Thin Iceland

Not so long ago Iceland was, ironically, hot property, the home of hot money. Tempted by the country's high interest rates, investors fell over each other to buy Icelandic assets. The problem is that it's a small place, home to a few decendents of some Vikings who gave up half way to Greenland, with very little to actually put your money into. This means that the investment funds were in total disproportion to the real size of the underlying market. In the recent rush away from rISKy assets, the unwary have learnt what it means when everyone rushes for the exit in a small market. The door is just too narrow and something has to give.

One of the dislocations has been the currency. The Icelandic Krona (ISK) yesterday moved in an almost mindboggling manner. Trading at one point at 350.00 to the Euro, it dropped to 140.00 as the Central Bank decided that the proper rate is 131.00 and declared that is where it shall be. Not so, said the market, which almost instantly started paying up to 200.00. Trywalker only had a half-a-million Euro position, but with prices moving at 10% a quote it caught his attention, I can tell you.

Troubling times for a country that used to be called Beejam...


Update 08/10/08 15.00 CET: The Icelandic Central Bank has just given up on its idea of pegging the Krona at 131.00 to the Euro. This is because the rest of the world thinks it's 280.00-300.00 and denial is never a good status for policy-makers.