Thursday 20 March 2008

The cost of protecting the bonds of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf against default soared to records this week amid concern Iceland's three largest banks may be unable to fund themselves.
Credit-default swaps on Kaupthing, Iceland's biggest bank, rose 22 basis points to 855, according to CMA Datavision in London. Glitnir, the third biggest, soared 93 basis points to 850. The cost of the contracts is about seven times more than the average for banks in Europe including Commerzbank AG in Frankfurt, which has similar credit ratings to Kaupthing.
``Like all banks, the Icelandics rely on maintaining access to markets,'' said Simon Adamson, an analyst at bond research firm CreditSights Inc. in London. ``Talk about problems can become a self-fulfilling prophecy.''
Iceland's banks have been among the hardest hit in Europe as the credit market freeze prompted investors to shun all but the safest assets. The banks, based in a nation of 300,000 people with a $19 billion economy, have funded lending, acquisitions and other investments in Northern Europe, including Scandinavia and the U.K., by relying mainly on the money markets rather than customer deposits.
The companies, which Moody's Investors Service rated Aaa as recently as March last year, have sought to allay funding concerns. Kaupthing and Landsbanki both opened Internet banks to attract deposits and reduce their dependence on capital markets.
Credit-default swaps on Landsbanki rose 27 basis points in the week to 631. By comparison, the Markit iTraxx Series 8 index of credit-default swaps of 25 banks and insurers across Europe fell 34.6 basis points this week to 123.

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