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Iceland's Krona Proves The Magic Wand As Europe Ails

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http://www.telegraph.co.uk/finance/comment...urope-ails.html

The krona has fallen by half against the euro since the `New Viking' trio of Landsbanki, Glitnir, and Kaupthing strayed out of their depth and brought down Iceland's financial system.

Nothing is cheap, but prices have come within reach. Reykjavik's cafés are packed with euro-youth, at last able to afford a taste of all-night dancing at this Arctic Ibiza.

Out in Iceland's Eastern fjords, Alcoa has raised aluminium production to record levels – and metal matters as much as fish for exports.

"The smelters are running full speed," said the new-broom finance minister, Steingrimur Sigfusson. So is Mr Sigfusson himself. Last week he launched three new banks on the ruins of the old. Normality is returning. "We are going to get through this better than feared. We're feeling real activity in the economy, and much of this comes from a favourable exchange rate," said Mr Sigfusson.

Iceland's great lurch towards casino capitalism over the last decade has a cultural logic. "We are a fishing culture: when the herring is there, we take it," said Andri Snaer Magnason, author of `Dreamland: A Self-Help Manual for a Frightened Nation'.

There was no easier catch on offer than the Greenspan bubble and the global "carry trade". How could fishermen resist?

In one sense it was a terrifying shock for the 310,000 inhabitants of this Norse-Celtic outpost of lava rock to see their currency, banks, and global image crash in a single week last autumn. Yet nothing has really changed.

"Everything still feels normal. The services of the state are intact. The swimming pool is open. You can still have a decent heart attack in Iceland," said Mr Magnason.

"Friends who lost jobs in banking have already found new work, and you could say the krona has worked as a buffer for us. We all went down together, and that has led to healthier recession without mass unemployment."

The jobless rate has risen to 9.1pc. This is below the eurozone average of 9.5pc, and is stabilising much earlier.

Those who point to Iceland as a scarecrow exhibit of what happens to a small country caught in a financial storm without the shield of euro membership have the matter backwards, as will become ever clearer over the next two years.

The OECD expects Iceland's economy to shrink 7pc this year. This is much better than Ireland at minus 9.8pc, and recovery will come sooner. So next time you hear the Sacra Congregatio of the euro faith incant yet again that EMU saved Ireland from a terrible fate, know that they deceive only themselves.

You take your punishment early with devaluation, as Britain did on leaving Gold in 1931, or ending the D-mark torture in 1992, or now. You look a sorry sight at first, but sweet vindication comes later.

It is those caught in a deflation trap with fixed exchange rates that face slow asphyxiation, and deeper social damage. Youth unemployment is already 34pc in Spain, 28pc in Latvia, 25pc in Italy, 24pc in Greece, and rising.

At Iceland's central bank – mercifully, no longer listed beside al Qaeda as a terrorist body by UK authorities – Governor Svein Harald Oygard says currency therapy is working as it should. "If you lean back and look you can see that fall of the krona accentuated the shock at first, but it is also now working as a turbocharger for recovery.

Devaluation only works providing everyone else doesn't do it.

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Devaluation only works providing everyone else doesn't do it.

Don't worry, the ECB will let the PIIGS bleed to death before they even start looking at the problems a wildly overvalued Euro is causing :rolleyes:

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Don't worry, the ECB will let the PIIGS bleed to death before they even start looking at the problems a wildly overvalued Euro is causing :rolleyes:

Actually I think its the Germans....

...we'll see what happens in a year when the Germans come to realise that they have no-one to export their BMWs and machine tools to

The the Euro will probably be allowed to depreciate...

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...

The the Euro will probably be allowed to depreciate...

Against what? Certainly not the worthless UKP or USD..... Only leaves the Yuan, whcih IIRC is going down as well due to Chinese holding USD in such quantity.

You can't devalue all the world's currencies at the same time :D All that does is give ...... massive inflation ;)

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Against what? Certainly not the worthless UKP or USD..... Only leaves the Yuan, whcih IIRC is going down as well due to Chinese holding USD in such quantity.

