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Attack on the Crown

Written by A Forex View From Afar on Tuesday, April 01, 2008

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Attacks On The Crown, The US $ Next?

The attack isn't on the English Crown, but very close, it is on the Icelandic Krona (which actually means Crown). Quote;

"...give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system". "They will not get away with it".

These comments, made by the Chairman of the Icelandic Central Bank, David Oddsson, confirms that Hedge Funds (described as "unscrupulous dealers") are out in force, attacking the country's financial system. Iceland is in a tough position right now, and looking vulnerable; the current account deficit is at 16% of GDP, and inflation stands at 8.7% against the central bank’s target of 2.5%.

Late Call On The Downgrades
To give a helping hand, of course for the Hedge Funds not for Iceland, the rating agency, Fitch, has just announced it has changed the country's outlook from Stable to Negative;

"Fitch Ratings has today revised the Outlooks for the Republic of Iceland’s Long-term foreign and local currency Issuer Default ratings (IDR) to Negative from Stable"

Even more staggering is the fact that Fitch has the same intentions for Iceland's biggest three banks, but only now that the Hedge Funds have had their chance to tear them apart in an effort to replace their recent loses.

"Fire, Fire"
Why do these rating agencies alway crop up and yell "Fire" after the facts are out in the open? Is the idea of rating something not meant to enable a forward valuation to protect against this? They did it with U.S. LDO and CDO (sub-prime) debt valuations last year, they were 9 months behind the curve on those.

The Fed, The Last Resort
What is very interesting is that Fitch has cut ratings on some banks, that until some days ago were fine (until the hedge funds role in to rape and pillage), but they chose to keep the AAA rating on mortgage backed papers that have a 60% default, that can be hardly called speculative bonds. What gives there?

The "good" news is those AAA bonds will soon change to Treasury Bills, if they haven't already been swapped, as the Federal reserve step in to buy debt that nobody can sell.

It could get worse; Paul Krugman and David Oddsson are hinting that Bear Stearns, which is in insolvency right now, may implicate others in their debacle. It seems that the other Hedge Funds involved are DA Capital Europe, King Street, Merril Lynch GSRG and Sandelman Partners. Maybe the rating agencies will want to join the Rogue's Gallery too, no wait, rating agencies will probably leave it until much later into a problem before downgrading themselves.

Forget Ratings
Where on earth does all this lead to in regard to trying to value debt? If ratings are only ever reactive, instead of being pro-active, is there a need to have ratings at all? It has failed average Joe dramatically recently. The Institutions deserve to make their own restitution if they could not be bothered to get second opinions on the swaths of debt that were gorged on, in a greedy frenzy whilst the US housing market exploded.

European Gains
Maybe the Treasury is looking to regulate the wrong people, maybe the rating agencies deserve to get grilled by Big Hank and Helicopter Ben, and leave the Banks to sort themselves out via the Interbank. All of the Red Tape has an unwanted sticky side too; London and Frankfurt are gaining Market share of foreign investment whilst all the whistle-blowing and finger-pointing takes place.

Door, Horse, Alan Greenspan
Closing the stable door should have been done in 2005, the Horse bolted a long time ago Hank, and was last seen being ridden into the sunset by Alan Greenspan.

US$ Valuations
The US Dollar will only appreciate with an expanding economy, the Contraction phase is done, we are in the Trough, next comes Expansion, and then eventually Growth. However, Growth cannot happen with poorly rated debt, and debt cannot be rated retroactively. So, until the debt can get properly accounted for, the US $ may not appreciate too much more than just having Bounce Days throughout 2008.


Sources:
Paul Krugman: The North Atlantic conspiracy
FT: Put-upon Iceland’s latest woes

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  1. 1 comments: Responses to “ Attack on the Crown ”

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