Columbia University Professor and former Federal Reserve official Frederic Mishkin wrote a much-discussed Op-Ed in the Financial Times yesterday. In it, he asks

Are potential asset-price bubbles always dangerous?

He answers this question with a no, noting that some asset bubbles are more dangerous than others because of their connection to debt and credit. I agree with his delineation and assertion that some asset bubbles are more dangerous than others. But, his conclusion that the non-credit variety of asset bubble — what he calls the “pure irrational exuberance bubble” — is not dangerous is false. This is the same blinkered thinking which led to Nasdaq 5000 and its crash. Experience demonstrates that all asset bubbles are dangerous, some asset bubbles are more dangerous than others. Think Animal Farm: All bubbles are equal, but some bubbles are more equal than others.

The real question Mishkin attempts to answer is whether the Federal Reserve (where he once worked) or any other central bank should target asset prices so as to prevent bubbles from taking form.

Because the second category of bubble does not present the same dangers to the economy as a credit boom bubble, the case for tightening monetary policy to restrain a pure irrational exuberance bubble is much weaker. Asset-price bubbles of this type are hard to identify: after the fact is easy, but beforehand is not. (If policymakers were that smart, why aren’t they rich?) Tightening monetary policy to restrain a bubble that does not materialise will lead to much weaker economic growth than is warranted. Monetary policymakers, just like doctors, need to take a Hippocratic Oath to “do no harm”.

Are we to take this seriously?  Even Alan Greenspan is showing more realism in the wake of our latest bubble.  This man is outright dangerous.  Don’t be fooled; his piece is a plant. We have some serious asset bubbles forming right now and he is looking to give intellectual cover to the watch-the-bubble-and-clean-up-after-the-mess policy we saw on display in the late 1990s. Yves Smith thinks there is a connection between his statement and likely Federal Reserve policy.

What I find interesting is how the Federal Reserve under Greenspan had an explicit policy of targeting asset prices as a means of reflating the economy. Yet, Mishkin is saying they should not target asset prices as a means of deflating the economy. This is what is called monetary policy asymmetry, otherwise known as the Greenspan Put. It’s not about targeting asset prices but looking for excess credit growth, which was certainly on display in the Nasdaq boom as well.

In effect, Mishkin is arguing for us to continue with business as usual. This is one of the more loathsome pieces of prattle I have witnessed since the financial crisis began. I hope no one takes this man seriously. I am ashamed that he is a professor at the business school I attended.

I would be remiss if I didn’t point out his equally absurd piece of research on Iceland’s economy before it collapsed. he wrote a piece called “Financial Stability in Iceland” with Tryggvi Herbertsson which stated:

Our analysis indicates that the sources of financial instability that triggered financial crises in emerging market countries in recent years are just not present in Iceland, so that comparisons of Iceland with emerging market countries are misguided.

No, Mr. Mishkin your analysis is misguided. It was with Iceland and it is here again. See below for a real analysis on Iceland from Willem Buiter and Anne Sibert which we can take seriously.

As I have been saying, you can get wildly different conclusions from two people based on the same facts and largely the same analysis. It goes to philosophical predisposition.  What this FT article by Mishkin demonstrates is that no amount of real world evidence of the havoc that bubbles wreak will dissuade these ivory tower ideologues from supporting failed economic policy.

Sources

Not all bubbles present a risk to the economy – Frederic Mishkin, FT

Financial Stability in Iceland (pdf) – Icelandic Chamber of Commerce

The collapse of Iceland’s banks: the predictable end of a non-viable business model – VoxEU

Central Banks Can Do Better Than Just Mopping Up – Caroline Baum, Bloomberg

Related posts:

• Popping bubbles
• Federal Reserve’s Fisher says tightening will be aggressive
• Japan’s easy money policy was the trigger for the tech wreck
• Quote of the day: William White and inflation
• Bank leverage: forever blowing bubbles part two

Today, Moody’s warned that Iceland, Latvia and Hungary were stabilizing but that their economies remained fragile. The problem is high debt levels, which is restraining consumer spending. Recovery in the Eurozone has been the main aid to stabilization, the report said. Absent this support, the outlook is considerably worse.

