In These New Times

 DrewHasselback

National Post

17th August, 2008

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Iceland facing meltdown

Credit crisis hits Iceland

Iceland’s currency crisis has reached a point where a senior government minister is suggesting the tiny island nationconsider adopting the euro.

Ingibjorg Solrun Gisladottir, Iceland’s Foreign Minister, said in a TV interview on Friday that Iceland has “outgrown” its local currency. With the country’s three largest banks now holding assets equal to roughly nine times the country’s output, she said the Iceland could move to the euro so it could draw down on reserves at the European Central Bank. 

“If the banking system is to be maintained at the present size, we need a strong lender of last resort, in which case we can only look to the ECB and to adopting the euro,” Gisladottir said.

Iceland’s currency troubles offer a glimpse into the complexity of maintaining a separate national currency in so small a country. The kronur has dropped steeply against the euro, especially as Icelanders opt to hold their savings in the European currency. Double-digit inflation (13.6% in July) has forced Iceland’s central bank to impose a hefty interest rate of 15.5%.

Drew Hasselback