Iceland the absurd

I mentioned Iceland a few times only on this blog – because it was sort of well known in the hedge fund community – a crowded trade even.  Paul Krugman did an (incorrect) anti-hedge fund piece where he happily swallowed the dogma about hedge funds of conspiring against Iceland.  You didn’t need to conspire against Iceland – it was obvious once you read the balance sheet of any of the banks or any of the major corporates.

The first time I mentioned Iceland on this blog was in my list of current account deficit countries with potential banking problems.

Later I mentioned – but only in the comments – the raid on the UK savings market done by IceSavings and Kaupthing.  These were high interest rate deposits that seemed to be insured by a combination of the Icelandic and UK government if you read the documentation.

I wrote a post about high rate deposits (Wachovia will walk over you) and I confess that I had an ulterior motive – I was looking for someone to tell me how much the Icelandic banks were raiding the deposit market of Norway.  I got a few nice helpers amongst my readers (thank you). 

But this post is an ex-post analysis of just how absurd Iceland became – and some speculations from there.

Firstly the Russian loan (5.4 billion) is really big.  The population of Iceland is about 320 thousand people.   This translates to almost 17 thousand per person.  That is a real bailout – none of this small stuff that America is doing. 

It is pretty hard to see how an economy that has functionally destroyed itself is going to pay that back.  Whatever it looks like a darn big loan to a very dodgy credit – and I presume that there is a non-financial motive for granting it.

In my quick post on Iceland (done at JFK airport with a beer whilst waiting for a plane and not adequately fact checked) I linked to Andrew Neil who thought that the ulterior motive was Russian access to Iceland as a military base – or at least as a military refuelling depot – an unsinkable aircraft carrier if you will.

That is plausible because there is no obvious financial motive for this loan.  But there is an alternative theory doing the rounds – which is that one of the Icelandic banks was closely tied to the Russian Mafia – and the loan by the Russian Government is just make-good.  [The implication being that the Russian Government is just another arm of the Russian Mafia.]  Again I have no proof for that hypothesis – however as you need a non-commercial explanation of the loan its as good as most.  [Access to military bases however looks more likely…]

But you got to realise just how big the Icelandic problem is relative to the Icelandic economy.  Kaupthing Edge and IceSavings raided the UK deposit market as noted above and raised 3 billion pounds in deposits.  That is another 20 thousand dollars per person in Iceland.  Iceland as I need not remind readers cannot print pounds or dollars.  It is small wonder the Icelandic government is not going to meet its deposit insurance liabilities.  We have the Sovereign Default of a democracy at hand.  That is rare… I always thought it was populist dictators that defaulted.   Now I guess it is just populist democracies.

So Iceland is going to default at the national level and the level of every bank.  Lets have a look at its corporates.  I did this – there are about 20 companies listed on the Icelandic stock exchange.  I went and read the annual reports of about 5 and they were mostly similar – over-levered global acquisition conglomerates with Kaupthing as the major investment bank. 

Bakkavör Group sticks in mind – just because it was so levered in such an ordinary business – processed fresh food.  The five year summary is as follows:

(Click for detail...)

Yes – it does have quick ratios of less than one, current ratios of less than one and ebit of only about a ninth of outstanding debt. 

It might be possible to survive that – but it will be tough.

And whilst the investment bank is Kaupthing with whom it shares multiple board members – the list of “principal bankers” contains more usual suspects – they are Barclays, RBOS, Rabobank, Mizuho,  Fortis, ABN Amro, Bank of America Securities and HSBC.

Oh Iceland the international.  What happens in Iceland does not entirely stay in Iceland.

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It is also worth considering what happens to Iceland in the absence of new funding...  It has no banking system left.  There is nobody much willing to take Icelandic Kroner.  The country has no reserves of hard cash that matter.  Its winter coming.

They can sell fish and energy intensive manufactures (their main exports) for hard currency.  But this is not like Australia - when the going got really tough in Australia in the depression you gave up and went and hunted (feral) rabbits for food.  

Iceland is a little colder.

My guess - and it said only half in cynicism - the women are beautiful in Iceland - the place just pushes out Miss World winners.  Its almost as close to NYC as Vegas.  Sex Tourism for hard cash will be their next export industry.

If they adopt the Vegas slogan will it work for financial crisis as well?  What happens in Iceland/Vegas ...

J