Moody’s re-affirmed Iceland and Hungary’s ratings of Baa1 and Latvia’s of Baa3, one notch above junk. But, Moody’s refused to remove its negative outlook to the countries’ credit ratings.

The Wall Street Journal reported:

"These three countries are the only ones whose government ratings have experienced multiple downgrades over the past two years," says Kenneth Orchard, vice president in Moody’s sovereign-risk group. The ratings of these countries still carry negative outlooks, signaling the possibility of further downgrades in the next 12 to 18 months.

As I mentioned in my last post, it is the debt that is holding these countries back. The report states:

The domestic sides of the economies remain weak as households and corporates struggle with elevated debt levels, the aftermath of housing bubbles in the cases of Latvia and Iceland, and weak banking sectors that are unable or unwilling to extend credit.

As a result, the FX Team at brown Brothers Harriman think these countries are over-rated. In a note released today Win Thin said:

All three of these countries saw improvements in their sovereign risk profiles this past quarter, but all three still remain overrated.  Our model puts Iceland at B, Hungary at BB, and Latvia at B.  Moody’s has always been too generous with its Eastern European ratings, and we have to question why all three remain investment grade still…

All three are also likely to contract in 2010, so the stresses on their economies and their social fabric won’t be going away anytime soon.  Downgrade risks are likely to persist for these three well into next year, as well as for Estonia and Lithuania.

I can’t help but see this as yet another data point demonstrating that this whole house of cards is being stitched together via fiscal and monetary stimulus. Absent this stimulus, the U.S., the U.K., the Eurozone, Japan, and China would all relapse into recession, dragging weaker economies like Latvia or Spain deeper into Depression.

Watch for any signs of premature policy normalization in the the Eurozone or the U.S. as a prelude to a double-dip. The silver lining here is that Moody’s also upgraded Brazil to investment grade today, showing that the emerging markets outside of eastern Europe are doing quite well (story here).

Related posts:

• Hungary cut to a notch above junk by S&P
• More trouble in the Baltics as S&P downgrades
• Baltics: Fitch downgrade and more downgrades to come
• A bearish view on Eastern Europe
• The EU promises to bail out eurozone members

From the FT.

Iceland’s bid to join the European Union received a boost on Monday when the 27-nation bloc’s foreign ministers agreed without delay to ask the European Commission for its opinion.

The swift decision means that Iceland, which only submitted its membership application on July 17, has already moved ahead of Balkan countries such as Bosnia-Herzegovina and Serbia in the queue at the EU’s entry door.

The speed at which the EU is likely to process the application reflects the fact that Iceland, as a member of the European Economic Area trading system, already participates in the European single market and applies about two-thirds of all EU laws.

Moreover, Iceland belongs to the EU’s Schengen agreement, which permits passport-free travel across the borders of 25 European countries.

At present there are only three official candidates for EU membership – Croatia, the former Yugoslav republic of Macedonia and Turkey – and each faces formidable obstacles on the road to entry.

Iceland is the kind of member the EU wants.  No wonder they are on the fast track.  But, this is sure to annoy the Baltics, the Turks, and the Balkan countries waiting on the outside.  The FT sees 2011 or 2012 as the earliest Iceland can join.

Related posts:

• The EU promises to bail out eurozone members
• Is Ireland the next Iceland?
• Moody’s: Iceland, Latvia and Hungary in “fragile stabilization”
• Iceland and the wonders of competitive currency devaluation
• Denmark wants in on the Euro

Ambrose Evans-Pritchard has a good piece on Iceland out today at the Telegraph. The main point of his article is that Iceland is emerging from crisis and depression in a relatively healthy state due to a fifty percent currency devaluation.  While, GDP will shrink by 7% this year in Iceland, Ireland, Latvia, Estonia and many other European countries will fare far worse.  When you look at unemployment, Iceland looks good yet again. 

