Is Iceland the Canary in the
Mineshaft of Global Financial Contagion?
London, UK - 27th March 2008, 10:54 GMT
Dear ATCA Colleagues
[Please note that the views presented by individual contributors
are not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and threats.]
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. While
Iceland's inflation target is 2.5%, the February inflation rate was 6.8%.
The central bank's rate hike is designed to increase confidence in the Krona,
that has slumped and made imported goods more costly. It is now apparent
that sovereign central banks cannot manage the "Global Credit Crunch"
without severe pain and it would appear that the financial markets and margin
calls are calling the shots in the accelerating "Great
Unwind near The Speed of Light." This leaves central banks and
regulators as front row interactive spectators who are following the markets
and NOT leading them!
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