“If it ain’t your cods, it’s pollocks”

An interesting set of events was set in motion a fortnight ago, though its roots lay somewhere in late February 2007. A recent trip by an anonymous team member to double Michelin-starred Tom Aiken’s latest venture, Tom’s Place; in essence a posh chippy, bemoaned the lack of cod & suggested that the pollock wasn’t up to much. AA Gill agreed in his unique indomitable fashion the following Sunday & all the talk of cod had me thinking of the Icelandic banks.

Almost exactly a year previous, Moody’s released the results of its widespread review of the banking sector. Its JDA (Joint Default Analysis) allowed ratings to take into account the potential for government support. As a consequence the three largest Icelandic banks, Kaupthing, Landsbanki & Glitnir were upgraded several notches from A1 to Aaa by Moody’s. I wrote at the time that this was a load of Codswallop (see here). “Investors have questioned for example whether a country such as Iceland (with a population similar in size to Hull, and an economy based around cod) has the ability to support banks which has liabilities three times the nation’s Gross Domestic Product.”

The market initially bought into Moodys’ story, pricing five year credit default swaps at around sixty basis points back in February 2007 (the cost of ‘insuring’ against default). A mere six months later and Moody’s had lowered the rating three notches. A year to the day after my initial blog the whole affair had come full circle with Moody’s returning the bank to its A1 rating. At the time of writing, five year credit default swaps are trading between 500 & 700 basis points, much more in line with a high yield credit carrying significantly lower ratings, and the Icelandic Prime Minister plans to conduct a ‘confidence boosting’ investor roadshow. Fish and chips sales may benefit from a recession, Icelandic banks clearly don’t!

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

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