Today’s Central Bank of Iceland selling rate is 168.09 krónur per euro, down 12% since 1 February. On the other hand, if you look at Yahoo! Finance, they quote a rate of 290.66 krónur per euro… The European Central Bank hasn’t quoted a ISK exchange rate since 3 December, when it was 290 krónur to the euro. How much is a króna really worth?
Entire textbooks have been written about exchange rate theory: fortunately, we only need to consider a very simple definition here. You’ll just have to trust me that we would reach the same results through more complicated theory, but we can just consider that a currency is worth what people are willing to pay for it. This leads to two important conclusions, neither of which you are likely to hear from the mouths of Icelandic politicians.
Firstly, in reality, the króna is worth less than 168 to the euro. It must be, because 168 to the euro is the rate it “trades” at within Iceland, where there are strict controls on selling krónur. If the currency controls didn’t exist, more people would want to sell krónur – that’s only logical, otherwise there’d be no need for the controls! If more people are selling krónur, it’s exchange rate will go down. Hence the CBI exchange rate is artificially high.
From the Ministry of Puffins blog
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Vilhjalm
2 years ago
A poster on another blog made some good points about the value of the ISK.
A day or two ago there were NO trades at the official rate – NONE – which shows that the official rate has no relation to it’s real value.
The ISK value is the amount of ISK in circulation, or potential circulation, in relation to the value of assets that can be bought.
“The general exchange rate you see quoted in the press therefore reflects two things – the productive economic capacity of a country (which includes its capital assets) and the amount of the currency in circulation (with special regard to that circulating outside the country).
So let’s look at Iceland. Well as we’ve seen a good proportion of productive capacity of the country is already pledged to foreigners through the secured bonds. So we can’t use those to back up the general currency. What’s left? Not much, lets call it zero in fact. How much ISK is outside the country? Loads. Divide loads by zero and you get a very high number indeed!
160 ISK/euro – in your dreams.
260 ISK/euro – you will get this as an implied rate if you are an Icelander with something worth buying on the unofficial market (such as selling fish in Grimsby).
100000 ISK/euro – that’s probably nearer the correct value.
What does this mean? Well the analysis shows Iceland is bankrupt (the immediate claims against the country are beyond the value of all the future output of the country). Bankrupt means the currency is worthless. That means the exchange rate is almost infinite. Worthless means that real inflation is stratospheric”
Roy
2 years ago
We must not forget to factor in the fact that Iceland is one of most least corrupt countries in the world which should stand for something! I´m guessing that 50.000 ISK/Euro is probably more realistic.
Physchim62
2 years ago
Thanks Dadi for proving that someone listens to the Minister of Puffins!
The full post goes on to say that the króna is certainly worth more than 290 to the euro, and I even hazard a guess that it’s true value is around 200 to the euro (give or take a lot). I would like to see that admitted by Icelandic politicians, but I’m not holding my breath…
BaconDoubleCheeseburgerWithStrawberryMilkshake
2 years ago
Irrespective of what Icelandic politicians, the central bank, and the IMF say, the currency restrictions will never be removed – not until Iceland adopts the euro. To think otherwise is to live in cloud cuckoo land…