Icelandic banks’ trade finance operations threatened by crisis

The future of the trade and commodity finance operations of Icelandic banks Landsbanki and Kaupthing are hanging in the balance following the forced nationalisation of both banks amid a crippling currency crisis in Iceland.

Trade finance professionals at both banks were reluctant to speak while their employers remained in turmoil and the crisis threatened to bankrupt the state of Iceland itself.

One-third of Landsbanki staff in Iceland have already been laid off and both banks, now under state control, are expected to retrench dramatically and to hold a fire-sale of assets. Atli Atlason, managing director of personnel at the new Landsbanki, said that the bank would completely reorganise, minimising its brokerage operations and international projects, although some would remain.

Both banks had embraced the ‘yen carry trade’ – borrowing at low interest rates from the Far East to reinvest in more lucrative projects elsewhere – earlier and more enthusiastically than anywhere else, with Kaupthing doubling in size every year since 1995. There have also been unsubstantiated rumours circulating for many years that Icelandic organisations were engaged in money laundering for the Russian mafia.

Landsbanki and Kaupthing had lent generously to such entrepreneurs as Robert Tchenguiz and the retail conglomerate Baugur, asking them to put up little of their own money. When valuations fell, the banks were heavily exposed. Tchenguiz has been forced by the bank to sell stakes in a number of major businesses at a loss of about £800m.

However, when the international financial markets froze, the Icelandic banks were unable to either roll-over their borrowings or to refinance.

Landsbanki was forced into administration and nationalisation following a run on the bank, while Kaupthing was nationalised after its UK subsidiary, Kaupthing Singer & Friedlander (KSF), was put into administration by the Financial Services Authority – an event sparked by the bankruptcy of Landsbanki and the decision by the Icelandic government not to honour its deposit guarantee to non-Icelandic savers.

KSF accounted for more than 40% of Kaupthing’s deposits.

The collapse had been expected for most of the year. Newspapers, such as the Daily Telegraph, had warned as early as February 2008 that Iceland was facing a potentially catastrophic financial crisis. By the end of March 2008, credit-default swap rates for Iceland’s three largest banks were among the highest in the world, reflecting a belief that there was a real chance of default.