Currency Crisis: The Case Of Iceland

Abstract

The purpose of this research paper is to analyze the Krona (the Icelandic currency) from an investment perspective while determining what has influenced its recent value deterioration.  The paper looks at many different variables that have influenced the currency since the 1980s.  These factors include: Iceland’s market-based economy, the layout of their financial system, the exchange rate system, balance of payments, international investment position, and the fiscal/monetary policies that influence their society.  When investing in this currency, it is vital to understand the importance of each of these factors and their role in the valuation of the currency as an investment.  With the recent decline of the Krona’s value, recommendations are put forward regarding Iceland’s currency’s management.  Due to the fact that their financial system has been the backbone of their economy over the last decade, they need to stabilize this system first and foremost.  As soon as the economy will display signs of recovery, the government must take measures to curb the deficit and external debt, while encouraging the diversification of the Icelandic economy.  Moreover, Iceland must do its best to join the Euro zone.  In that context and from an investment approach; namely, trading the Krona, individuals should sell it if they have a short-term investment horizon.  However, in the long-term ranging from three to five years, the currency promises modest return.