Thursday, 1 March 2012

New Current Account Figures for Iceland

New data on current account came fresh from the Central Bank today. Iceland is still in trouble: we're not running the positive current account we need to be running if we're going to be able to build up FX reserves and get rid of the capital controls some time. In fact, we're running a deficit - although nothing close to the madness that was going on 5 years ago.

Current account since on quarterly basis since 1991 (four quarter running average). I aggregate the stuff into two simple variables: net surplus on exports and imports of goods and services and then net income of financial assets (interests and such). Figures in millions of ISK.

This graph doesn't say much though, since the size of the economy and the price level aren't corrected for. If we use four quarter rolling average of GDP (data available since 1997), we get this graph. 

Current account deficit in Iceland. 2007 is what it is: we were really running an epic deficit of 25%!! I do believe we have the world record in that perspective, no other nation in the world has managed to run such a humongous current account deficit. 

So yes, we managed to run a surplus on goods and services of around 10% in 2011. But all of it went into paying the interests on external debt.

Foreign parties have around 400 billion ISK in the Icelandic economy. They can't get it out because of the capital controls. The interests on those 400 billion is maybe around 20-30 billion ISK per year. The net income from goods and services was 130 billion. One sixth of that went into paying for the "imprisoned" funds of foreigners. 

Somebody would claim that Icelanders should accept the fact that the krona needs to depreciate by maybe 10-20% to get the current account into proper surplus zone where non-indebted foreign reserves can be built up. They also need to lower the interest rates at home and give individuals and companies a chance to refinance their external debts with at-home created money, instead of ballooning out the coffers of foreigners by paying them interests. They should also consider just skip having the capital controls, let the krona drop if it wants to and stop paying interests on the "imprisoned" money that wants to get out anyway - it will one day, and by then there will be additional interests on the debt from today until whenever the capital controls will be lifted.

Finally, the net debt creation of the banking system, such as in the form of mortgages for speculation purposes, needs to slow down. It was the debt-creation (manufacturing of purchasing power) that gave us the capabilities of running a mad 25% deficit on the current account in 2007 and the story is repeating itself, once more, today, though the scale is thankfully smaller. But the purchasing power used for buying in imported goods is coming from somewhere and the bank-mortgages used for speculation are certainly responsible for some of it.

And on top of all this, the central bank has begun its new cycle of interest rates hikes in the hopeless fight against inflation in an indexed-mortgages economy.

What a basket case the Icelandic economy is when it comes to financial stability!!

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