Sunday, 5 October 2008

It is game over in Iceland

The Icelandic Kroner is in free fall, down 15 percent in one week. The current account deficit out of control, inflation running at more than 12 per cent and interest rates at a record 15.5 per cent. The three largest banks have liabilities eight times greater than the country's GDP. The Icelandic banks are not too big to fail; they are too big to save. The credit rating agencies have downgraded both the government and the four major banks.

How can anyone get out of that kind of mess?

Don't laugh too long at the hapless Icelanders. The UK economy has the same basic structure as Iceland. Our financial sector employs 20 percent of the workforce, and the liabilities of our banking sector are several times annual GDP. Only we have a population of 60 million.

The MPC should think long and hard about the effect of a rate cut on sterling. Further exchange rate weakness might turn our little banking crisis into a fully fledged exchange rate crisis.

9 comments:

John McClane said...

OT. The first mention that I've found on the BBC that Greece, as well as Ireland, has guaranteed all bank deposits.

Anonymous said...

Alice,
Don't you think that a UK currency crisis will be coming anyway. How can we avoid it? Our imports are necessities, fuel and food, but our exports to declining markets are not necessities.
Our trade imbalance has long reflected this. Against the yen and euro the pound has already collapsed over the last year. I think 20% counts as a pretty big drop.
That is why I think when you suggest higher inflation rates that you are ignoring deflation. Prices can go up during deflation as deflation is internal. Import prices reflect our trade position (bad).

aSteve said...

Leikur yfir?

Sterling suffered a ~15% devaluation against the Euro earlier this year... so I'm not sure that Iceland has a crisis yet.

I find it interesting how the most geographically isolated financial centres seem to get into the biggest trouble. I guess there's a lesson in there, somewhere.

Man in a Shed said...

And yet St Vince of Cable is suggesting the Bank of England be ordered to let inflation rip...

Anonymous said...

On a plus note, Iceland is a great place to visit and the women are very hot. And now it's cheaper to go there. As for the UK, when return to our normal state of vile crapulance, I wonder how many will want to take a holiday here (oh, you know, dodging the skinheads, the chavs, hoodie gangs etc. to get to the pub or the historical attraction).

dearieme said...

How are cod futures doing?

dearieme said...

Actually, if we're about to plunge back to a medieval standard of living, salt cod should do well. Buy, buy, buy!

SEO Firm said...

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