Comments on: Iceland central bank explains shock interest rate hike

By: Not Icelander

Not Icelander — Thu, 30 Oct 2008 00:37:59 +0000

“The Icelandic government then supplies the krona at the subsidised rate of around 150.”

Yeh, I assumed the only party that would possibly supply the subsidy was the Iceland govt. But it’s doin git indirectly with foreign money from the IMF.

But this can’t continue very long. Iceland will run out of foreign reserves or they they will have to stop all exchange out of Kroner.

By: bc123a

bc123a — Wed, 29 Oct 2008 17:06:28 +0000

@Alan:

WHAT?

Of course it is worth to buy icelandic crown outside of Iceland! Why pay 1 EUR per 150 ISK, if you can get it cheaper abroad? This is charade by icelandic central bank – they are burning their cash reserves and hoping they will “convince” people abroad that ISK is “worth more”. Well, it is simple law of supply and demand – NO ONE wants to *buy* ISK at 150, except for sedlabanki, but they only buy it from icelanders, and in small amounts.

The sad fact is, that the true market value of ISK is more close to 300 than to 150, but for the sake of providing the illusion a bit longer, sedlabanki will drain their reserves and buy ISK at a 200% premium.

Bid at Yahoo stands at 290 ISK/EUR, that means, there are people willing to sell ISK at 290 ISK per EUR. And NO ONE IS BUYING – the ask is at 335 ISK per EUR.

So, please, stop with this nonsense – you may get tourist boom which will really help your economy, but you will not get any tourist, when they learn that their EUR in Iceland is worth only half of the internation market value. And sedlabanki will get bankrupt, if they continue this for too long… so you will have few tourist and no foreign cash reserves.

By: Alan

Alan — Wed, 29 Oct 2008 12:07:32 +0000

looks like every one here is not looking at the true facts
The exchange rate is that rate being shown by the Icelandic Banks
Then there is a differant exchange rate in the Uk and believe me what your paying in England is totaly differant, the money changers in the UK are making a lot of money sellng Icelandic KR
So its simple dont buy Icelandic kr out side of Iceland and dont take the kr out of Iceland,
Right now Iceland will be making money on exporting products such as fish lamb energy, but they will not be bringing stuff in to the country,
they will be making money on tourists
I know for a fact life is not easy in Iceland i lived there for 20 years

By: Peter - London

Peter - London — Wed, 29 Oct 2008 11:29:11 +0000

“Who is absorbing the differential between the fantasy “official” rate and the actual market rate?

And how long do Iceland merchants (hotels, tour companies etc…) think they can keep charging tourists the “official” rate? I’m sure no one is exporting goods at that rate? ”

The local banks partake in a daily auction to fix the rate. The Icelandic government then supplies the krona at the subsidised rate of around 150. To buy Euro’s the government would have to pay anywhere from 450 to the current rate which is 332 ( http://uk.finance.yahoo.com/q?d=t&s=EURISK= ) or use its 2Billion euro reserves.

The purpose of the IMF loan is (possibly) to continue this charade (the purpose of which is to keep voter happy and Politicians in power), however
any sort of fix won’t last, as the UK found out when it left the ERM.

By: Not Icelander

Not Icelander — Wed, 29 Oct 2008 06:41:32 +0000

“That’s why you are not allowed to buy huge amount of foreign currency and send them abroad.”

Who is absorbing the differential between the fantasy “official” rate and the actual market rate?

And how long do Iceland merchants (hotels, tour companies etc…) think they can keep charging tourists the “official” rate? I’m sure no one is exporting goods at that rate?

What gives. What’s going on over there.

It’s curious. I hope Iceland can get out of this mess.

By: Anonymous

Anonymous — Tue, 28 Oct 2008 23:38:16 +0000

The current market rate in continental Europe for the krona is 280 ISK for 1 €. Iceland is able to maintain an higher rate at home because of the restrictions. That’s why you are not allowed to buy huge amount of foreign currency and send them abroad.

By: Not Icelander

Not Icelander — Tue, 28 Oct 2008 22:57:14 +0000

“Pls note that the IMF’s recommendations are the exact opposite of what the Icelandic central bank did initially! Does anybody believe this government knows ANYTHING about economics? It sure doesn’t look that way.”

The Iceland Govt/CB is subject to political pressure and that may, in the short term, override economic reality. However, once one goes hat in hand to the IMF one no longer has independent control of economic policy. That may explain the difference.

By: Gray, Germany

Gray, Germany — Tue, 28 Oct 2008 22:06:20 +0000

Pls note that the IMF’s recommendations are the exact opposite of what the Icelandic central bank did initially! Does anybody believe this government knows ANYTHING about economics? It sure doesn’t look that way.

By: Ingar

Ingar — Tue, 28 Oct 2008 21:30:03 +0000

Here we go again living in fairy fantasy tralalala land. Lend me your ears say the Icelanders, lend me more money.

By: Not Icelander

Not Icelander — Tue, 28 Oct 2008 21:20:45 +0000

Let me elaborate.

These exchange rates quoted here bear no relation to reality.

http://sedlabanki.is/?PageID=183

It may be the “official” exchange rate but the real rate, that is the rate that someone will actually pay for a Kroner, is no where close to the “official” rate. That’s what is meant by it is lower than Icelanders are currently feeling. One of two things must be happening. Either the govt of Iceland is using up reserves to support the “official” exchange rate (doubtful as they don’t have the reserves) or the trading in Kroner is frozen (likely).