Nordic Currencies: Iceland's Krona Slumps on Rating Downgrades

By Bo Nielsen

Oct. 2 (Bloomberg) -- Iceland's krona tumbled to the lowest level against the dollar since at least 1992 as bank bailouts and debt-rating downgrades this week by Standard & Poor's and Fitch Ratings spurred investors to dump the currency.

The krona plunged 22 percent this week after the island nation's government said Sept. 29 it will purchase a 75 percent stake in 104-year-old Glitnir Bank hf after the firm's short-term funding dried up. The currency fell for a sixth day versus the dollar, its longest run of declines since June 16.

``This is a fully-fledged currency crisis,'' said Carl Hammer, an emerging-markets analyst in Stockholm at SEB AB. ``Investors have lost confidence in the financial system and the central bank can't bail out the rest of the banks the same way it did Glitnir. It simply doesn't have the money.''

Against the dollar, the Icelandic krona slid almost 5 percent to 114.60 by 2:30 p.m. in Reykjavik, compared with 94.35 at the end of last week.

The krona dropped 7 percent on Sept. 30 after Moody's Investors Service put its Aa1 rating for Iceland on review for a potential downgrade. Fitch lowered Iceland's rating after the government paid 600 million euros ($859 million) for its stake in 104-year-old Glitnir. S&P cut its rating the day before.

Glitnir and Kaupthing Bank hf, Iceland's biggest bank, have funded lending for acquisitions and other investments in northern Europe by borrowing in money markets rather than using customers' deposits. The banks, along with Landsbanki Islands hf, top the list of European banks most likely to fail, according to prices of credit default swaps collected by Bloomberg.

`Liquidity Squeeze'

``If the liquidity squeeze is a big problem in the U.S. and euro zone, imagine what's its like for a tiny economy like Iceland,'' said Elisabeth Andreew, chief currency strategist in Copenhagen at Nordea AB, Scandinavia's biggest bank. ``We have advised our customers to stay out of the krona for a long time.''

The swap market is frozen, with rates yesterday reaching a negative 70 percent, according to SEB's Hammer, as investors sought to sell the krona for dollars and euros. A negative swap price indicates investors are willing to receive lower interest payments for krona they lend to get financing in euros or dollars.

The benchmark interest rate in the nation of 320,000 citizens has been kept at 15.5 percent since April in an effort to lure investors to the economy and fight the fastest inflation in 18 years.

The krona is the third-worst performing currency in the past 12 months among the 179 covered by Bloomberg, behind only the Turkmenistan Manat and the Zimbabwean dollar. It has slipped 45.9 percent against the euro and 47.1 percent versus the dollar.

Money-Market Rates

In other trading, Norway's krone was at 8.2726 per euro, from 8.2780 yesterday, after the European Central Bank left its key interest rate at 4.25 percent today and President Jean-Claude Trichet said a reduction in borrowing costs was discussed.

The one-month Norwegian interbank offered rate, or Nibor, snapped six days of increases, falling to 7.73 percent, from 7.91 percent yesterday, the highest level since 1999. The Nibor rate is fixed at noon local time.

Norway's central bank may be forced to reduce interest rates to ease credit constraints, Dagens Naeringsliv reported today, citing Skagen fund manager and former central bank policy maker Torgeir Hoeien.

``The money-market rates remain high because of a lack of dollars,'' said Arne Lohmann Rasmussen, a senior economist at Danske Bank A/S. ``We expect rates to remain elevated for the rest of the year.''

Norges Bank last month supplied one-week dollar currency swaps to ease liquidity in the financial market.

Norway's jobless rate dropped to 1.7 percent in September, the lowest in three months, threatening to fuel wage growth and create a second wave of price gains.

Sweden's krona climbed to 9.7056 per euro, from 9.7463. It slipped to 7.0216 versus the dollar, from 6.9573.

Nordic government bonds rose, with the yield on Sweden's 5.25 percent note due March 2011 falling 1 basis point to 3.67 percent. The yield on Norway's 6 percent security maturing in May 2011 lost 7 basis points to 4.56 percent, according to Danske Bank A/S prices. Yields move inversely to bond prices.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net