Iceland: When Too Big To Fail Becomes Too Big To Rescue
[snip, snip]
Fast-forward to today, and Iceland has indeed bailed out Glitnir. But
here's the thing: Iceland's credit default swaps are now suggesting
that the sovereign itself is a distressed credit.
Contracts on Iceland's debt jumped to 17.5 percent upfront and 5
percent a year to protect 10 million euros ($13.8 million) of bonds.
One scary datapoint: the assets of Kaupthing Bank amount to 623% of
Iceland's GDP, which is possibly why its own credit default swaps are
trading somewhere over 2500bp.
How bad can things get in Iceland? Here's what one local said:
They are fighting powers that they are powerless to fight. It's
like tackling a storm raging in the sea with a teaspoon.
The main supermarket can't get imported goods because they have no
currency. The shops are half empty. One of the store managers has
advised people to start hoarding. We're running out of oil. And winter
came last night - about a month early.
Received opinion has it that if Iceland backstops the Icelandic banks,
then the other Nordic countries, or someone, will backstop Iceland.
Which might be true: we'll find out "very soon". But there's no news
yet.
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