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Iceland: Geyser crisis unfolding

Tue, Oct 7 2008, 12:46 GMT
by Lars Christensen

Danske Bank A/S

The past 24 hours have been extremely hectic in terms of news out of Iceland, and the Icelandic krona has been swinging wildly in an extremely thin market. This is the news so far:

• • Yesterday, the Icelandic prime minister, Geir Haarde, addressed the nation. In his speech, Mr Haarde said that Iceland was facing very serious economic and financial challenges and that the Icelandic government would put forward a plan to parliament to stabilise the situation. However, the Icelandic government has so far failed to put forward any concrete measures. 

• • The Icelandic authorities today surprisingly announced that Iceland would get a loan of EUR 4bn from Russia. However, a spokesman for Russian Prime Minister Putin has said that the Russian government does not have any knowledge of such a loan. It is very unusual that the Icelandic authorities should make such an announcement without having the apparent support of the Russian government. A USD 4bn loan from Russia would be positive, naturally, but for now we elect to assume that there is no loan before it has been confirmed by the Russian authorities. 

• • Iceland's Commerce Minister today announced that Landbanki's Board has been dismissed and that the bank is in receivership. This de facto means that the bank has been nationalised or least that control of the bank now is in the hands of the government. Kaupthing is now the only one of the three largest Icelandic banks that is not de facto in the control of the Icelandic government.

• • Today, the Icelandic central bank said it would peg the krona to the euro at a rate of EUR/ISK 131. It is still unclear whether this is intended as a permanent or a temporary measure. Given the fact that the Icelandic FX reserve is less than USD 3bn, the peg does not look very credible, and we do there not expect it to be maintained. To maintain a credible FX peg the government would have to put forward a credible stabilisation package, and there is still no news of such a package despite the prime minister's earlier indications.

• • The IMF today confirmed that it will embark on a fact finding mission to Iceland.

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Published on  Tue, Oct 7 2008, 12:50 GMT