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Iceland

Page history last edited by Brian D Butler 15 years, 1 month ago

 

Iceland

 

Iceland is a Nordic country situated in the North Atlantic Ocean and is the most western point of Europe. As a country, Iceland has been quick to adapt to internet technology and has emerged as a major contender for tech companies looking to Europe for a research base.  There are four international airports in the country, with Keflavik in the southwest of the country being the main entry point. It is located 50 km west of the capital city, Reykjavik. Maritime transport is also a major asset of the country. More than 99% of all imports and exports to and from Iceland are moved by maritime transport.

 

The country focuses on its research, software and equipment industries. The economy is driven by large numbers of small dynamic companies specialising in niche areas and overseas companies have increasingly moved to Iceland to tap into this research potential. One particular area of research expertise is in the medicine and genetics fields, taking advantage of the health and genealogical records of a homogenous population.

 

The Icelandic labor force is well educated, with more than 55% having educational backgrounds beyond compulsory schooling. As evidence of the cosmopolitan character of the Icelandic people, 25% of university degrees have been completed in other countries, mainly in Europe and North America. As Europe’s ‘outpost to the west’ Iceland provides an excellent setting for any investor.

 

IMF  Bailout 2009:

 

IMF programme that was agreed in mid-November, which includes US$2.1bn in loans, of which US$870m was provided in early December. This will be supplemented by around US$3bn in loans from Iceland's neighbours, mostly the Nordic countries, following the first planned IMF review of policies in February 2009. The loans will be used primarily to strengthen the Central Bank of Iceland's foreign-currency reserves, which should help to support the krona.

 

Problem is:  a devalued currency does not help Iceland, as it may have for a bigger country like Brazil....because Iceland exports of manufactured goods is minimal

 

Table of Contents


 

 

 

 

Crisis 2008

 

The credit crisis of 2008 might find its first victim with Iceland.   In spite of having sound economic fundamentals (see below), none of that will matter if a confidence-driven run takes hold, and it will be all too easy for lending officers in far away banks to decide that Iceland is the kind of obscure risk that they might get blamed for.

 

"Iceland has had a colossal real and financial boom. An already rich economy grew by 4 per cent per annum; Reykjavik house prices rocketed; the financial system borrowed billions of dollars from abroad; and the current account deficit is 16 per cent of gross domestic product. Iceland was a popular target for the Carry Trade, with foreign investors buying high-yield krona, and given that Iceland’s population is small – about the size of Coventry in the UK, or Pittsburgh in the US – distortions were inevitable."

 

 

Iceland is described as a Nordic hedge fund masquerading as a country! Like many hedge funds, Iceland is now in trouble. Their central bank was forced to raise interest rates to 15% this week in an emergency move to halt the collapse of the Krona, which has fallen 18% since mid-March as "Carry Trades" have been unwound.

 

Particularly, the unwinding of Japanese Yen positions has been a key factor in the sudden capital flight away from Iceland this month. The Yen's surge in recent weeks has played havoc with the capital in-flows into many countries across the world.

 

From where did the troubles emanate in Iceland? Banks. The country's all-conquering banks -- including Kaupthing, Glitnir, and Landsbanki -- pushed the asset base of the Icelandic banking system to a world record of eight times GDP, tapping the global capital markets to launch M&A raids across the UK, Scandinavia and beyond.

 

As access to easy credit all but dried up in the financial markets, the spreads on Icelandic bank debts rose from less than 50 basis points to 800 over a few months. They are now near levels seen in Bear Stearns' debt just before the Federal Reserve's rescue. This raises a critical question: Is the Icelandic government -- which presides over a population smaller than the Canton of Geneva -- big enough to rescue its highly leveraged banks?

 

If the government tries to raise billions in the global markets it would damage its own credit rating. The central bank has just USD 2bn (GBP 1bn) in reserves.

 

 

 

 

 

see more discussion:

 

Iceland's PM urges banks to curb plans for expansion - Mar-03

 

 

 

 

 

 

Sound economy (in spite of fears):

 

But Iceland’s real economy is sound, and its strengths of fish, tourism, technology and aluminium smelters powered by zero-carbon geothermal energy are well suited to the 21st century. It would be a pity if international market panic made the slowdown needed to control inflation worse than it has to be.

 

Iceland can not be compared to Eastern Europe or the East Asia's debt crisis in 1997. For one, Iceland is one of the wealthiest nations in the world and was rated with the best living standard in the world on UNDP Human Index this year (I guess they don't take the weather into their calculations). We have excellent infrastructure, a very stable political environment, almost non existing corruption and a flexible economy. 

 

The large deficit can partly be explained with the construction of the Karahnjukar dam and aluminium smelters, huge construction projects which have had a noticable effect on the Icelandic economy.

