The Icelandic currency Króna, ISK fell sharply yesterday. The ISK fell 7 percent and has not dropped that much since the floating currency rate of the ISK was introduced in 2001.
When markets closed yesterday one Euro was worth ISK 118; it had been worth ISK 109 at the beginning of the day. Icelandic currency experts traced the drop to general risk avoidance on international financial markets. Other high interest rate currencies, similar to the ISK, also dropped dramatically yesterday, Fréttabladid reported. At midday Tuesday the EUR was at ISK 123, the GBP at ISK 156 and the USD at ISK 77.
“The Icelandic Króna is hit the hardest because of the sub prime loans crisis in the US and the effect on that on credit markets,” said financial analyst Ulrich Leuchtmann, with Commerzbank. He predicted that the ISK would drop further.
Analysts at Kaupthing bank said that the sellability of the ISK had decreased considerably because of the turmoil in international financial markets and called for the National Bank of Iceland to provide the Icelandic banks short term loans in foreign currencies. However the currency reserve of the National Bank could prevent it from taking such measures.
The Icelandic banks have been reluctant to lend in foreign currency in the last few weeks because of the credit crunch.
Recent pay rises on the Icelandic labor market are in turmoil because of the situation. The weakening of the currency basically wipes out pay rises as the prices of necessities and oil go up. Many families have taken out mortgages in foreign currencies. If the situation prevails in the long term they could be faced with considerably higher payments.