Is this the way forward for the likes of Lithuania?  Apparently not because the Baltics want into the Euro come depression or high water.  In the case of Spain or Ireland, they are already in.  America certainly wishes it could depreciate the currency as well.  But, since its main problem on the currency front is in Asia and those currencies are mostly pegged, the U.S. couldn’t really organize a devaluation, even it wanted.  Moreover, competitive currency devaluation is an outlet only for small countries – Iceland: yes, Switzerland: perhaps, America: forget about it.  That would certainly trigger major retaliation.

But for small Latvia, here’s what you might get.

The krona has fallen by half against the euro since the `New Viking’ trio of Landsbanki, Glitnir, and Kaupthing strayed out of their depth and brought down Iceland’s financial system.

Nothing is cheap, but prices have come within reach. Reykjavik’s cafés are packed with euro-youth, at last able to afford a taste of all-night dancing at this Arctic Ibiza…

In one sense it was a terrifying shock for the 310,000 inhabitants of this Norse-Celtic outpost of lava rock to see their currency, banks, and global image crash in a single week last autumn. Yet nothing has really changed.

"Everything still feels normal. The services of the state are intact. The swimming pool is open. You can still have a decent heart attack in Iceland," said Mr Magnason.

"Friends who lost jobs in banking have already found new work, and you could say the krona has worked as a buffer for us. We all went down together, and that has led to healthier recession without mass unemployment."

The jobless rate has risen to 9.1pc. This is below the eurozone average of 9.5pc, and is stabilising much earlier…

The OECD expects Iceland’s economy to shrink 7pc this year. This is much better than Ireland at minus 9.8pc, and recovery will come sooner. So next time you hear the Sacra Congregatio of the euro faith incant yet again that EMU saved Ireland from a terrible fate, know that they deceive only themselves…

It is those caught in a deflation trap with fixed exchange rates that face slow asphyxiation, and deeper social damage. Youth unemployment is already 34pc in Spain, 28pc in Latvia, 25pc in Italy, 24pc in Greece, and rising…

Evans-Pritchard is a well-known Eurosceptic, so you can understand that his view is bound to be slanted.  Nevertheless, he makes some good points here.  And Latvia, in particular, is the nation for which this story is most relevant.  But there are certainly others.

More at the link below.

Source

Iceland’s krona proves the magic wand as Europe ails – Ambrose Evans-Pritchard, Telegraph

Related posts:

• The Eurozone and the spectre of banking collapse
• Iceland: a cautionary tale for small nations
• Moody’s: Iceland, Latvia and Hungary in “fragile stabilization”
• Is Ireland the next Iceland?
• The EU promises to bail out eurozone members

13-minute video from the Wall Street Journal.

Related stories:

• Iceland warms to Europe
• Iceland to hand bank stakes to creditors
• Iceland’s rehabilitation

Related posts:

• Weekend Video: A Conversation with Tim Geithner at CFR
• Jamie Dimon on the economy
• A conversation about Bear Sterns and the economic crisis
• Tear gas and rubber bullets at G-20 Protests
• Galbraith and Buffett think a second stimulus is necessary

As this deepest of recessions takes hold, an increasing number of countries are seeing outbreaks of civil unrest. First it was Greece. Later, we saw unrest in the Baltics in Riga and Vilnius. Now, Iceland is experiencing the same. These countries are amongst the hardest hit economies. Therefore, we should see these episodes as a harbinger of what is to come unless government can prevent this downturn from deepening.

Angry Icelandic protesters clashed with riot police as they called for a new government on Wednesday and the country’s prime minister said he had the support of his coalition partner.

Geir Haarde, Iceland prime minister, speaking after his limousine had been pelted with eggs and cans by demonstrators, said the government was ”fully functional”…..

Anti-government and central bank protests are now regular fixtures in the once-tranquil capital after sharp currency falls and the collapse of the financial system in October caused by billions of dollars of foreign debt being incurred by banks.

