Lower, Hike, Peg, De-Peg! What is Iceland Doing?!

By Sean Hyman

Iceland has weathered the worst of this credit crunch storm. Recently, three of Iceland’s biggest banks failed. The Iceland financial regulator had to take them over because the banks couldn’t secure the short-term funding they needed to stay open.

The recent mayhem has sent Iceland central bank scratching for anything they can. They’ve thrown just about everything at this problem in two weeks time. They’ve tried to peg their currency from free floating.

When that didn’t work, the Iceland Central Bank had to de-peg days later. Then they cut the interest rate by 3.5%. Then they almost immediately had to turn around and jack up their interest rates by 6%.

On top of this, they’ve written to just about everyone for funding. Iceland is working to secure loans with Norway, Sweden and Denmark to the tune of US$4 billion. They even asked Russia for emergency funds. How low do you have to go? That’s like asking the Mafia for a loan!

The latest news is Iceland tried to secure a loan from the IMF. Finally the IMF told them they had to jack up interest rates to 18% (6 percentage points higher at the time), or they could forget about the US$2.1 billion loan that the IMF had to give them. So of course, IMF’s central bank raised rates to 18% (like they had any choice).   

But it’s not just Iceland that has their hand out for the salvation of the IMF. You can add Hungary, Belarus, Pakistan and the Ukraine to that list too. However, Iceland is one of the currencies that has suffered the most.

They say a picture is worth a thousand words. So take a look below and I think you’ll see what I mean. No, that’s not the space shuttle lifting off! That’s the U.S. dollar skyrocketing versus the Iceland’s krona!

U.S. Dollar Shoots to the Moon Against the Krona

Don’t Like the Rate on the Krona? Just Wait a Few Minutes!

Can you see why no one wants to lend to them? Gee, who would know what the exchange rate should be? If you took a few minutes to consider it, you may already be losing money. Banks know this. So they’ve avoided the krona like the plague.

So while they have gotten some loans that have come their way, it’s not all over yet. It will take more than the IMF to turn this around.