Kaupthing becomes latest Icelandic bank to default

The news comes one day after the same fate befell Kaupthing’s two main domestic rivals, Landsbanki and Glitnir Bank, which have also been nationalised in the past fortnight. Cash settlement auctions of credit default swaps linked to the three banks will be held on October 10 for Landsbanki and Glitnir, and October 13 for Kaupthing.

Iceland’s main regulatory body, the Financial Supervisory Authority, said it was forced to take control of Kaupthing “to ensure continued commercial bank operations in Iceland”, adding that domestic deposits would be fully guaranteed by the government.

The banks are the first European firms to default since the credit crisis began, and mark the first credit events in the region since Italian dairy company Parmalat defaulted in 2003.

It follows on from other high-profile credit events to have taken place in the past month, such as those of Fannie Mae and Freddie Mac, Lehman Brothers and Washington Mutual.

A settlement auction for CDS tied to Fannie Mae and Freddie Mac took place on October 6, with auctions on Lehman and Washington Mutual scheduled for October 10 and October 14.

At the October 6 auctions, the final price for Fannie Mae’s senior and subordinated obligations were set at 91.51% and 99.9% respectively, while prices for the equivalent obligations for Freddie Mac were set at 94% and 98%.

In cash settled CDS transactions, protection sellers are required to pay the par value of defaulted bonds to protection buyers, minus the recovery rate.

See also: UK bank CDS spreads tighten further
Icelandic banks in default
Fannie and Freddie auctions raise questions about CDSs

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