Weekly international investment round up to March 9, 2010
‘What’s the capital of Iceland? About €3.50’ goes the old credit crunch joke and last weekend’s overwhelming referendum result which saw 94% of Icelanders vote to reject the deal to repay Britain and Holland some $5 billion from the Icesave debacle looks set to continue the ‘fun’ a little longer.
Just as the pun goes about asking turkeys to vote for Christmas the fact that it was rejected came as no surprise particularly with ‘No’ vote supporters stating it would saddle each person in Iceland with the equivalent of $15,000 of debt but far from ending the deal in reality it only acted to let out some steam and delay the day of reckoning.
In an attempt the help their country’s bid to join the EU and to obtain aid from the international community the newly formed Icelandic government first agreed to reimburse holders of the Landsbanki Icesave accounts in Britain and Holland last June. Following a few months of negotiations a deal was agreed only for it to be unexpectedly rejected by President Olarfur Grimmson in January thereby forcing a referendum on the issue.
As a sizable chunk of the debt can actually be repaid by selling off the assets of Landsbanki a key issue would appear to be how interest on the debt is to be repaid. Britain is asking for 275 basis points above LIBOR but it may move on this following the referendum as it’s in no one’s interest for a deal not to be done. Both Britain and Holland have elections due before the first week of June and with Gordon Brown likely to call UK elections in May the time window to tie-up a few credit crunch loose ends is shortening however, as both governments have already stumped-up the cash to compensate their estimated 400,000 account holders/voters who lost out when the Icelandic banks froze, the greater pressure to resolve the issue would appear to be on Iceland. The days of almost zero unemployment on the island are long gone and Iceland desperately needs billions in foreign investment and loans in order to de-ice their economy and for their interest rates to melt from their current 9.5% which is crippling home loan holders. Whilst it is understandable to be resentful for the need to pay money owed to foreign governments there is little chance of the situation improving unless it happens therefore a settlement should soon be reached.
Greek Prime Minister, George Papandreou, was also after foreign assistance this week from America as he combats ‘stage two’ in his country’s crisis namely; battling the speculators who are aiming to make their fortunes betting against his country’s economy. He has asked the US to impose tighter regulations on hedge funds and currency traders but at the lightning speed these ambulance chasers’ move Mr Papandreou’s bolt will rust some more while waiting for this horse to return.
Ultimately, Governments’ past thrills of easy money and low interest rates were the keys used to open the markets’ ‘Pandora’s Box’ and they now face the devil’s job in trying to close it.
