Iceland wary of Euroisation

Kaupthing, Iceland’s biggest company with total assets valued at €56bn, has been denied permission by the Central Bank of Iceland to adopt the euro as its principal currency.

Kaupthing bank followed in Straumur Burdaras investment bank’s footsteps when it requested the right to record all annual financial statements, accounts and shares in euros. The central bank released a statement this week citing the danger of adopting a foreign currency to Iceland’s monetary system as the main reason for declining to grant permission at this time.

The conflict highlights a debate about the effects of the euro on Iceland’s financial system, especially at a time when Iceland’s economy has been described as ‘overheating’. The banks counter the worry over risks by arguing that employing the euro is simply another reflection of the international reach of their business. Banks also point out that the euro enjoys a considerably more stable exchange rate than the fluctuating Icelandic krona.

As Iceland is not a member of the European Union, the central bank governor Eirikur Gudnason said these applications must be delayed as the bank cannot clear euro-denominated securities without membership in the European System of Central Banks.

The banks reject this claim and see it as evidence of the sentiment against ‘Euroisation.”

“It is safe to say the statement testifies the bank’s negative stand against ‘eurisation’ of Icelandic financial companies,” said head of research at Glitnir bank, Ingolfur Bender. He said the issue is set to gain increased importance as more banks apply to use the euro.