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Iceland PM Warns Nation's FX Shortfall "Is Matter Of Huge Concern"
Just a few weeks ago, the Icelandic government started threatening to use the European 'template' of removing guarantees on large deposits (though maintaining its capital controls) indirectly pressuring the wealthy to spend (for fear of haircuts). However, the capital controls have backfired as Bloomberg notes, Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank. The Prime Minister has said that the FX shortfall - exacerbated by his own policy restricting the selling of Krona - is "a matter of huge concern." The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.
The yield on Iceland’s 5.875 percent dollar $1 billion bond due May 2022 has soared this year to as high as 5.71 percent last month from a low in May of 3.81 percent. Its spread to the U.S. Treasury curve widened to around 280 basis points yesterday from a May 28 low of around 180 basis points.
Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank.
Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product.
The nation faces a “repayment risk of foreign debt by private entities in the economy, who don’t have access to foreign financial markets,” Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based central bank, said yesterday in an interview. “We view this as being exacerbated or made worse by the fact that our current account is actually declining.”
Prime Minister Sigmundur David Gunnlaugsson has said Iceland’s foreign exchange shortfall is “a matter of huge concern” as he tries to scale back currency controls in place since 2008. The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.
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“Repayment of this debt is currently under capital controls,” said Benediktsdottir. “So we can use the capital controls to actually manage the outflow of those repayments. By doing so, we can keep both financial and currency stability.”
Whocouldanode that Capital Controls and the restriction of free markets would have unintended consequences?
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5.8% on a 1billion bond!?!
why the fuck can places with this small amount of liquidity even be allowed to have debt offerings in times like this?
edit..
which totals 20 GDP!?!? this is a world wide takeover of epic proportions bitchez
Iceland must run a large current account surplus in order to generate the cash necessary to pay its debts, because foreigners will not invest in the country as long as the capital controls remain in place. Removing the capital controls is a giant gamble, but it is also the only way to take a shot at getting the country back to normal. Expect no gambling from Iceland's leaders. They'll have to go hat in hand to obtain another loan from someone.
http://dareconomics.wordpress.com/2013/10/09/around-the-globe-10-09-2013/
Or they can just default on the foreign debts and tell their creditors to go take a hike.
They defaulted once. I doubt they want to fall into the cycle again.
And the minute they do that, they just got sucked right back into almost the same situation that places like Greece and Cyprus find themselves. Repudiate the debt, begin rebuilding. Or live in debt slavery forever.
Yes, at least for two reasons: 1) they can't get money out, and 2) Icelandic assets are overpriced, while capital controls are in place. I think they want to get 'half-pregnant'; loosen a little bit so their exports get more profitabe, but not enough to seriously hit those with foreign currency loans.
So Iceland proves 1 thing...and that 1 thing is that this system cannot be saved. The 'economic system' the 'monteray policy' which supposedly governs all that we do doesn't work and inevitably fails. You've got Japan and you've got Iceland...we are evolving through this crony facist stage towards value is worth infinitly more than any demoninated price.
In a world constructed on the poison of fiat, debt WILL find you.
was it iceland a few years ago that just added 25mil to there "account" with a key stroke....and the cb'rs said hey...you cant just make that shit up out of thin air....
Iceland, reminds me of Apfelkorn in Keflavik! Great people of "Island", don't let the bankers dupe you!
HA.. Crack #1
Now comes the discovery that nothing is safe despite anything and everything.
Ol' Yellen is going to have to ramp up to 115B or more in a hurry.
Guys, I don't understand this article. Can some help me get some clarity on it please? anyone?
Read the last statement " free markets" the writer is an idiot and thats why i doesn't make sense printing counterfeit fiat all over the world doesn't make the fx market free does it?
Read it again. The author said "restrictions on free markets have consequences". Ergo, markets with restrictions are NOT free markets.
Do you think the author was implying the fx was a free market?
The whole point of the article was that if they got ride of capital controls they could access the "FREE" fx markets. Maybe im wrong but i dont think the writer is that deep
It depends on which article you're referring to. If you mean the excerpted bloomberg article, I think the author was saying something like "Iceland is trying to perform a delicate balancing act to support the krona through currency controls, without triggering even worse outflows of foreign capital." Good luck with that.
If you mean Tyler's article, I think the author was saying, "As usual, bloomberg is absolutely clueless. And the Icelandic gov't were idiots to think they could escape all collateral consequences of defaulting on their banks' gambling debts and debasing their currency."
Do I think FX markets are free of intervention? Of course not. There's a very overt currency war underway, and no markets are left unmolested and un-rigged.