Television footage from channel RUV showed protesters banging on Mr Haarde’s black limousine and then pelting it with eggs outside the government building.

The vehicle managed to drive away after riot police arrived.

PARLIAMENT PROTESTS

The protest also left the government building splattered with eggs and paint. The demonstrators then moved off to parliament and by evening about 3,000 protesters had gathered to face riot police surrounding the Althing, hurling fire crackers at the building and chanting ”disqualified government”.

One demonstrator scaled the face of the parliament building, reaching a balcony from which he hung a sign reading ”Treason due to recklessness is still treason”.

The volcanic island’s economy is expected to suffer a huge contraction this year while unemployment, once close to zero, is set to soar.

”People feel that it is incredible that after such a policy disaster that we faced last year, there has been no resignation, no minister, no one has resigned or responded, or taken responsibility for what happened,” said Gunnar Helgi Kristinsson, a political scientist at the University of Iceland.

Mr Kristinsson said there was a substantial likelihood the government would not survive the coming two weeks.

Source
Icelandic protesters clash with police – FT

Related posts:

• Baltics: Violence from an Argentina-style collapse
• Violence erupts in Latvia
• Where is the outrage?
• An Icelandic post-mortem
• Iceland: a cautionary tale for small nations

The Irish government scrapped a planned recapitalization of Anglo Irish Bank and moved straight to full nationalization.  While some may view this as a necessary move to shore up a troubled institution, I see this as ominous news because the Irish banking system is systemically weak and subject to a potential collapse along the lines of Iceland.

The Irish government is to nationalise the troubled Anglo Irish Bank.

Brian Lenihan, the Finance Minister, said today in a statement that the €1.5 billion plan to recapitalise the bank announced last month will not go ahead, because the funding position of the bank had weakened and given the loan scandal that saw the bank’s top officials quit in December.

“The government has today decided, having consulted with the Board of Anglo Irish Bank Corporation, to take steps that will enable the bank to be taken into public ownership,” Mr Lenihan said.

Anglo Irish’s chairman and former chief executive officer Sean FitzPatrick resigned in mid-December after admitting he had failed to disclose an €87-million loan from the bank. Chief executive David Drum also quit.

“The funding position of the bank has weakened and unacceptable practices that took place within it have caused serious reputational damage to the bank at a time when overall market sentiment towards it was negative,” Mr Lenihan said.

“Accordingly the government believes that the recapitalisation is not now the appropriate and effective means to secure its continued viability. Therefore the government must move to the final and decisive step of public ownership,” he added.

Update 16 Jan 2009: In the interest of even-handedness I am posting this blurb from the FT’s Lex, which appeared after I wrote this article and is more positive about the Anglo Irish nationalization than I am. Their conclusion is that the disappearance of Anglo Irish as a drag on publicly traded Irish banks will bolster the other two big banks. The shares in AIB and BIR give the lie to this view. But, it is still early days.

Anglo Irish Bank, the country’s most reckless commercial property lender – and the most exposed to the Irish and UK property bubble – has at last been committed to the safety of an institution: the Irish government. Dublin procrastinated as the bank gasped its last, the chairman resigned over governance lapses and risks increased of a run on the bank. Full nationalisation became the only option to avert a collapse of the Irish banking system. None of the three largest banks now has a trailing earnings multiple of over one, which says it all.

Ireland’s banks got carried away in the heady years of a property and consumer spending boom that is now a distant memory. The economy could contract 4.5 per cent this year; unemployment is headed for 10 per cent; and with the government deficit zooming towards 10 per cent of gross domestic product, there is even talk of a visit from the International Monetary Fund. The government has been flat-footed from the outset. In September, it tried to steal a march on other countries, by guaranteeing all bank deposits and funding, but did nothing to bolster their capital position, leaving them exposed when, shortly afterwards, the UK government raised capital requirements for HBOS, Lloyds TSB and Royal Bank of Scotland.

