The Central Bank of Iceland has announced that the key interest rate will increase by 6% to 18%. The bank recently lowered the rate by 3.5% from 15.5% to 12%. In a press release the bank said that the reasons for the decision would be made public at 11am today.
Mbl.is reports that when the Central Bank lowered interest rates on the 15th of October, economists were warning that the decpreciation of the krona would encourage further inflation in the country. They argued that tt would have been a dangerous situation to have interest rates under the rate of inflation and ultimately this would cause considerable inflationary pressure.
Inflation in Iceland rose by 2% in October to 15.9% year on year.
I can’t think of anyone who actually saw the subprime mortgage crisis coming and did something about it. Hindsight is 20/20.
this seems to have been a experiment to try to turn sh*t into gold, strange how far it went until it crashed,
http://www.youtube.com/watch?v=mzJmTCYmo9g
Peter – the CIA factsheet only lists “Other – 69.1%”, and with only two other categories. In the link I gave earlier, you have a more detailed breakdown with Financial, Insurance AND Real Estate amounting to 27.2% (combined). In the CIA’s “Other”, you also have transport, tourism, and a slew of other non-banking related services. While finance does contribute to the growth of other sectors, you could argue that other sectors contribute to finance as well. Using sector interdependancy to claim that 70% of the country amounts to nothing once banks are gone is as specious as saying that the UK loses 80% of its GDP if the communications sector blows up, because nobody can talk to each other anymore.
I couldn’t find that NYT article you mentioned but I did find a 1999 article about subprime mortgages. http://query.nytimes.com/gst/fullpage.html?res=9c0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all
It’s not a prediction and it certainly doesn’t propose doing anything about it. It basically outlines the risks of a subprime loan (which are essentially the same as any other loan). It doesn’t predict the contagion to all sectors, the drying up of liquidity worldwide, the collapse of national economies and a global recession.
Newspapers and research institutes may have occasionally touched on the truth, but for every one that warned against subprimes, you had another congratulating governments and banks for facilitating home access – and both probably had solid data and sound reasoning. That’s what they do: you can always find a newspaper or author that’s against the trend of the times (and it’s not as if they have anything to lose by being proven wrong down the line). They’re right as often as they’re not, and as such it’s a bit easy to go back in time after the fact and cherry-pick those that did manage to meekly point out that there were risks to that endeavour.
I’m not sure what you mean with your 1991 analogy – the UK real estate sector is in the same shape as anywhere else (i.e. headed down after having spent the last few years shooting up), and your private banking industry is essentially gone after your government took it over. Unless your point was that in spite of everything history tends to repeat itself, in which case I can only agree. The trick, as everywhere, is to know when to fold.
from SPAIN – We are in agreement that Iceland does have resources to eventually support a krona at a reasonable exchange rate. All I’m saying is that it has little bearing on the immediate situation, because the markets are in upheaval, the Icelandic economy is in reorganization, and nobody _today_ wants to touch the krona with a ten-foot pole. The reality is that nobody will trade the ISK at 150 per EUR in today’s markets. Speculation would be to buy ISK at 350 per EUR on bets that Iceland’s resources, industries and infrastructures will eventually bring the krona back down to more reasonable levels ;).
Ross:
“GNI per capita measured in terms of Purchasing Power Parities (PPP) amounted to 34 thousand US dollars in 2007, the twenty-second highest in the world and the fifteenth highest among the OECD countries. In comparison with the Nordic countries, Iceland’s GNI per capita is lower than that in Denmark, Norway, Finland and Sweden, but somewhat above the EU average.”
Really ?????????
Greece in front of Spain, Italy and New Zealand ? Credibility of this table, really ?
IMF, Gross domestic product per capita, current prices, US$.
Country 2006 2007
Denmark 50,815.379 57,136.733
Finland 39,827.971 46,856.045
France 37,019.835 42,033.941
Germany 35,422.063 40,400.402
Iceland 54,224.819 64,547.715
Italy 31,801.625 35,745.165
Japan 34,263.643 34,296.061
Norway 72,768.127 83,484.787
Spain 27,989.026 32,089.781
Sweden 43,190.450 49,602.514
U. K. 40,237.538 46,098.560
U.S.A. 44,063.340 45,725.348
I see Iceland is a very rich country; or would have we to say that it WAS a rich country ?
Something that is VERY rich cannot overnight be poor; Iceland is not a man, a woman, is a country.
It is necessary to look for reality, and reality is not reality of the speculation.
Axel:
” 70% of ‘ REAL ‘ icelandic GDP, never were banking
this is absolute nonsense
where did you find this figure ?”
