Iceland to investigate suspected market manipulation
STOCKHOLM, March 31 (Reuters) - Iceland's financial watchdog said on Monday it had begun investigating whether market players may have deliberately spread rumours about alleged weakness in the island's banks to manipulate the market.
Iceland's banks have been frozen out of credit markets in the last few months over fears they could default on debt, while the country's currency has been battered by worries the economy is headed for a sharp slowdown after years of red-hot growth.
"Last week we started to gather information on whether negative rumours had systematically been spread against the Icelandic banks and the Icelandic financial system in order for those spreading the rumours to profit from it," the head of Iceland's Financial Services Authority said by phone from Reykjavik.
Jonas Jonsson, director general of the FSA, declined to comment on who had been contacted or the scope of the probe.
"We considered at least there is a reason to investigate it. Steps will be decided on with regard to the information we get," he said.
Iceland's three main banks, Kaupthing KAUP.IC, Landsbanki LAIS.IC and Glitnir GLB.IC, have been rocked by speculation about their ability to handle the debts they have built up as they expanded overseas in recent years.
The banks themselves have continually stressed they have ample liquidity and well-diversified income streams.
But the cost of insuring their debt against default has soared, effectively freezing them out of credit markets.
Five-year credit default swap spreads on Kaupthing and Glitnir exceeded 1,000 basis points on Monday, higher than Bear Stearns BSC.N before its bailout and sale to JPMorgan (JPM.N).
Some analysts also wonder how sustainable the Icelandic banks' profits are in the current market environment. Banks across the world have suffered from falling business volumes and higher funding costs.
Kaupthing has seen its share price fall nearly 40 percent since a peak at the end of July last year. Landsbanki's are down 28 percent and Glitnir's 43 percent.
The DJ Stoxx European banking index .SX7P is down 30 percent over the same period.
The Icelandic crown, once popular with traders who borrowed cheaply to buy high-yielding Icelandic assets, has dropped in value by 40 percent since late July last year as risk appetite has shrunk.
This has stoked inflationary pressure and forced the central bank to hike rates, the latest move, to 15 percent, last week. Inflation was at 8.7 percent in March, well above the central bank's 4 percent target limit.
Last week, central bank chief David Oddsson called foul over developments in the markets.
In a speech at the central bank's annual meeting on Friday he said Iceland had seen a situation similar to that experienced by Britain's HBOS HBOS.L, which briefly saw billions of dollars wiped off its value earlier this month after unfounded rumours it had problems.
He said unscrupulous dealers had made a stab at bringing down Iceland's financial system, saying an international investigation into events would be logical. (Editing by Will Waterman)