Dublin then procrastinated until December, when it launched a €5.5bn bank recapitalisation plan. Bank of Ireland and Allied Irish Banks were offered €2bn a piece in exchange for 75 per cent voting control, and told to raise €1bn each in rights issues. Anglo Irish was in line to receive €1.5bn, but the run on deposits has now intervened. The downturn in Ireland will force Bank of Ireland and Allied Irish Banks to be more realistic in their bad debt projections. Both look safer bets now that the government has removed the sector’s main systemic risk. Ireland’s bankers and politicians can now resume discussion of their golf handicaps in the club bars.

Sources
Ireland nationalises Anglo Irish bank – Times Online
Irish banks – FT Lex

Related posts:

• Ireland guarantees bank deposits at six banks
• Irish government unveils plan to recapitalise banks
• Irish property dam about to burst
• Irish banks have unreported bad debt
• Government banking Irish edition

The question on everyone’s mind in the emerging markets is who will blow up next. Arnab Das of Dresdner Kleinwort Benson takes a stab at answering that question. He targets the Baltics as the problem children and sees current account surplus nations in Asia as lest vulnerable. He also discusses his views on Russia.

Below is the video with him on CNBC giving forth his view.

Related posts:

• How Iceland collapsed
• Is Ireland the next Iceland?
• Violence erupts in Iceland
• Iceland fast tracked for EU membership
• Iceland: a cautionary tale for small nations

The Economist does a very good post-mortem on Iceland and its spectacular collapse with a number of lessons for other countries, especially those with oversized financial sectors like Ireland, Switzerland and the U.K.  Below is a snippet from their article which I highlight because it also demonstrates the real risk of social unrest due to economic collapse.

Atop a hill near Reykjavik’s old harbour is a bronze statue of Ingolfur Arnarson, the first Nordic settler of inhospitable Iceland. It overlooks a bunker-like building: the central bank, headed by David Oddsson, a man who more than 1,100 years later has shown similar survival skills. Before chairing the central bank’s board of governors, Mr Oddsson was prime minister for more than 13 years, a record, during which time Iceland became one of the richest countries in the world. For years he was Iceland’s most popular politician, privatising most of the banking system with a Thatcherite zeal and floating the currency, the krona.

But the collapse of the krona and nationalisation of the country’s three largest banks in early October, which forced the country to secure help from the IMF, have left Iceland’s economic miracle and Mr Oddsson’s reputation in tatters. For weeks, protesters have gathered in Reykjavik’s main square each Saturday calling for his removal from office. On the chilly afternoon of December 1st a few hundred of them, shouting “David out, David out”, gathered at the Arnarson statue and marched down the hill to the central bank. In the lobby, they were met by riot police, who eventually defused the situation.

Such protests are almost unheard of: the only previous mass demonstrations to shake the country, against NATO membership, took place in 1949. But the economic crisis has exposed deep fissures in the nation of 300,000 people. In the same building the next day, Mr Oddsson barely smiles when he tells The Economist, “They say that the only way to get to paradise without dying is to be governor of a central bank. This has not been true in Iceland.”

So far, such protests are the most tangible evidence of the troubles besetting Icelandic society. The landscape bears scars too. From the central bank, the view of snow-dusted Mount Esja across the estuary is blocked by a half-finished grey edifice, sprawled like a dead whale across the harbour-front. This was to have been Iceland’s most spectacular building, crowning 15 years of economic growth: a concert hall facing out to the North Atlantic, covered in glass prisms imported from China meant to resemble glaciers and lava. But since the collapse of the bank that led the funding, construction has almost ground to a halt.

Likewise, blocks of half-built luxury flats stand half-finished along the waterfront. Instead of glass prisms, Icelanders are looking forward to a different Chinese cargo in the dying weeks of the year: fireworks. They set off more per person each new year than any other country in the world. Such is the demand that the Chinese manufacturers are making a special loan to Icelanders to buy them, according to a local newspaper.