The CIA world fact book
https://www.cia.gov/library/publications/the-world-factbook/geos/ic.html
The interaction between Finance and the rest of the economy cannot be under under estimated. Commerce, construction, ‘other services’. How much of that dies without finance? In the UK its at least equal to the finance loss.
Ross Carlson:
“I can’t think of anyone who actually saw the subprime mortgage crisis coming and did something about it. Hindsight is 20/20.”
Sorry, but thats an Urban Myth, propagated by the bankers and politicians who profiteered out of the bull market.
The Sub Prime crisis (and its son, the alt-A) was predicted by the New York Times FIVE years ago on a front page article. It laid out the consequences of the loans and the likely outcome as the fixed term rates come to an end.
There have been many warnings of what would happen with the spectacular borrowing bubble for a whole range of people.
History itself point to many many bubbles and property crash’s going back over a hundred years.
In the UK we had our last crash in 1991. After that, nobody was ever going to speculate in property prices again, never would anybody believe that house prices could only rise.
Another property boom was IMPOSSIBLE after the 1991 crash as the spectre of negative equity was burned into the nations conciousness.
Look how that turned out.
@Gray, Germany:
Politicians in the UK as well as Denmark and indeed most of Scandinavia were horrible financially. The teachings of John Maynard Keynes were the order of the day in all scandinavian countries, but our politicians had visions. They had visions of free and competent healthcare to everyone. no one should be homeless, no one should starve. no one should be afraid wether they had money or not to retire. education should be readily available to anyone who desires it, not only a boon for the wealthy.
The nationalizations in the UK during the 70’s were not successfull, but neither was the extreme liberalizations Thatcher carried out.
When Blair campaigned to raise tuition fee at universities in the UK, I wondered why he wasn’t kicked and banned from the labour party for life.
Governments can afford billions to bail out banks, but not offer free education for the working class is above my logic.
In support of Axel’s latest comment, you can see here the GDP breakdown of Iceland for 2007:
http://www.fisheries.is/economy/Structure/
Ross Carlson
im not saying a saw this coming
Jefferson was smart, i only wish we had leaders like him today, but instead we have Bush and Brown
and other hopeless idi*ts
I can’t think of anyone who actually saw the subprime mortgage crisis coming and did something about it. Hindsight is 20/20.
Me neither , God help us
From Spain
your right, 70% of ‘ REAL ‘ icelandic GDP, never were banking
this is absolute nonsense
where did you find this figure ?
about the euro, it wonderful, but we cant use it
it would mean giving up our natural resources and freedom, i would rather use our monopoly money,
I want everyone to consider this… Banks are not worried about a lack of funds, they are worrying because they now lack the ability to lend. The only question is can we, as a society, live within our means. Unfortunately, a population of 300,000 on an island in the north atlantic cannot sustain a good standard of living without credit. It´s not just big enough. This is a matter of simple nature. There is no such thing as easy money, no matter who lends it, either we are going to face this now or pass hell to our kids. I, for one, am not coward and can admit that I and everyone else I know have abused credit!!! Survival has changed…………………………..
@Gray, Germany
We are a peaceful country with some very violent and imperialistic neighbours I think we can agree on that. Denmark haven’t started a war in 200 years I believe.
“England used to be such a wonderfull country, but after Thatcher and Blair, things have turned for the worse I am afraid.”
I’m not at all a big fan of Thatcher and Blair, either, but let’s not pretend that before them everything was simply wonderful in the UK. Have you forgot Edward Heath, for instance? In comparison, he makes John Major look like a political genius.
More importantly, the krona is worth what people will pay for it, and that currently stands in the vicinity of 300 to 350 to a euro. Maybe Iceland has the industry and infrastructure to support a 100 ISK/EUR currency in the long run, but with CDS spreads at 978 today, it is clear that the markets won’t go anywhere near the krona unless there’s significant return potentioal (which the 6% increase should contribute to). Then again they can’t increase the interest rate ad infinitum because a) they’d choke residents with a domestic loan, and b) I’m not sure how much debt they could support with their GDP at those rates.
I doubt they’ll try a peg again. For one they already observed they couldn’t sustain it, and for two their recent rhetoric doesn’t seem to lean that way.
I’d also like to point out that it’s always easy to find quotes from great men decades ago who said something wise which applies to today’s situation. It’s always easy after the fact; just look at the number of people in the news who happily patronize everyone with their “But it was so obvious, how could you NOT see a crisis coming?” Where were they all two years ago? Aside from the people at Goldman Sachs and John Paulson (not Henry), I can’t think of anyone who actually saw the subprime mortgage crisis coming and did something about it. Hindsight is 20/20.
