I wrote on the 17th of January a sort of live report on the major financial crisis Iceland is facing right now. At that time I had no idea what was going on and I kind of freaked out.
Just to recap, we’re in the midst of a macroeconomic meltdown with a plunging Króna. The Icelandic crown has been one of the major victims of global credit market turmoil, weakening from 82 crowns to the Euro Mid-April the inflation hit 8.7%, well beyond the bank’s target rate of 2.5%, and well in advance of wage growth of 6.8%. The forecast of Kaupþing Bak is a 12% by the summer… The central bank raised its benchmark interest rate to a record 15.5%. This has prompted fears about the stability of Iceland’s relatively large financial sector, whose business is mostly overseas.
Part of the problem seems to be that the economy was too good. Employment was (and still is for now) about 1%, to be precise the number of people out of job was 1,631 in February. (Yes in Iceland you can easily count them).
Investors are selling the krona because of concerns Iceland has too much international debt at a time when banks around the world are restricting access to credit. The currency’s plunge has transformed icelanders (and especially expatriates like me) into currency obsessives. I dare any of people reading this to give me a exchange rate of your currency to the U.S dollar, the Euro and the Swiss Franc. In fact most of the people have no idea what it is unless they’re preparing a trip abroad (and still). Here everybody can tell you such thing on a daily basis.
The major problem is that Icelanders like to borrow — and they particularly like to borrow from banks in Europe, where interest rates are much lower. This has Icelanders lapping up euros, something that is only serving to aggravate the meltdown in Iceland’s currency.
Forecasts are rare nowadays since this rapid crisis came as a surprise. Recession was foreseen but not in a such short amount of time and in a such scope. What I am reading here and there so far is that there a slight possibility that the Króna is going to depreciate a little bit further but in general a cooling down of the economy by the end of the year is the most probable. No one dares to see anything going better until 2010. Once again, Iceland shown a quick recovery from "similar" problems in 2002. Iceland has a very flexible economy that can swiftly adapt.
Until then, we can see the bright side of it. The most expensive country in the world has a weaken currency right now which I think should boost the tourism for that summer. My sister could have never expected such a perfect condition to give me a visit next month.
Appreciation of 5% during lunch time.
Here is most probably the cause
16.05.2008
The Central Bank of Iceland concludes swap facility arrangements
The Central Banks of Sweden, Norway and Denmark, have entered into euro/Icelandic króna bilateral swap facility agreements with the Central Bank of Iceland.
The facilities are a precautionary measure made to provide the Central Bank of Iceland with access to euro if needed. Each agreement provides up to EUR 500 million, where the Central Bank of Iceland can acquire euro against Icelandic króna. The swap agreements are facilities that may be drawn upon by the Central Bank of Iceland when and if necessary.
The above agreements significantly enhance the available international liquidity of the Central Bank of Iceland. The Bank intends to further bolster its external liquidity in the period ahead.