Icelandic Stocks Drop 77% as Trading Resumes After 3-Day Halt

By Jakob Lindstroem

Oct. 14 (Bloomberg) -- Iceland's benchmark stock index plunged 77 percent, the biggest decline on record, as trading resumed after a three-day suspension and the nationalization of the country's largest banks.

Investors demanded a higher premium to hold Icelandic government bonds, while the price of the country's currency remained ``undetermined,'' according to TD Securities.

The global financial crises sparked the collapse this month of Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf with debts equivalent to as much as 12 times the size of Iceland's economy. The three banks accounted for about 76 percent of the OMX Iceland 15 Index's value prior to the nationalization.

``We are quite far away from having it up and running in terms of anybody being able to invest, or disinvest in the Icelandic stock market,'' said Lars Christensen, a senior strategist at Danske Bank A/S in Copenhagen. ``Given that we don't have a normally functioning exchange-rate market, a fixed income market, we don't have a clearing system between the banks internally, it's hard to talk about any well-functioning stock market.''

The OMX Iceland 15 fell 2,326.22 to 678.40, the lowest since April 1996. The gauge has lost 89 percent this year, making it the worst performer among 88 equity indexes tracked by Bloomberg News. Four of the 13 other stocks in the index didn't trade, while the six that did accounted for about 8.5 percent of the measure's weighting before today.

Global Stocks Rally

Iceland's record decline came as the U.S. plan to inject $250 billion in banks helped send Europe's Dow Jones Stoxx 600 Index to its biggest two-day gain on record. The regional benchmark added 3 percent today, while the Standard & Poor's 500 Index rose 0.7 percent.

Trading in Icelandic stocks was halted since Oct. 9 after the OMX Iceland 15 lost 30 percent in nine days as the country's financial system collapsed. Iceland started talks in Moscow today to secure an emergency loan of as much as 4 billion euros ($5.47 billion) from Russia.

There was no trading yesterday in Iceland's krona by foreign banks and the price of the currency remains ``undetermined,'' Beat Siegenthaler, chief strategist for emerging markets at TD Securities Ltd. in London, wrote in a note today.

Currency, Bonds

The currency's bid/ask spread, the price at which traders are willing to buy and sell, was 300/450 per euro on Oct. 10, according to TD Securities.

Investors demanded a yield premium of 473 basis points more than European government bonds, up from 412 basis yesterday, to hold Iceland's 1 billion euros of 3.75 percent bonds due 2011, according to BNP Paribas SA prices on Bloomberg. The bonds yield 8.19 percent.

Among the stocks that did trade today, Alfesca, a maker of salted fish products, dropped 0.95 krona, or 17 percent, to 4.5 kronur. Icelandair Group Holding hf, the country's largest carrier, retreated 0.5 krona, or 3.2 percent, to 15 kronur. Marel hf, an Icelandic meat-processing company, lost 0.6 krona, or 0.8 percent, to 71.1 kronur.

`Need Capital'

The country should seek aid from the International Monetary Fund and later apply for European Union membership and adopt the euro, Foreign Minister Ingibjorg Solrun Gisladottir wrote in Morgunbladid on Oct. 13.

``There's not that much left to trade,'' said Ross Porter, a Norway-based portfolio manager at Skagen ASA, which manages $10 billion. ``They will need capital.''

The OMX Nordic Exchange said in a release late yesterday that it set the prices of the three nationalized banks to zero in the index after ``not being able to receive valuations from market participants.''