Iceland’s ice cold currency

Spring has arrived in Iceland, but it’s still a frigid winter for its currency, the krona (ISK). In early November 2007, 1 US dollar only purchased just under 60 krona. Today, the depreciated dollar against other major currencies commands nearly 77 krona. Against the mighty euro, the krona has depreciated nearly half since midsummer 2007.

Iceland, a small country of only 300,000 inhabitants but with a relatively high $20 billion economy, is heavily dependent on foreign capital. Under the strain of a global credit crunch initially caused by a mortgage subprime crisis thousands of miles away, international investors grew skittish and withdrew investments denominated in Icelandic krona. The result: it’s stock market has fallen 45%…inflation hovers in double digits…it’s banks face liquidity problems…and to attract international investors in an effort to support the krona, Iceland’s central bank has raised interest rates to 15.5%, the highest in the industrialized world. Under a best case scenario, the high interest rate will usher in an enduring stagnant economy. It’s hoped to be the price to pay in order to stave off highly leveraged hedge funds from manipulating the krona down to disastrous levels. Iceland’s central bank’s total reserve of under $5 billion is another potential weapon in its arsenal against unscrupulous hedge funds. However, the high interest rate and the total reserve may not be enough to protect the value of the krona.

A tiny country like Iceland is not equipped to adequately support its own volatile currency in this unfair world. Iceland should follow Ecuador and Panama’s lead by abandoning its own national currency in favor of a hard currency, such as the US dollar or euro. National pride should never interfere with growth oriented economic policies.

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(Above photo by US photographer, Spencer Tunick)

Tags: hedge funds, iceland central bank, iceland economy, international investors, krona