It's commonly said, "The first one to default (or debase) wins". Well, yes--but there are always consequences. If you default, you lose access to international capital markets until you serve your time in fiscal purgatory and become more Germany and less Puerto Rico. I still think that defaulting is the best course, because I don't think either individuals or nations should be living high on the hog on borrowed money. Spend what you earn, earn what you spend. If you have to borrow for it, YOU CAN'T FREAKING AFFORD IT.
Credit cards are a very expensive convenience. Even if you never carry a balance, they raise the cost of everything you buy by roughly 4% (although it's hidden).
Likewise, a bond-selling Treasury is an excavating machine that will dig a hole you can never climb out of.
Does that mean Iceland may need to "confiscate" the pretty little island they gave to the Bjork?
http://www.complex.com/art-design/2013/02/iceland-has-given-bjrk-an-island-to-thank-her-for-cultural-contributions
I mean, you can't just go giving islands away when you're totally outta the Kronas, people...
Article assumes that iceland govt must back private icelandic debt. Let the private debt default what companies cant pay should go bamkrupt. There is no such thing as a riskless fiat based asset
And the author makes the final stupid statement that foriegn currency markets are free markets. EVERYbody in the zionist world is counterfeiting there fiat
Such an idiotic writer the stupidity is amazing
thanks!
The article does not do a good job of explaining the situation. Prior to the Icelandic collapse, countless Icelanders had taken out cross-currency loans from Euro continental banks--for businesses, to buy homes, even cars. When the banks failed, the tiny nation of 320k could not possibly cover the liabilities. You could fit the population of Iceland into Chicago about 30 times with room left over.
So the govt devalued the krona to deal with the massive debt. In so doing, they caused the balances of those private-sector loans to soar, because the borrower was paid in kronur but had to make his house payment in euros. In the collapse, the krona fell from 90K=1 euro to 340K=1 euro. Then Kronur trade was suspended because no one would give anything for it on FX.
One man explained his crippling losses: "I bought my house with a 200,000 euro loan. Now, after paying on it for several years, I owe the kronur equivalent of 600,000 euros. How can I ever pay that back?"
Debt can be risky. Cross-currency debt is insanely risky. The Chinese will be able to tell you all about that soon.
All I know is that if the international banking community can fuck Iceland....they're going to with a vengeance.
Yup, looks like Iceland is fixed but good.
i remember kyle bass predicting preciesly this scenario.
i remember at the time cheerleading iceland's debt-dissolving strategy.
janus is occasionally wrong; until, inevitably, facts convert him.
i've seen the light:
http://www.youtube.com/watch?v=xzNyVPbx3gI
(janus is the fat-man in the shades)
Actually some months back, a fairly long time ago actually, when all the media and press was reporting the recovery of Iceland and it's security from financial crisis, I read one or two economic reports that claimed that Iceland was sitting on a giant problem, and that problem would be Iceland's FX position. Iceland did clean up it's financial sector, but some problems are international in scope and Iceland still had to deal with it's world FX position. And we know the EU and Britain are gunning for Iceland, to take that nation down for it's mass default of foreign bank deposits. I don't pretend to know the ins and outs of world FX or Iceland's true position in the international markets. BUT, this story today is an exact reflection of those earlier stories I read. Saying that Iceland had only escaped their financial crisis to a certain degree, but that given time, FX would come back to haunt that nation's world financial position. I tend to agree, it was a story too good to be true, that Iceland could escape by default on bank's debts to foreign depositors and that markets would accept this without a smack back or a knock out blow to Iceland down the road. It appears that the past is still a problem, and FX is a crisis for Iceland. Iceland may yet be smashed to bits by international bankers.
Like the war on drugs taking down the Silk Road, the banker's are now going to try and take down Iceland. Freedom will not stand, going your own way against repressive laws will not stand. Iceland is in a war, I hope they had not declared victory and moved ahead as if the long arm of the global international power elites in the banking sector would not be back for their payback! Be it freedom loving SR users, or freedom loving Iceland, the world powers DEMAND control of your lives, especially your economic lives. SR paid no taxes, they must die, Iceland gave bankers the "fuck you", they must die.
While we sleep, the new fascism is growing at an amazing rate, spies and militarized police are growing faster than after the Soviet revolution. We in America and the world are in a real revolution from above, and we don't even know it, most of us. The elites are grabbing for power and wealth and using their highly paid spies, military, drug warriors, bankers, cops and agencies of repression like CIA, NSA, FBI, DEA etc. etc. to steal all power and all wealth.
The revolution is not getting publicity, because the corporate elites own the media. Global banker power is growing, the spies, police and armies are in place to enforce their will and their power. Believe it, all evidence points to a Revolution of the elites against the 99%. They are winning, we are losing, and our taxes are going to pay for their victory and our repression. Cops have tanks now, and are ready to run your door down and taze you, just in case you bought some weed on SR, or, like Iceland, tried to stiff the international bankers.
Banksters are trying to get back at Iceland