Markets in everything Iceland fact of the day

by on October 22, 2008 at 11:56 am in Economics | Permalink

Frederik writes to me:

In the classifieds on the web of the daily Iceland newspaper Mbl, you find hard currency for sale (US dollar, Danish kroner, and Euro) ranging from USD 300 to USD 12000. With the breakdown of the official exchange rates, the market has emerged.

The article is here, in splendid Icelandic.  Just imagine using classified ads to buy foreign currency; I don’t see any market on U.S. eBay but maybe I just don’t have the right keywords.

kurt October 22, 2008 at 1:20 pm

Soon, they’ll run out of dollar notes. So as tourist, bring cash, you’ll get a liquidity premium :)

Anonymous October 22, 2008 at 3:35 pm

Search for “euro” in the US eBay category “Paper Money: World” and you’ll find auctions for non-collectible euro banknotes in many denominations and overall quantities, up to a maximum of 650 euro.

Rex Rhino October 22, 2008 at 3:52 pm

I have sold money on ebay. None of the banks in Canada will exchange Azerbaijan money, but the money was far from worthless… Somebody in the U.S. needed Azerbaijan currency, so overall it was a pretty good exchange.

I don’t know what would be the point of trading easily exchangeable currency like Euros or Dollars on ebay or through classifieds tho. Obviously there is some implicit understanding that I am supposed to have that I am just not getting. Could someone explain?

bob October 22, 2008 at 7:13 pm

albatross: Here’s my vague understanding of what´s happening, based on random conversations in Reykjavik.

There are three major Icelandic banks with assets and liabilities an order of magnitude larger than the Icelandic economy as a whole. In early October, Glitnir couldn’t obtain a routine loan to refinance its debt. Glitnir had enough cash to survive until 10/15, but the Central Bank governor, David Oddsson, panicked and nationalized Glitnir.

After the nationalization of Glitnir, the credit markets started to question the solvency of the entire Icelandic banking system. The second largest bank, Landesbanki, failed and was nationalized, and I´m not sure what the story is behind that right now. Landesbanki and Iceland´s largest bank Kaupthing had large retail operations in the U.K. British depositors are worried about their savings, and David Oddsson unfortunately declares that the Icelandic government won’t insure the British deposits.

As a consequence of this, thousands of Brits jam Gordon Brown’s phone line. Even though Kaupthing was basically solvent, in response Gordon Brown uses anti-terrorism legislation to freeze the assets of Kaupthing. Thus Kaupthing can’t pay its debts, also fails, and is nationalized.

The only noticeable fallout in Iceland is a completely collapsed currency. During the drama with Kaupthing, I watched the price of a dollar in Kronur rise from around 100 to around 320. (In January it was in the mid sixties, the rise to 100 reflects concern about the solvency of the banks.) The currency market now is completely frozen. I’ve tried to buy dollars, but been informed that every trade must be approved by the Central Bank, and they’re only authorizing trades for necessary imports of food and gasoline right now.

While the currency was collapsing the government first declared that they would peg the kronur to a basket of currencies, but this lasted about five minutes. The government didn’t have any reserves to defend the peg. Right now the government’s dwindling reserves are being used to finance necessary imports, while a bailout is being negotiated. A $6 billion IMF / Russia / Japan bailout is looking almost certain, I guess the money is intended to pay the banks debts, restore confidence, and (hopefully) defend the currency. Also during the drama, the government announced they had obtained a loan from Russia, but this was apparently premature.

Hope this is informative.

Lincecum 4 seamer October 23, 2008 at 1:02 am

Scary situation to have to live through.

In Canada, we’ve seen our currency’s value bounce around from near .60 USD a couple of years ago, to 1.09 USD a few months ago and then lose over 30% of it’s value in a few short weeks (even though it appears as though, on most measures, Canada’s economy is in better shape that that of the US).

What am I missing in this picture?

Thor October 23, 2008 at 6:30 am

Bob: It was the central bank that declared prematurely that they had obtained a loan from Russia. Also it was Landsbanki that got frozen with the anti-terrorism laws.

Lucas October 24, 2008 at 10:54 am

So, I have a trip planned to Iceland in December. Anyone have any tips since it sounds like it’s going to be a little like the Wild West by the time we get there…

Mathaus November 5, 2008 at 4:22 am

I have moved out of Iceland 3 months ago. Tips for trip is would be typical turist places noted in every brouchure. Blue lagoon, Geysir, Gullfos, mabe a trip to volcano Hekla. Great restaurant would be Seafood cellar downtown, good place for buying food Bonus store chain, and great pizza from Rizzo :)

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