Almost no other private creditor is lending them anything; Iceland has turned instead to the IMF. In November the fund agreed to a $2.1 billion two-year standby programme, which was supplemented by promises from Nordic countries and Poland, as well as Britain, the Netherlands and Germany. The package will be worth $10.2 billion in total—more than half of Iceland’s GDP.

The IMF calls the collapse of the banks the biggest banking failure in history relative to the size of an economy. In 2007 Iceland’s three main banks made loans equivalent to about nine times the size of the booming economy, up from about 200% of GDP after privatisation in 2003 (see chart 1). Only about one-fifth of those loans were in kronur; interest rates on these were punitively high. Ordinary citizens instead borrowed from their banks in cheaper currencies such as yen and Swiss francs to buy even the most modest homes and cars.

I think you know how this one ends. The full article is much longer. I highly recommend reading it, especially as it pertains to the UK economy. The link is below.

Source Cracks in the crust – The Economist

Related posts:

• Violence erupts in Iceland
• Iceland: a cautionary tale for small nations
• Is Ireland the next Iceland?
• Iceland fast tracked for EU membership
• The Eurozone and the spectre of banking collapse

Just a few moments ago I caught a very interesting post on Alice Cook’s site UK Bubble. The gist of the post was that things are falling apart in Ireland very quickly. Given what we saw with Iceland, I have to ask: is Ireland next?

I wouldn’t suppose that things are this fragile but we cannot dismiss out of hand talk of Ireland going the way of Iceland. Here is what Alice posted:

Someone left this intriguing comment on one of my posts yesterday:

Alice can you shed any light on what is going on in the Irish Republic?

Last week beef prices collapsed. This week I am unable to sell finished beasts at all.

Last week a police strike in Donegal was narrowly averted when the local authority agreed to stump up accrued overtime.

Bank of Ireland shares are trading for under 90 cents from a one time high of 18 Euro. It looks like the Government’s bluff is about to be called…

Rumour has it that the cashpoint system will stop within 3 days

Can you shed any light?

Is there anyone out there who can help?

Now, Ireland happens to be one of the worst affected bubble economies in Europe. They have seen a massive house price bubble along with huge leverage as their economy leapt forward over the last decade. However, this has all gone pear-shaped in the last year or so and Ireland has a recessionary economy with rising unemployment, collapsing house prices and severe knock-on effects in terms of commercial property. Immigrants, who once flocked to Ireland are no longer coming.

Meanwhile, Ireland was the first country to offer a blanket guarantee to it’s banks’ depositors. I welcomed this move as a necessary step to restore confidence. However, there are two problems associated with it.

1. As Willem Buiter has pointed out, this move was a “beggar thy neighbour” policy which initially sucked deposits out of British institutions. British savers flocked to government-protected Irish institutions in the UK which courted the British savers with higher interest rates — the government had effectively subsidized the banks. Eventually, Europe as a whole got onside, and sweeping deposit guarantees were offered all around.
2. The government must be able to credibly back up its guarantee. And this where Ireland looks a lot like Iceland. The country has an outsized financial sector which could not possibly be guaranteed by the Irish government. Moreover, Ireland is a member of the Eurozone — meaning it can’t print its own money. The UK, which borrows in Sterling can at least print money to finance any guarantees. The Irish are constrained — and, therefore, vulnerable.

It remains to be seen whether there is a sub-current of panic about the fragile Irish banking system that could lead it to Iceland’s fate. In fact, commentators like Wolfgang Munchau have argued that the single currency is a boon to the likes of Ireland because it prevents currency attacks like the one Iceland suffered, leading to its downfall.

However, a run on Irish banks is what would ultimately bring the Irish down. After all, it is the Government bank guarantee which creates the vulnerability. The Irish Government needs to make some contingency planning because an Icelandic fate is not out of the question. It need not worry about a currency run, but a bank run is still possible.

There are two ways to skin a cat.

