The central banks of Norway, Sweden and Denmark have joined forces in a stunning move to rescue Iceland, offering a credit line of €1.5bn (£1.2bn) to beat back speculators and shore up the battered krona.
The solidarity gesture is a powerful signal to hedge funds betting on Iceland's downfall that they are up against the international system. The swap accord doubles the foreign reserve cover of the Icelandic government at a stroke.
Iceland's central bank said the deal was a "precautionary measure" to stabilise the currency, which has crashed 25pc this year.
Emphasis added by me.
I guess I really don't understand the ways in which currencies are valued. Couldn't we say the US Dollar has crashed against the Euro? The Dollar has gone down against the Euro more than 25 per cent!
Lars Christensen, an economist at Danske Bank, said the swap deal would make it harder for speculators to short the krona but would not stop Iceland plunging into a deep recession.
"Economically, this changes nothing. Iceland is one of the most indebted countries in the world," he said.
Paul Rawkins, of Fitch Ratings, said the country's external debt had reached $97bn, five times the size of the economy. " The markets had begun to doubt whether the government had the resources to rescue the banks," he said.
Iceland has evolved into a sovereign hedge fund.
With a home economy the size of Bristol, its banks have borrowed massively on the global capital markets to launch raids on companies across Europe.
Emphasis added by me.
More:
Chris Whalen, head of Institutional Risk Analytics, said Iceland was the emblem of our times.
"The country is like a big pension fund that has taken a punt with leverage," he said.
Emphasis added by me.
Iceland? Who knew?
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