 

If you are interested in knowing more about the status of the Icelandic economy and of the Icelandic banks I recommend that you check out an interview with Richard Portes on CNBC from last Tuesday. The link is below.   http://www.cnbc.com/id/15840232?video=696487936

 

 

How an Icelandic collapse could roll to hurt other economies:

 

Iceland is not alone in living far beyond its means. The Baltics, the Balkans including Romania, Hungary, Turkey, and South Africa (to some extent) are all in a similar boat as they are all living far beyond their means.

 

History shows that countries which run current account deficits above 10% of GDP for any length of time almost always get into trouble. East Asia's debt crisis in 1997 erupted even before any nation reached double digit deficits. Iceland's deficit is now 16% of GDP. Latvia is at 23%, Bulgaria 21%, Georgia 18%, Estonia 16%, Lithuania 14%, Romania 14%, Serbia 13%, South Africa 7% and Turkey 6%. All these economies have let credit grow faster than what would be considered safe, some exceeding 50% growth a year!

 

Iceland is one of the first "large deficit nation states" to succumb to investor flight, sending an early warning signal of potential troubles across a great swathe of Eastern Europe, the Mediterranean and across the world.

 

Peripheral European economies that depend heavily on foreign investors -- most recently Iceland and Romania -- are left with no choice other than to raise interest rates aggressively to shore up their currencies and to fight rising inflation as financial markets question whether the countries can sustain their debt-fuelled growth.

 

The rate increases contrast with the US Federal Reserve's policy of cutting rates in the face of turmoil in financial markets and fears about an economic slowdown. Poland, Slovakia, the Czech Republic and Russia, are in a better position to ride out the storm in global markets, thanks to better-balanced economies, strong inflows of foreign direct investment, and in Russia's case, huge oil-and-gas revenue.

 

 

 

Mortgage troubles in Europe (carry trade related)

 

For example, most mortgages in Hungary over the last two years have been in Swiss francs, with the Balkans and Poland not far behind. This is now turning into slow torture. The Swiss Franc has risen 5% against the Euro since October. The real level of the debt is ratcheting up fast. Foreign debts have reached 122% of GDP in Latvia, 101% in Estonia and 73% in Lithuania, mostly in Euros. For now the debtors are shielded by fixed exchange rates in Europe's ERM system, but this could make the shock even worse should the currency pegs start to snap. There is now a real risk of global financial contagion from Iceland as it increasingly looks like the canary in the mineshaft!

 

 

 

Iceland carry trade (and its effect on Brazil, and other markets)

 

see more discussion on:  Carry Trade

 

The Turkish Lira is another enigma. How it has stayed so high for so long is thanks to the "Carry Trade." Until now Turkey has been the darling of the Yen "Carry Trade," for example, offering irresistible yields to Japan's army of house wives and investors.

 

 

Article from 2006:

 

"Iceland is the carry trade nightmare. Icelandic banks borrowed heavily on European markets and invested in high yielding Iceland bonds that were over 10%. In February the Iceland Krone collapsed and interest rates are rising in Europe. The result the carry trades are blowing up. The Iceland banks have debt the equivalent of 150% of Iceland GDP maturing in the next two years. A banking crisis and collapse appears to looming sharply on the horizon. And with it could go the Iceland economy where a country debt default is highly probable given their debt is 300% of GDP. The Icelandic Krone is expected to lose even more in the coming months and in turn that could trigger a bigger global problem. At this stage Iceland is in deeper trouble than Thailand was at the same stage in 1997.  Nor is Iceland an isolated case. The British rating agency Fitch recently warned about a "general increase in bank systemic risk in the last six months". The problem as Fitch warned is the huge build up because of sustained low interest rates of equity and property bubbles. Fitch noted there is now "a high level of vulnerability to potential systemic distress in some countries" noting in particular Ireland, Norway, Russia, South Africa and the aforementioned Gulf states (Executive Intelligence Review March 21, 2006). The property bubble in particular is starting to show signs of stress with new mortgages down sharply from a year ago in the US and recent reports of housing sales are falling below expectations."

 

 

old article from 2006

 

"If you read the financial press closely, it was hard not to learn a bit about the Icelandic krona over the past week.   The krona pays a high interest rate, you see - enabling Iceland to attract the funds needed to cover its (significant) current account deficit.    It is a mini-New Zealand, in other words.  Everbank was offering Icelandic krona denominated accounts.   It is good to get into carry trades early - you get the high interest rate and watch as other investors bid up the currency too.  But it is not so good to get in late - falls in the currency can offset the gains from higher interest rates. And I guess some folks started to get a bit nervous.   Fitch downgraded Iceland, the krona fell sharply, and downward movement in the krona led to downward moves in Brazil, South Africa, Indonesia, Poland, Mexico and Turkey.

