You can’t spell RISK without ISK
Today the currency of my native country of Iceland has fallen by 5.9% and the current EURISK rate stands at 118, whereas last summer it could be found hovering around 88, so the effective drop since then is about 34%.
According the reports found on foreign exchange sites such as fxstreet.com, this is written up to the current risk-aversion we see in global markets, and the fact the the Icelandic banks’ expansion of late was mostly fueled by high-risk investments and financing.
Couple this situation with an inflation of 9% for the last 12 months in Iceland, which is sure to increase rapidly due to the following facts:
1. Iceland has an import/export trade deficit of 2.5 billion euros in 2006 (that’s according to the 118 exchange rate). Divide that amongst the 300.000 inhabitants, and you have each persons debt increasing by 8.300 EUR per year.
2. The real-estate loan market is completely financed by index-linked loans, which are linked to the consumer price index (CPI) as published by Statistics Iceland institute (statice.is), which has by the way risen 27.5% in the last 5 years. These loans since 2004 have been primarily provided by the Icelandic banks, which are now offering them at around 6.5% interest linked to the CPI, which has risen over 6% per year for the last two years.
3. The CPI includes real-estate costs, so in effect there is a possibility for a (downward spiraling value) feedback loop.
I’m not an economist, and perhaps I’m getting a few things wrong, but overall it seems the economy of my little island, which has in the last few years been rocket-propelled by endless expansion of the banks, large industrial undertakings (aluminum plants, etc), and the recent few years of blooming investments worldwide, is not braking like the rest of Europe; suddenly but with ABS, but rather crashing quite uncomfortably into concrete barrier.
