The Icelandic krona could rise 8 per cent against the euro during the next few months, says a senior analyst at Bear Stearns investment bank.

Bear Stearns’ chief currency expert, Steve Barrow, believes the krona “has probably fallen enough” and predicts its value will bounce back to around 110 to the euro by July, according to a report in Bloomburg.

At one point the currency experienced a 35 percent fall against the euro since the beginning of 2008 but is now making up with modest gains. Losses against the dollar have been less severe at 12 percent in 12 months.

The experts at Bear Stearns retain their position of authority and the bank itself remains one of the big names on Wall Street, despite its emergency sale to JP Morgan earlier this year. Bear Stearns was a high profile victim of the global credit crunch, largely caused by defaults in the US sub-prime mortgage market.

Bear Stearn’s vocal support for the Icelandic krona will come as a surprise to some analysts. The US bank has been implicated in a possible plot whereby unscrupulous traders allegedly conspired to profit from an artificially induced meltdown of the Icelandic economy. The Icelandic government blames much of the recent negative market coverage on the country on misinformation provided by such investors.

Bear Stearns’s comments echo the sentiments of Icelandic finance minister, Arni Matthiesen, who spoke at a meeting in Hamburg last week. The minister stated that the krona is currently undervalued and that the worst of the crisis might already have passed.

The development of CDS spreads on Icelandic banks has reached a turnaround point and is now moving away from the peak it reached at the end of March, reports Nordic corporate and investment bank Glitnir.

The 5-year CDS level for Kaupthing now stands at 710 basis points (bp), which is 340bp less than at the beginning of April when the spread peaked at 1,050bp. The spread on comparable CDSs for Glitnir has fallen by 280bp from its peak and is now 720bp. The spread on Landsbanki has fallen by 400bp from the end of March when Landsbanki’s 5-year CDS level peaked at 800bp.

The Icelandic Prime Minister and a number of Icelandic banks, financial institutions and international analysts have attributed the recent surge in the CDS of Icelandic banks on market manipulation by foreign investors and hedge funds. This so-called ‘attack’ is now being investigated by the Financial Supervisory Authority in Iceland.

Hedge funds and investors had bought CDSs on Icelandic banks with the view of profiting from the financial instability in the country. According to Glitnir Bank and economics professor Dr. Richard Portes, this is however not likely to prove the case. They say that many people who have bought CDSs for this purpose can be expected to close their positions in due time.

As a result of this, CDS spreads on Icelandic banks are forecast to move closer to levels corresponding to their real default risk. The recent CDS turnaround indicates that this development has already started and a further correction can be expected in coming months, says Glitnir.

Meanwhile risk aversion in global markets has abated in recent days with CDS levels on large European corporate falling considerably this week.

The Financial Services Authorities (FSA) in the UK and Iceland have been warned about a London-based hedge fund which disapproved of a British professor‘s positive assessment of the Icelandic economy, reports visir.is and Iceland Review.

Dr Richard Portes, professor in economics at the London Business School and President of the Centre for Economic Policy Research, was allegedly contacted by the hedge fund which urged the professor to consider his reputation when reporting on Iceland and Icelandic banks.

Dr Portes is the author of a number of influential reports on the financial situation in Iceland and has recently portrayed the Nordic country and its banks in a more positive light than many other foreign analysts and media outlets.

The hedge fund in question is one of the four foreign hedge funds that Sigurdur Einarsson, Chairman of Kaupthing Bank, has accused of instigating an attack on the Icelandic financial market and Icelandic banks.

“I quickly realised what was happening and decided to listen carefully and take notes,” Dr Portes said. He then contacted the FSAs in both the UK and Iceland to report the incident.

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