Icelandic economy on verge of meltdown TAKEOVERS: BAUGUR

0 Comments | Sunday Herald, The, Apr 9, 2006 | by Matthew Magee

CORPORATE raids from Iceland such as Baugur's stakebuilding in House Of Fraser on Thursday could become a thing of the past if Iceland's economy continutes to deteriorate, as predicted by economists.

Baugur anonymously spent pounds-28 million for a 9.5-per cent stake in the retailer early on Thursday morning, confirming its bid on Friday.

It is the second time that Baugur has built a stake in House Of Fraser. In 2003 it joined with Tom Hunter to acquire a 21-per cent stake but subsequently sold it in 2004.

The economic situation in Iceland is being closely watched by observers who expect both a domestic recession and an end to international expansion as the price of debt rockets. Iceland's central bank raised interest rates by 0.75-per cent to 11.5-per cent 10 days ago to attempt to cool the overheating economy.

"We could well see Icelandic companies starting to liquidate their assets, " said James Knightley of broker firm ING Financial Markets. "It will come down to whether Icelandic companies will have to sell their assets to cover their obligations at home, with interest rates rising so high." Carsten Valgreen, the chief economist of Danske Bank and author of a recent report on the Iceland economy said:

"There is a significant risk of a liquidity squeeze, which will cause companies to look at their equity positions."