Reality is 70% of ‘ REAL ‘ icelandic GDP, never were banking: it was something fictitious, something unreal.
European devaluation is fruit of higher inflation than the one of the neighbors, and therefore, loss of competitiveness. Devaluation is competitiveness, higher prices, growth, and again higher inflation: test, Pound always lost value to German mark, Dutch gulden, Austrian shilling, Suiss Frank, Belgian frank.
Yes, a devaluation of 25-30% would be very well received in my country, if we did not have Euro currency; but, thanks to the Euro, pillars of my country hold solidly, our banking even holds better than the one of other richer and powerful countries: UK or USA. In these countries, high towers fall like leaves in the Autumn.
@Trevor I have one of these canines at home. hence the name.
“All Bar One at Canary Wharf not so busy these days, by the way.” Haven’t been there in a loong time, say 2 years possibly?
“We stopped calling ourselves “Great” Britain ages ago.” Great Britain isn’t that still island of brittania + surrounding islands? And also doesn’t is spell “GB” you your cars anymore?
It is a shame you don’t refer to yourself as great Britain anymore, it really is! GreatBritain used to be a beacon for freedom and democracy in Europe, it would be absolutely delightfull if the UK would assume that role again, instead of just follwing the US in rights and wrongs.
England used to be such a wonderfull country, but after Thatcher and Blair, things have turned for the worse I am afraid.
“I am the dog that will bite every Brits ass that gets too close :)”
Brave words, coming from a nation that has been beaten by both the Brits and the Germans reglarly doing the lat 200 years…
:P
>>Euro to Ikr 300-400 is not a real situation, because is not a real situation consider overnight Iceland is a poor country. They should look for reality,
The reality is that banking was 70% of Iceland’s GDP. When you remove that amount of income from a country the wealth of its people and value of its currency falls with it. That is completely ignoring the knock on effect of a world wide economic crash.
Devaluing the currency is one step a country can do to improve its economy. Its the advantage Britain retains and has used to devalue the Pound.
Countries within the Euro such as Ireland, Greece and Spain would love the ability to follow suit.
Didn’t I comment recently here that a lower interest rate would only fuel inflation? Looks like the IMF sees it the same way. For a beter, stable exchange rate of the Krona,it’s important to reduce the amount of money floating around. Still this makes someone wonder if the Icelandic government has any real expert for economic policy advising them? Do they need the IMF to see how to fight inflation? That’s economics 101…
Perfectly I understand your words but, the one is the Central bank that should take suitable actions so that the situation is next to the reality.
Euro to Ikr 300-400 is not a real situation, because is not a real situation consider overnight Iceland is a poor country. They should look for reality, and reality looks for work and development, channels adapted to look for normality as soon as possible. I do not speak to implant strong krona at 150 to €, without blessing of market; I speak to start up suitable economic and monetary actions so that is possible to be arrived at the situation from that Euro is worth 150 krona, approximately, and not 300-400. Is a real situacion that Euro is worth 300-400 krona? Is a real thing that one of the richest countries in the world be absolutely exhausted? Is it a suitable situation are for supervising and anticipating had not done great thing? It is necessary to look for the best thing, it is necessary to look for the reality and it is necessary to work more and much.
About Hungarian subject, ECB would not have to be responsible for the stupidities that certain governments do; sometimes, ECB eats expired cake, and he does not deserve it!
Denmark currency: danish country always had similar inflation to Central Europe ( Germany, Netherlands, Austria ) ; danish inflation something distant to Nordic area: higher inflation. Nothing would harm to Denmark if adopt Euro: I think, it is question of love … its currency … !!! ¡¡¡ . Different are aspects Swedish and Norwegian; they always had inflation higher than Central Europe, – also other things – and therefore to adhere would be a serious subject, meditated subject.
Very complicated Icelandic situation; we hope with loans and hard work – also hard work of Central Bank ! – , situation is alleviated in next months … or years.
Warning since 1802, because of a bank!
a letter from Thomas Jefferson from the year 1802 ,Letter to the Secretary of the Treasury Albert Gallatin (1802)
this was writen 206 years ago
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. ”
Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
3rd president of US (1743 – 1826)
Wise words, from one of few smart Americans
some idi*ts on wall street should have read this
This new strategy to increase interest rate may in theory work , but i hardly think we will ever know because what is left of Icelandic busyness will be as dead as the Krona very soon
its still impossible for our export industry to sell products out of the country, the payments are frozen somewhere or simply lost, the Americans say “we know you are not terrorist but we cant take the risk” so that market has vanished, i am guessing are afraid they would be put on a list of companys that does busyness with a nation that is linked with terrorists, its amazing how powerful
this word is and how much damage it can do,
as for our nordick friends, thanks for your kind thoughts.
