The Canadian loonie looks mighty appealing to tiny, troubled Iceland

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The Gazette, Wednesday, March 7, 2012

Iceland, a nation of 300,000 people, wants to adopt the Canadian dollar as its currency because its own, the krona, is practically worthless. One thousand kronur are worth less than eight Canadian dollars.

The loonie is flying high over Reykjavik. While Iceland officially favours joining the eurozone, that could take years to negotiate, with serious conditions imposed on the country to reduce its deficit and debt. As the Globe and Mail reported, Icelanders' "favoured alternative is the Canadian dollar, easily outscoring the U.S. dollar, the euro and Norway's krone."

There's nothing to prevent Iceland from doing this, though the Icelanders would receive nothing in return. They wouldn't ask for a seat on the board of the Bank of Canada, and they would not be consulted on monetary policy by the Canadian central bank.

All they want is the loonie, and from their point of view, it makes a lot of sense.

They'd be getting a stable currency and a petro dollar at that, one that rises with the price of oil. With crude prices currently more than $100 a barrel, the loonie has again achieved exchange-rate parity with the U.S. greenback, making the Canadian dollar one of the strongest currencies in the world.

Standing behind the loonie is the Canadian brand. Our fiscal frameworks are among the strongest in the world - with a cyclical deficit of only 2 per cent of gross domestic product in the next fiscal year, with the books due to be balanced by 2015, and with a debt-to-GDP ratio of only 30 per cent. The World Economic Forum has named the Canadian banking system the strongest in the world for the last four years in a row.

None of which can be said of Iceland.

At the worst moment of the 2008-09 financial crisis, Iceland's debt-to-GDP ratio was 850 per cent. What happened was a financial bubble that, like all bubbles, burst.

In the early 2000s, a nation of fishers decided to become a nation of investment bankers. Former fishing-boat captains bought bundled mortgages in California and merchant banks in London, places they had seen only in the movies.

When the Icelandic banks collapsed in 2008, they lost $100 billion, or as Michael Lewis wrote in a brilliant 2009 Vanity Fair article, "roughly $330,000 for every Icelandic man, woman and child." As he noted, the Icelandic stock market, whose value increased by a factor of nine in the bubble, lost 85 per cent of its worth after the crash. The Reykjavik housing market, which had tripled from 2003 to 2007, also crashed, as people's mortgages became worth much more than their homes. This is why they were torching their cars to collect the insurance.

At the time, as Lewis wrote, Iceland didn't have the right people in place to cope with the crisis. "The minister for business affairs is a philosopher," he noted, "the minister of finance is a veterinarian. the central bank governor is a poet."

This is hilarious, except if you're an Icelander.

The Canadian ambassador, Alan Bones, was due to speak on the krona-loonie question last weekend at a conference in Reykjavik organized by the opposition Progressive Party.

That is, until they got wind of his speech back in Ottawa, and Foreign Affairs promptly pulled the plug. First, an ambassador has no business speaking at a political meeting, Second, it's a question of monetary policy for the Icelanders alone to decide. Third, he apparently forgot to clear his remarks with Foreign Affairs or Finance.

That being said, the Icelanders are quite welcome to adopt the loonie. This would be the first time any other country adopted the Canadian dollar as its own.

This is known as dollarization, and it's a fairly common occurrence. No less than 10 countries, many of them in the Caribbean and Central America, have adopted the U.S. dollar as their own. El Salvador, Panama, Ecuador and the British Virgin Islands are among them. The Bahamas and Haiti are among countries using the U.S. currency in addition to their own. They get the stability of the world's reserve currency. Several jurisdictions, including Monaco and the Vatican, use the euro. And several Pacific island nations use the New Zealand or Australian dollar.

But no country has ever adopted the loonie. Or even talked about it, until now.

In addition to the advantages of adopting a strong currency, Iceland would be moving closer to another Arctic nation.

All together, Canada should take this as a compliment.

Back in 2009, flying home on a government Challenger from a conference in Europe, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney had a refuelling stopover in Reykjavik.

Flaherty quipped that Carney might want to buy some kronur. As it turns out, the Icelanders want to buy loonies.

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