Talk about talking down the economy!

Hedge Fund Pressured Economist to Talk Down Icelandic Economy

By Tasneem Brogger

April 11 (Bloomberg) – Richard Portes, president of the independent Centre for Economic Policy Research, said a hedge fund tried to convince him to talk down Iceland’s economy and banks and that he had reported the event to regulators.

They spent 30 minutes trying to convince me that Iceland is a disaster,'' Portes said by telephone from London today. I found out later it was a senior executive, one of two founding partners at this hedge fund.‘’ He declined to name the fund.

The krona has slumped 21 percent against the euro this year on speculation Icelandic banks may be hard pressed to sustain debt-financed growth, forcing a government bailout. Kaupthing Bank hf and Glitnir Bank hf, Iceland’s No. 1 and N. 3 banks, have Europe’s highest credit default swap spreads, indicating investors are betting there is a chance they’ll go bankrupt.

Iceland’s Financial Supervisory Authority has been investigating the slump in the krona after the central bank Governor David Oddsson called it a speculative'' attack by unscrupulous dealers.‘’ Portes said he reported the phone call to the FSA.

The attack on the currency started after a group of hedge fund managers met in a bar in Reykjavik in January to co-ordinate efforts to exert pressure on Iceland’s credit default swap market, the Financial Times reported on April 8.

Portes, who is also a professor of economics at the London Business School, said on March 11 that Iceland’s banks have strong'' liquidity and that credit default swap levels for Kaupthing are ridiculous,‘’ adding that the CDS market had become ``totally dysfunctional.‘’

The price of insuring against default of 10 million euros of five-year debt at Kaupthing approached 1 million euros at the end of last month. That compares with about 35,000 euros a year earlier.

The central bank yesterday raised the benchmark interest rate half a point to 15.5 percent, the second increase in three weeks, to revive the krona and slow inflation that soared to 8.7 percent in March, more than three times its 2.5 percent target.

No-one turns a blind eye when the chief economist of any bank talks an economy up.