We are grateful for the help from our friends in Faroe Islands, i hope we can return the favor somday
Actually bid/ask is 283/328.
At that price Iceland would be comparable to Western Europe prices.
“Dane, much as the crassness of my fellow countrymen embarrasses me, you are asking for it with a name like that. We stopped calling ourselves “Great” Britain ages ago.”
The Great has nothing to do with attitude or opinion, its just a reference to the size of the island – i.e. Greater and Lesser British Isles. Lesser being the smaller of the two, aka as Eire.
Another example is the Greater and Lesser Antilles
>>And good luck with 150 – 300 or 400 would perhaps stand a chance, but at 150, the Icelandic central bank would drain the rest of their reserves in a matter of days or weeks…
Thats what I’m expecting to happen. Being politicians not economists, they will peg at an unsustainable amount and blow billions of the IMF loan on defending the Krona. Its seems to have settle around 300-400, lets watch them aim for half that.
@from SPAIN:
you don’t understand that any peg has to be *defended* with real money, real foreign reserves, which iceland currently does not have?
What is the benefit if iceland says “we peg ISK to EUR at 150”, and then does not provide foreign currency to buy ISK at that rate? Peg has meaning if you are actually able to sell and buy currencies at that rate!
And good luck with 150 – 300 or 400 would perhaps stand a chance, but at 150, the icelandic central bank would drain the rest of their reserves in a matter of days or weeks…
Dane, much as the crassness of my fellow countrymen embarrasses me, you are asking for it with a name like that. We stopped calling ourselves “Great” Britain ages ago.
And we’re all “arse” not “ass”. All Bar One at Canary Wharf not so busy these days, by the way.
On Oct 28, 2008, Mike Smith wrote:
>Poor Icelanders. This is dreadful for anybody in Iceland repaying a mortgage
>loan.
Yes, but also bear in many have taken loans for other capital items in a basket of foreign currencies such as Yen, USD, Euro, etc.
So a stronger Krona is actually the only thing that will provide a short-term relief to those who’s monthly payments are about to come due for those loans.
On the subject of pegging, some currencies simply move in different directions as nations are so diverse, and maintaining a peg can be simply too expensive as the Central Bank tries to drown the speculators with cash, depleting their reserves.
Trying to keep a peg against the market is what ‘sunk’ the Bank of England in 1992 when the UK was forced out of the EC’s ludicrous Exchange Rate Mechanism, thus saving the UK economy for the following decade.
If the Major administration had not been so delusional about the “enhanced policy credibility that ERM membership was expected to bring” then the UK would be £6bn better off (or more because of course it was gold reserves they mainly liquidated) today.*
(Despite what many said at the time, the tragedy wasn’t leaving the ERM, it was entering it.)
Can the currencies currently in ERM II honestly say it has been worth it? Hungarians certainly seem to be feeling the pain in particular right now.
Where is the ECB for them now?
Like the British, the Swedish know what’s good for their nation and have stayed resolutely out.
The Danes could join the Euro if they wish, but other than the political union aspects, will it really be of benefit?
Why would any successful country give over its economic destiny to unelected politicians in Brussels where soon qualified majority voting based on population size will be the way even the limited ‘democracy’ we see there will function.
*Of course that waste of taxpayer’s money is small fry compared to Brown and Darling’s largess in throwing prudence to the wind with the £37 billion ‘bail-out’, and that’s only the beginning of their spending plans.
Brown and Darling are quite happy to put future generations of Brits into financial slavery, just as population demographics mean there are less and less people working to finance this coming neo-Keynsian spend and tax orgy.
On Oct 28, 2008, Jack London trolled:
>Unless you’re a dog, isn’t this an oxymoron?
“Jack London” you and your colleague’s transparent trolling just reduces your credibility even further. Don’t be such a disinfomoron.
Yes, but when UK increased interest rate to safeguard the Pound, September 1992, 12% -> 15%, and since did not provide effect, back 15% -> 10%, Pound had a fictitious value, did not correspond to real value, and in addition Pound blows began. Nevertheless, Iceland is not in a pact of stability, in a fluctuation pact tremendously reduced only +/-2,25% as pound in 1992, and krona is not receiving first blows of the possible battle but blows took already place: December 2007: Ikr 90-95 / Euro ; Oct 2008: Ikr 150-200-300 / Euro. Pound rate, year 1992, was fictitious; krona, today, is real. Euro: Ikr 300 is not real exchange rate; Euro: Ikr 145-150, yes! In 1992, Pound: 2,9 Deutche Mark was not real rate; Pound: 2.4 Deutsche Mark, yes!
