Iceland krona weakness “exaggerated”

Geir Haarde - Prime Minister of IcelandIcelandic Prime Minister, Geir H. Haarde, said in a speech in London on Tuesday that the current weakness of the Icelandic krona is exaggerated. The PM believes that although some depreciation had long been expected, the currency’s current status is “lower than its equilibrium level should be”.

Speaking at a conference of international investors, Haarde emphasised that the fundamentals of the Icelandic economy remain strong and stressed his belief that the country will emerge unscathed from the global economic downturn.

The currency has faced downward pressure as the recent flow of direct foreign investment in large-scale industrial developments begins to dry up with the completion of construction projects.

The krona has been further dragged down by fears that the Central Bank would be unable to bail out Iceland’s huge banking sector in the event of a crisis. The Icelandic banks have expanded rapidly over the last decade or so and have significant foreign debts. Their combined assets are nine times the national GDP.

The government’s actions to help the currency and the property market at the end of last week are expected to help, and any foreign currency loans the government takes out will make a positive difference very quickly, according to research from Glitnir Bank.

Haarde said he believes Iceland’s trade deficit and the Central Bank base interest rate will begin falling before the end of the year – a development that would significantly aid the krona in its recovery. A new Glitnir research report echoes the PM’s sentiments on the decreasing trade deficit and interest rates.