Monday, October 27, 2008

Countries at Risk? What's next?

2 things led to Iceland's situation. Monetary policy and Banks Overleveraging. To cut it short and sweet. Here we go?

Monetary PolicyGovernment's policy is to raise interest rate when inflation rises and lower interst rate when inflation decreases. As inflation has been damn high, Iceland has been raising the interest rate continuously, resulting in interest rates exceeding 14%, relatively higher than other countries. And this resulted in foreigners putting money into Iceland to earn that rate. When they do that, they are basically buying the currency and basic demand and supply tells us that exchange rate rises as a result. But now money are fleeing out and now, the currency go "starn" and plummets. As always according to the natural law of gravity, what goes up must come down and what goes down must come up.

Banks Overleveraging Need we say more?

Anyways, we were just itchy and curious ( as usual) and picked this up from the IMF. And we noticed that Iceland's Current Account Balance ( as a percentage of GDP) has been negative from 2006,2007 (partial estimate), 2008 (estimated). See the other countries on this list closer to home...Vietnam, Australia, New Zealand....and USA and UK. Are this countries at risk too? What are their foreign reserves?We will leave it up to our sexy readers. Please note the shaded grey green are IMF estimates by the way.....

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