Any depreciation of the Icelandic krona below Ikr 145-150 / Euro, would not be real rate but speculative situation. And Central bank would have to take part, or developing appropriate ways so that this did not happen.
Perhaps, interest rate 18% is not sufficient, but it is managed to channel the situation with the appropriate actions, inflation will fall quickly, and rate also.
A so small Central bank does not have mechanisms sufficient to calm a weather of ferocious speculators; but, for that is the forecast; forecast of situations is very important, mainly when goes to a tiny country and Central bank. This so particular case, forecast and supervision must be extreme.
Spain: I am not one of the bubbleplayers, because I have never beleeved in them. To me a balanced economy is more what I want.
Icelanders have got credits, and they will get what they need. Remember that not all communication goes in English. But they – as all others – need to find out what to do the comming years.
Iceland is a small population with rich resources -which you also mention, this make everything easier. I am much more concerned how Europe will handle this crises – that is where the population is.
Norways economy is also affected as others, but the politicians knew it would come, and we have saved for it.
I have also 20 years of lifesavings, which I have no control over, and I can just hope there will be some money when that time comes. Today i read that the company may have bad results, and they have lot of years to go.
Economy is about thrust, money is about thrust. What is loan thrusted on? Future income, increased values.
I intend to have a look at this mans books – I hope some others will do to.
http://en.wikipedia.org/wiki/Thorstein_Veblen
@SPAIN
In theory yes but one should note that there have been previous instances in history where governments unsuccessfully tried to use a shock increase to the interest rate to save a plummeting currency (such as with the British Pound on Black Wednesday). This 6% increase is massive by any standards, but as Matti Mäki mentioned earlier the markets today are strongly risk-averse and 18% might still not be enough.
Pegging the currency requires foreign exchange reserves that the Central Bank doesn’t have, which is why the previous peg attempt failed.
@Jack London.
““GreatDane”
Unless you’re a dog, isn’t this an oxymoron?”
I am the dog that will bite every Brits ass that gets too close :) And therein lies the problem, Brits are all ass!! got no idea where to start biting!
Many Euros to fight are not the solution; at end, waters look for prehistoric channel!
Yes, luckyly few countries have so many natural resources and so little population. If those natural resources did not exist, Norwegian subject and situation would be very different.
Since you have so many Euros, why do not you send a few of them to HIS beloved brothers, the Icelanders, whose difficulties are principles?
Do not be avaricious, and alleviate deep difficulties they will have.
“GreatDane”
Unless you’re a dog, isn’t this an oxymoron?
@Spain: Pegging a currency is not as easy as one might think.
Denmark can only do this because we have the support of ECB through the “ERM II” agreement.
The Danish national bank has been forced to increase interest rate, and also use reserves to defend the Danish Krone.
Spain: Problems with Norwegian Kroner? Perhaps we just slow down a bit and let Iclandic krona join, then we speed up. We are not pegged with Euro, but perhaps we have enough Euro for a holiday or two for the whole population – icelanders included…
After hurried decisions, way of the nervousness and complex situation of the Icelandic economy, sanity returns to reign in the decisions of the Central bank.
Interest rate, lower, than inflation? Never in the Icelandic economy. It is a scandalous interest rate, but it will help to knock down the inflation, and also would stabilize the Krona. Main thing is to stabilize the currency, therefore inflation will become stabilized, will fall later, and interest rates will be able to be reduced.
Why Central bank of Iceland does not peg national currency to the Euro? Estonia pegged its currency to the German mark; later Estonia and Lithuania pegged their currencies to the Euro. Also Austria had pegged its currency to the German mark. And Denmark? Danish currency goes with the Euro. Unique way to stabilize the economy with low interest rates is to peg krona to the Euro.
Later, in decades, since Icelandic inflation usually is higher, devaluation would be possible!
Currencies of Norway and Sweden are not pegged to the Euro, and also with difficulties.
Poor Icelanders. This is dreadful for anybody in Iceland repaying a mortgage loan.
I can see I’ll be carrying a big goodie bag for my (Icelander) friends in Reykjavik next time I visit.
It´s fairly obvious that Matti Mäki´s native tongue isn´t English!
P.S. If he had signed Bob Jones I would have drawn the same conclusion!
Welcome IMF!!!!!
Like bringing a tank of gasoline to the bonfire. Additional pressure on local finances in addition to the economic crises may only exarcebate things. Time to think outside the box.
To loan to Iceland is impossible, if you can be quite certain, that you loose the capital.
If interest rate is 18% or 80%,
that’s equal.