Iceland govt can’t agree on how to curb krona

Iceland’s government appeared to be in disagreement yesterday over how to rein in the surging krona with Prime Minister Bjarni Benediktsson slapping down a suggestion by his finance minister that it could be pegged to the euro or pound sterling. The Icelandic currency is booming as a result of the island’s spectacular recovery after the 2008 economic collapse, which forced authorities to nationalize three failing banks and impose capital controls.

When these controls were lifted in March, analysts hoped the krona would depreciate. Instead, a number of factors keep the currency at high levels, such as booming tourism, robust consumption and comparatively high interest rates, which are attracting investors.

Iceland is basking in good times right now: alongside the explosion in tourism, the fisheries sector is thriving, and the economy grew by an impressive 7.2 percent in 2016, with 11 percent in the last quarter alone.

The one dark cloud is its currency, the krona, which hit its highest level in almost a decade in early March. “Is the status quo untenable? Yes. Everybody agrees on that. We’d like to have a policy that would stabilize the currency,” Finance Minister Benedikt Johannesson told the Financial Times in an interview yesterday.

The Icelandic krona should therefore be pegged to a strong currency for advantages comparable to those of Denmark, which has long bound its kroner to Deutschemark and then to the euro, according to Johannesson.

But Prime Minister Benediktsson subsequently told Bloomberg that he preferred to keep a variable exchange rate, which would allow Iceland to better adapt to crises. “The krona’s role in the collapse and subsequent resurrection is undisputed,” Benediktsson said. — AFP