Iceland fixes crown at different rate to market

 

Having been untraded for days after it collapsed, Iceland's crown is moving towards a dual exchange rate with the central bank selling foreign currency to locals much cheaper than the international market rate.

Iceland's government took control of its banking system last week and has since imposed harsh foreign exchange controls, holding an auction every day to set the value of the crown.

Friday's fix valued it at 151 to €1 and 112.69 to the dollar, slightly weaker than yesterday's levels. But the Reuters matching dealing system showed the crown at almost half that value in international trade at 275 to the euro.

"Effectively, you have a dual exchange rate which isn't that unusual in this sort of case," said one analyst covering Iceland, asking not to be named.

"What the government is doing is giving away foreign exchange locally at much cheaper than the market rate."

International trade in the crown is still extremely light and illiquid, with the three most recent trades today shown as being at 1549 and 1550 the previous day.

Before yesterday, the most recent international trade had been on Oct 8 and had valued the crown at 340 to the euro.

If the crown continues to strengthen internationally even while weakening locally, the differential between the two rates might disappear and reach equilibrium. Otherwise, with Iceland's foreign reserves dwindling, the analyst said it could only continue local foreign currency selling for days or a couple of weeks.

That leaves Iceland increasingly dependent on securing outside funding, most likely either through an International Monetary Fund rescue package or a loan from Russia, which may be keen to spend its oil revenues for strategic gain despite its own economic problems.

Iceland says it is still considering whether to take any loan from the IMF and will decide within the week, also saying talks with Russia over the loan begun this week would resume soon.

Russia is seen wanting to boost its geopolitical influence in the aftermath of the war with Georgia, although Nato member Iceland has repeatedly denied it might offer the use of a former US airbase dominating the North Atlantic.

The analyst said Russia might also be waiting to see if Iceland gained a non-permanent United Nations Security Council seat. The UN General assembly was due to conduct elections late today for council membership during 2009 and 2010.

In the meantime, he said demand for foreign exchange would likely grow sharply in Iceland with a black market rate probably emerging before long.

Under exchange controls imposed earlier in the week, Icelandic firms are only allowed to buy foreign exchange for essential purchases such as food, fuel or medicines. Having been nationalised, the banks are effectively under state control. The central bank has also capped use of Icelandic credit cards overseas.

Reuters