Sources
Ireland – what is going on? – UK Bubble
Why the British may decide to love the euro – Wolfgang Munchau, FT
The Irish solution: unlawful, beggar-thy-neighbour and short sighted, but apart from that OK – Willem Buiter, FT Mavercon
Iceland, Switzerland, Denmark, Sweden, Jordan and countries with banks that are too big to bail out – Bronte Capital
The first casualty of the crisis: Iceland – VoxEU
Stunned Icelanders Struggle After Economy’s Fall – NYTimes.com

Related posts:

• Ireland guarantees bank deposits at six banks
• Irish government unveils plan to recapitalise banks
• Ireland nationalizes Anglo Irish bank
• Trouble in Ireland as Fitch cuts debt two notches to AA- and deficits soar
• Ireland: Next stop – IMF

Jon Danielsson has a very thorough piece up on the VoxEU site which details the catastrophic collapse of Iceland and its banking system. This is a cautionary tale on two fronts.

First, Iceland was a small country with a very large banking system. This has meant the country is simply not big enough to bail out its banking system. Other countries with similar problems dot the economic landscape, the UK and Switzerland being two very prominent examples (see related posts below for more details).

But, Iceland was also a small country with massive macroeconomic disequilibria. The United States has gotten on well enough despite its own imbalances, but it owns the world’s reserve currency. However, other small nations with similar imbalances are in desperate situations. This list should include the Baltics, Hungary and Argentina. (see reference posts below).

It is not clear to me that the Icelandic example is an isolated case given these two groups of countries and their tenuous economic circumstances. Please read the excerpt here with that in mind.

Iceland’s banking system is ruined. GDP is down 65% in euro terms. Many companies face bankruptcy; others think of moving abroad. A third of the population is considering emigration. The British and Dutch governments demand compensation, amounting to over 100% of Icelandic GDP, for their citizens who held high-interest deposits in local branches of Icelandic banks. Europe’s leaders urgently need to take step to prevent similar things from happening to small nations with big banking sectors.   

Iceland experienced the deepest and most rapid financial crisis recorded in peacetime when its three major banks all collapsed in the same week in October 2008. It is the first developed country to request assistance from the IMF in 30 years.

Following the use of anti-terror laws by the UK authorities against the Icelandic bank Landsbanki and the Icelandic authorities on 7 October, the Icelandic payment system effectively came to a standstill, with extreme difficulties in transferring money between Iceland and abroad. For an economy as dependent on imports and exports as Iceland this has been catastrophic.

While it is now possible to transfer money with some difficulty, the Icelandic currency market is now operating under capital controls while the government seeks funding to re-float the Icelandic krona under the supervision of the IMF. There are still multiple simultaneous exchange rates for the krona.

Negotiations with the IMF have finished, but at the time of writing the IMF has delayed a formal decision. Icelandic authorities claim this is due to pressure from the UK and Netherlands to compensate the citizens who deposited money in British and Dutch branches of the Icelandic bank Icesave. The net losses on those accounts may exceed the Icelandic GDP, and the two governments are demanding that the Icelandic government pay a substantial portion of that. The likely outcome would be sovereign default.

The post in VoxEU is much longer and very thorough. Please read the rest at the source link below.

Related posts – UK
The Last King of Scotland

Related post – Switzerland
Switzerland: politicians need to act now

Related posts – Emerging markets
The emerging markets crisis
Currency crisis is gathering storm
A shift to Eastern Europe and emerging markets too
The Euro and Baltic currency overvaluation
Are the Baltics the new Argentina?
Argentina faces potential collapse

Related articles
Iceland, Switzerland, Denmark, Sweden, Jordan and countries with banks that are too big to bail out – Bronte Capital

Source
The first casualty of the crisis: Iceland – VoxEU

Related posts:

• Is Ireland the next Iceland?
• Violence erupts in Iceland
• Iceland and the wonders of competitive currency devaluation
• An Icelandic post-mortem
• Iceland fast tracked for EU membership