You can't devalue all the world's currencies at the same time :D All that does is give ...... massive inflation ;)

Yep, the worthless GBP and USD, those are the currencies the Euro trades a lot with I think

GBP has already devalued c. 20-30% (haven't looked at the dollar recently) to the Euro

Don't know about massive inflation, difficult in the current environment, which appears deflationary - but could be inflation 18 months, 2 years out maybe

I would have though the Yuan is likely to appreciate?

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If devaluation was the answer then Zimbabwe would be the worlds superpower.

Holding the Yuan down by accumilating dollars seems to be working for the Chinese, so far? :unsure:

Equally similar policies allowed a lot of Asian countries to build up decent export based economies

Zimbabwe had other problems, like being run by a totalitarian (sp?) ganster ;)

I guess comparing Britain and Iceland to Spain and Ireland will tell you in 10 years the benefits of fixed exchange rates versus devaluation.... :unsure:

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Actually I think its the Germans....

...we'll see what happens in a year when the Germans come to realise that they have no-one to export their BMWs and machine tools to

The the Euro will probably be allowed to depreciate...

I doubt the BoE will let the euro depreciate against the pound too much. At least not until they think the corner has been turned. Even if the Germans decided to allow the ECB to devalue the euro, how would they go about it? QE? I can't see the ECB winning a race against the BoE to print money if Germany has any say in the matter (which it does).

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I doubt the BoE will let the euro depreciate against the pound too much. At least not until they think the corner has been turned. Even if the Germans decided to allow the ECB to devalue the euro, how would they go about it? QE? I can't see the ECB winning a race against the BoE to print money if Germany has any say in the matter (which it does).

I disagree. There's a limit to how much money the BoE can print without it having a very negative long term effect on the economy and we must be near that limit already.

There's also no need. The weak exchange rate has done its job, there's no need to perpetuate it much beyond the end of the year

tim

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I doubt the BoE will let the euro depreciate against the pound too much. At least not until they think the corner has been turned. Even if the Germans decided to allow the ECB to devalue the euro, how would they go about it? QE? I can't see the ECB winning a race against the BoE to print money if Germany has any say in the matter (which it does).

I was more thinking the ECB would raise rates more slowly than the BoE does, which was the case 2003-2007 I think? :unsure:

This led to the pound being strong against the Euro 2004-2007, which we spectacularly (sp?) came off from in 2008 (second half)

I guess I'm thinking more what will happen gradually not quickly :unsure:

The BoE has stopped printing money for now, they say ;)

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I disagree. There's a limit to how much money the BoE can print without it having a very negative long term effect on the economy and we must be near that limit already.

There's also no need. The weak exchange rate has done its job, there's no need to perpetuate it much beyond the end of the year

tim

I think it will last longer maybe 2-3 years, see my other post ;)

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I disagree. There's a limit to how much money the BoE can print without it having a very negative long term effect on the economy and we must be near that limit already.

I'm not sure what effect QE has had (if any). Of course there's a limit to the amount of QE that a currency can handle, but I believe the BoE is more likely to test that limit than the ECB. If the BoE sees inflation at say 10% then so be it, if Germany sees inflation at 10% they go ape-shit. Also I expect QE in euroland to be far more complex and bureaucratic: how does the ECB decide whose bonds to buy?

There's also no need. The weak exchange rate has done its job, there's no need to perpetuate it much beyond the end of the year

tim

You seem to be saying you think the corner has been turned. If so then yes, as I said, there is no need to devalue any further.

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True, but apart from Switzerland, our friends over the Channel have so far been very tolerant of our devaluation

Alternative view: we were tolerant (took materialistic advantage of) of their undervaluation for a long time -- proof is in the balance of trade.

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Icelanders usually bury sharks in the ground - but it looks like they have their heads buried there too.

They owe billions in foreign currency which they conveniently forget about.

They wouldn't be the first to "forget" to repay such debts...

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Icelanders usually bury sharks in the ground - but it looks like they have their heads buried there too.

They owe billions in foreign currency which they conveniently forget about.

And how will they be forced to pay it back, exactly?

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And how will they be forced to pay it back, exactly?

There are many international treaties that require debts to be paid between nations. Iceland is not Cameroon and is unlikely to wish to become of a similar financial status.

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