them will have read about the deposit guarantees by British and Icelandic governments.

Interesting question about what the regulators were doing though!

Anonymous said...

Another question is : if all our local autorities had asked for ther money back, would the bank have gone bust much earlier?

It's in the nature of fractional reserve banking that only a small proportion of depositors could have had their money back at short notice - a run on the bank would have rendered it insolvent much sooner.

Catch 22 - as long as people believed their money was safe, it was; as soon as depositors began to remove their funds the bank collapsed.

A few LAs might have got something out, but as soon as the credit flows into the bank dried up, most were doomed.