 

Why, you might ask, does what happens in Iceland matter to Brazil?   Or Turkey?  Their economies are not exactly any more similar than their cultures. The answer is that all are linked together by common set of carry-driven investors.    Tony Northfield of ABN Amro: "These countries are unrelated geographically, but they are not unrelated in portfolios."  The FT described last weeks dynamics in terms anyone who still remembers 1997 or 1998 would easily understand:  "For traders who has borrowed in euros, the krona's sharp slide wiped out more than a year's worth of carry trade profits in one fell swoop.  Those very same speculators, many of them hedge funds, will have built long positions in a plethora [great word] of other high-yielding currencies as well.  Hence, selling mushroomed, as positions in one country were closed to fund losses in another, prompting further losses."  Does this have any broader implications?  Iceland, after all, isn't the only country in the world with an unsustainable current account.   And it at least offers investors willing to finance its deficit a nice 10.75% coupon.  Another big borrower only pays 4.5% or so ...

 

 

 

 

 

Iceland Investment Promotion Agency:

 

Mr Ingi Ingason

Invest in Iceland

Hallveigarstigur 1

PO Box 1000

Reykjavik

121

Iceland

 

 

tel: +46 (0) 13 200 730

fax: +46 (0) 13 31 35 34

 

 

 

Places in Iceland

 

 

Akureyri

Akureyri region, "the capital of Northern Iceland” is the largest and most populated area in Iceland beside the capital area. Located in the centre of Northern Iceland it has grown to be the service centre for the whole Nordic region. Akureyri area is located at the largest fjord in Iceland, Eyjafjord, and consists of 9 municipalities with total of 22.000 inhabitants where Akureyri city is the largest with 16.000 inhabitants. Akureyri region is one of the most popular tourist attraction in Iceland because of its beautiful environment and strategic location.

 

Akureyri has the largest university in Iceland beside the capital area and the fasted growing in Iceland. Among technological departments at the university are the ICT, biotechnology and aquaculture departments amongst many more. Akureyri is often called “the seafood capital of Iceland” because of the large seafood sector in the region. As seafood is one of the largest export commodities in Iceland this area is very important in the Icelandic economy. Around this industry has grown a software industry that is servicing the seafood and aquaculture industries. Akureyri region is highly suitable for marine biotechnology activity because of knowledge and raw materials.

 

Investment Promotion Agency:

 

Halldór

Akureyri region business agency

Iceland

 

 

tel: +354 4605702

 

 

Thingeyjarsysla

Húsavík is the principal town of the region Thingeyjarsýslur in Northeast Iceland with about 2.500 inhabitants. It is the service centre for the surrounding region of 4.100 people. The town is located on the lowlands by the Húsavík-cove at Skjálfandi-bay, a large bay penetrating the island between the Mt. Kinnafjöll and Tjörnes. Húsavík boasts a local harbour with facilities for serving the fishing fleet as well as container coastal freight vessels and a local airport used for scheduled flights to Reykjavík, the capital of Iceland. In addition to the fishing, the region's most bountiful natural resources, there are enormous quantities of clean, fresh water and large capacity geothermal fields.

 

Industries located in Húsavík have access to the most sophisticated telecommunications system available. Húsavík is connected to the rest of the country with a fiber-optic cable connection and an extensive cellular mobile phone system. Húsavík is the first town in Iceland where fiber-optic cable connections have been installed in every home.

 

Hringur-Skagafjordur

Skagafjordur is located in Northwest Iceland midway between the country's two main urban centers of Reykjavik and Akureyri. There are daily flights between these centers from the region's Alexander Airport.

 

The main commercial sectors in Skagafjordur are energy and IT/computing. IT companies include specialists in the design and marketing of business software as well as general computer and internet services. The area is also well known for its ground breaking developments in aquacultue technology. A large number of the companies in the area are spin-offs from the University of Iceland and include Origo, creating solutions for the fishing sector and Element which is involved in software solutions.

 

 

West Fjords

The Westfjords peninsula is in the north western part of Iceland. It has a regular air service and the longest tunnel in Iceland, connecting the area with the national motorway.

 

All the townships in the peninsula have good data transport facilities. Teleworking centers are operating in the majority of towns, and one of the oldest internet service providers in Iceland is in Isafjordur. The Westfords economy is based on fishing, seafood processing and seafood related industry. Teleworking is fast becoming an important sector, utilizing the highly skilled workforce, which has one of the highest computer literacy rates in the world.

 

 

 

 

 

 

 

 

 

 

 

 

 

Digg!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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