The Central Bank of Iceland and its Russian dream

Seðlabankinn2Attempts by the Central Bank of Iceland to strengthen its foreign currency reserves in the lead up to the banking crash were characterised by desperation and internal anarchy, according to a bank economist.

The Central Bank went public on 7th October 2008 with news that Russia had provided Iceland with a four billion dollar loan to strengthen the krona. Prime Minister Vladimir Putin had personally signed off on the deal. But it later emerged that the revelation had been built on a serious misunderstanding and there was actually no loan at all.

The very same day, the Central Bank decided to peg the krona’s exchange rate. But the peg was dropped after just one day and had been built on nothing more than the bank governors’ wishful thinking, Central Bank economist Thorarinn G. Petursson told the banking collapse parliamentary investigators – adding that the Bank had been totally rudderless.

He particularly points to the Central Bank’s release of the Russia loan news, saying that Governor David Oddsson wanted to make the message public at the first possible opportunity in order to beat the Ministry of Finance to it. Petursson told the committee that he believes the handling of the banking collapse was an all-time low point in the story of the Central Bank of Iceland.

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