Turnaround in Icelandic CDS levels signals end of ‘raid’

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.