Wednesday, October 08, 2008

Danske Bank on Iceland

Although Danske Bank forecasts were not very well regarded in Estonia a year ago, the events on ground have proven them quite accurate. So it is interesting to read that they are even gloomier on the situation in Iceland:
The past 24 hours have been extremely hectic in terms of news out of Iceland. This is the news so far:
Yesterday, the Icelandic prime minister, Geir Haarde, addressed the nation. In his speech, Mr Haarde said that Iceland was facing very serious economic and financial challenges and that the Icelandic government would put forward a plan to parliament to stabilise the situation. However, the Icelandic government has so far failed to put forward any concrete measures.
The Icelandic authorities today surprisingly announced that Iceland would get a loan of EUR 4bn from Russia. However, a spokesman for Russian Prime Minister Putin has said that the Russian government does not have any knowledge of such a loan.
Today, the Icelandic central bank said it would peg the krona to the euro at a rate of EUR/ISK 131. Given the fact that the Icelandic FX reserve is less than USD 3bn, the peg does not look very credible, and we do not expect it to be maintained.
In March 2006, we wrote in our research note, “Geyser Crisis”, that Icelandic GDP could drop 5-10% if the country was hit by a credit crisis. Latest developments unfortunately confirm this bleak prediction.

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