EconTech

PK wonders:

The North Atlantic conspiracy

Is Iceland the victim of a financial conspiracy?

Such things really do happen. During the 1997-1998 financial crisis there was, almost certainly, a financial conspiracy against Hong Kong. According to the Hong Kong Monetary Authority, several major hedge funds engaged in a “double play”, shorting both the city-state’s stock market and its currency. The alleged plan was to put the HKMA in a double bind: it would be forced either to raise interest rates to defend the Hong Kong dollar — driving stocks down — or to devalue the currency. Either way the hedge funds thought they’d make a killing. They were, however, caught in a bear trap when the HKMA did the unexpected and bought up a large fraction of the HK stock market.

There was also, according to Australian officials I talked to at the time, a deliberate effort to drive down the Aussie dollar.

Now, Iceland is making similar allegations:

The cost to protect the bonds of Iceland’s three biggest lenders from default rose after central bank Governor David Oddsson said “unscrupulous dealers’’ are trying to break the country’s financial system.

…

Oddsson called for an international investigation into attempts to drive Iceland’s economy “to its knees,’’ in a speech on March 28. The central bank was forced to raise its benchmark rate to a record 15 percent last week to defend the krona after a 30 percent slump against the euro this year.

…

Attacks on the country’s Reykjavik-based banks “give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,’’ Oddsson said at the central bank’s annual meeting in Reykjavik. “They will not get away with it.’’

One interesting point: it appears that the Icelandic authorities particularly suspect Bear Stearns.

I’ll be keeping an eye on this.