From Volume 5, Issue Number 12 of EIR Online, Published Mar. 21, 2006

World Economic News

Warnings Surface of an Iceland Bank Blowout

In a lengthy article on the front page of its economic section (and promoted on the front page) March 13, Copenhagen's Jyllands-Posten warned against a blow-out of the Icelandic banks. The article, headlined, "Warning Against the Icelandic Geyser Economy," by Thomas G. Svaneborg, transmits this stern warning from Nykredit, one of the biggest Danish financial institutions. Included is a diagram showing the almost exponential increase in the price of the Icelandic bank stocks, with a fivefold increase over the last two years, and the caption: "Icelandic bank stocks rocket heavenward."

JP writes: "The roaring Icelandic banks are in danger of soon getting into serious economic trouble. In several parts of Europe, big institutional investors have stopped their lending to the eager entrepreneurs on Iceland, and in Denmark Nykredit is advising the investors to pull out their lending to the Icelandic banking market. 'I can't recommend to anyone lending money to for instance Kaupthing Bank [Iceland's biggest bank] in the short or long term under the present circumstances. The risk of incurring losses on the investment is too big' says Michael Sandfort, senior analyst in Nykredit Markets.

"The Icelandic banks have much more lending going out than deposits coming in, and for that reason have been borrowing many of the billions that in recent years they used to finance their own buying up abroad. They usually get the money by issuing bonds, and Michael Sandfort advises investors to get rid of that sort of paper.

"'We recommend selling all bonds issued by Kaupthing' he says and points out, that an Icelandic bank crisis can have incalculable consequences, since the three biggest banks in only a couple of years have been growing dramatically. 'They are so big, that they hardly can be saved by the Icelandic state alone, and since a major part of the investments are abroad, the state's obligation to provide a safety net under the banks is not the same any more' says the analyst."

A recent commission created by Reykjavik has developed an emergency plan for how to coordinate government intervention in case of a financial crisis. The commission recommends that the Icelandic financial oversight board get more power to intervene in the financial market, including the ability under certain circumstances to remove bank directors, board members and accountants.

Then in last week Merrill Lynch supported the Nykredit's analysis, and also warned against the many cases of cross ownership in Iceland. Sandfort looks critically at the fact that Icelandic banks' purchases abroad have been taken place very rapidly and at full market price. The competition on the Icelandic banking market is also increasing and lower the profit rates and it's only three years since the state owned most of the financial sector. According to Sandfort, too rapidly liberalizing the market often leads to a boom and a bankruptcy. "Every point is serious by itself, and when they come together like in this case, I'm almost certain that it cannot last" he said.

After the Iceland Meltdown, Now the Arab Stock Market Crash

The global "emerging market" asset bubble is bursting. The first wave was marked by the Iceland crash in February, which already had short-term international repercussions. In early March, another wave hit stocks, bonds, and currencies all over Latin America and Africa, and in particular Russia and Turkey. Now, Arabian asset bubbles are bursting. An example is the Egypt stock market, which increased last year by more than 100%. On top of the liquidity pumped in by international "carry traders," some petrodollars, due to record-high oil prices, played an important role as well.

Now, the whole thing is bursting, and there is outright panic selling. On March 14, the Dubai stock market plunged by 12%, its biggest one-day decline in history. There had been already several other sharp declines in recent weeks. In total, the Dubai Financial Market Index has lost 40% since the start of the year.

In Egypt, the CASE-30 stock-market index plunged by 5.9% on March 14. The Egyptian Capital Market Authority openly announced that it was buying up Egypt stocks in order to prevent the market from crashing.

As in Egypt, the government-run Kuwait Investment Authority has been instructed to buy up stocks after the Kuwait Stock Index Change Index falls by 3.7%. The decision was publicly announced by Kuwaiti Finance Minister Ibrahim al-Assaf on March 14.

Saudi Arabia has by far the largest stock market in the region. On March 14, the Tadawul All Share Index fell by 4.7%, following sharp losses on the previous three trading days.

After reaching an all-time high in mid-February, the total market capitalization among all Gulf region stock markets has imploded by an estimated $250 billion to just below $1 trillion.

On March 15, Saudi Prince Alwaleed bin Talal bin Abwaulaziz Al Saud, who Time magazine has called the "Arabian Warren Buffett," announced that he would invest $10 billion in the Saudi stock market.

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