January 23, 2009
With the banking crisis reaching new lows, the unthinkable is being thought: could Britain be the next Iceland?
Both currencies have been through the mill. Sterling yesterday hit a 25-year low against the dollar and has lost roughly a third of its value against the euro in the past year. The Icelandic krona plummeted against the dollar and lost more than half its value against the euro before it was suspended in October. In one day the krona slumped 30% against the euro.
There is also an uncomfortable closeness in the liabilities stored up by banks in each country. The debts of the big failed Icelandic banks totalled about 600% of the country’s GDP, which seems astronomical until you discover that the liabilities racked up by Britain’s come to about 400 to 450% of its GDP.
Iceland has recently had to get a $2.1bn loan from the IMF to help bail out its banks and broken economy. It happened in Britain in the 1970s. But surely it couldn’t happen again?
“When the banking sector collapses, the domestic currency of the country in question will obviously suffer,” said Nick Fullerton, managing director at FC Exchange. “The events in Iceland reflected exactly this but to draw direct comparisons with the UK is difficult as the situation is complex.
“There are a plethora of reasons for sterling plummeting, not just the state of the banks. If you add in factors such as deflationary concerns and alarming economic indicators you have a collaboration of negativity manifesting in the fall in the value of sterling.”