Iceland Is Running Out Of Money: Foreign Currency Debts Threaten Economic Stability, Cause New Fears In Euro Zone

on October 09 2013 12:50 PM
Iceland's parliament building
Source: Wikipedia

Iceland’s financial problems are finally catching up with it after the central bank revealed Tuesday that the private sector does not have enough cash to pay its foreign currency debt.

Current account surpluses over the next five years are not projected to cover even half of the private sector’s current non-krona debt owed up until 2018, which equals about 700 billion kronor ($5.8 billion) in total.

Currency controls were put in place to ease Iceland’s financial problems after the global financial crisis wiped out some of the country’s biggest banks, which had accumulated a combined $85 billion, far in excess of what the central bank could cover. As Iceland looks to lift those controls, there are fears that attempting to get capital to flow freely may result in a krona selloff that could increase foreign debts, seriously undermining the country’s economic stability. To make matter worse, Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based central bank, said Tuesday in an interview with Bloomberg that attempting to reduce the debt was difficult because of the country’s shrinking current account.

As things stand, Iceland’s strict regime of staggering payments is allowing the economy to recover without risking another financial collapse or the krona’s stability. The controls have also meant that foreign creditors hold about $7.2 billion that has been trapped inside Iceland to prevent capital flight. The government is trying to get those creditors to accept writedowns on the debt so the country can lift the controls and not have to deal with a currency selloff and economic collapse as money filters its way out of the country. 

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