Iceland Pegs Krona As Financial Turmoil Whips Through Europe

The turmoil in the financial markets has taken a particularly heavy toll on Europe, and unfortunately, Iceland is bearing the brunt of it. In fact, the Central Bank of Iceland moved to fix the value of the Icelandic krona to 131 against the euro following a more than 40 percent decline since the start of September. Due to the Central Bank of Iceland's high 15.50 percent interest rate and monstrous current account deficits - which amounted to 34 percent of GDP at the end of June - Iceland's krona faced heavy speculative selling, especially as risk aversion drove carry trade selloffs. 

Meanwhile, the country is struggling with liquidity issues, and the government is reportedly in talks with Russia to agree on a 4 billion euro loan. Iceland's Prime Minister Geir Haarde said, “In a situation like this it’s turning out that it’s every man for himself, every country for itself, everybody’s taking care of their best interest and that’s what we are doing." Mr. Haarde's comments highlight the lack of unity and support between Europe's individual countries and economies, which is doing little boost global investor sentiment. This leaves Friday's G7 meeting in Washington all the more important, as this would provide a prime opportunity to announce some sort of solution. However, as we found this past weekend following a meeting of the leaders of Europe's four largest economies - Italy, France, Germany, and Britain - no formal plan can easily trigger additional bouts of risk aversion in the markets.

EUR/ISK (Daily Chart)

Source: Bloomberg