Net tightens on the Iceland Rumour-Mongers

From the FT

....Full-blown investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsson, director-general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumours about the Icelandic banks and financial system in order to profit from it.

Details of the investigation are confidential, but the authorities are expected to pay close attention to movements in the credit default swap markets for Iceland’s banks. Spreads in these markets – a proxy for investors’ fears the banks will collapse – have ballooned from about 50 last August to more than 1,000, indicating a very high level of fear about their viability.

The suspicion is that speculators exerted undue pressure on the illiquid CDS market in the knowledge that the wider the spread went, the more fear of a banking collapse would contaminate the stock and currency markets.

There are also concerns about the way rumours were spread about the alleged reliance of Iceland’s banks on internet deposits, which triggered reports in UK newspapers that such deposits could be withdrawn rapidly.

The chief executives of the three main banks, Landsbanki, Glitnir and Kaupthing, made clear in interviews last week there is no evidence this is the case, despite the negative publicity about Iceland. They firmly believe such rumours were started deliberately in order to spark fears of a run on their overseas deposits.

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http://www.ft.com/cms/s/0/20b359f4-058b-11dd-a9e0-0000779fd2ac.html