Monday, April 6, 2009

Is It Time to Buy Icelandic Bonds?

A contingent of officials from Iceland is travelling the east coast of the United States. D.C. today, NYC tomorrow. I managed to catch up with them when the Minister of Business Affairs of Iceland, Dr. Gylfi Magnusson (Yale Ph.D. in economics 1997) provided a briefing on the current state of the Icelandic economy. It had suffered a brutal crash of its financial sector.

"No Western country has crashed in peacetime as quickly and as badly," Jon Danielsson, an associate professor of finance at the London School of Economics, said last year about Iceland.

Minister Magnusson's briefing was thorough and was enough for me to ask the key questions following the briefing. Given the strong performance the country was registering in the early part of the decade, followed by the crash, I asked, "Was there a period of strong money printing followed by a slowdown in the printing?" The Minister answered, yes. Although he didn't have specific numbers, he did say it was very substantial early on money printing and said that when the central bank clamped down, interest rates climbed to 18%.

Interest rates haven't dropped much since then. The central bank's rate stands at 17%. I found this fascinating, given that after a major contraction like the type Iceland had, a country's interest rates tend to eventually decline dramatically.

After the briefing, I spoke further with the Minister and asked him where the inflation rate stood now. He told me that last year it was very high, around 18%, because of the collapse of Iceland's currency, but this year there was virtually no inflation. That was music to my ears. It suggested that Icelandic interest rates may be in for a major decline. The Minister seemed to agree when I suggested the possibility.

I have to do more work before I make any kind of all out "Buy Iceland bonds" post, but it is a fascinating situation. As Audunn Atalason of Iceland's Ministry for Foreign Affairs put it to me after the briefing, "Most countries are still figuring out ways to deal with the downturn. We're passed that since our entire banking system collapsed and we are now working with a new one."


  1. Robert-
    How would an average investor buy Icelandic bonds? Is there a mutual fund or ETF?

  2. The Central Bank of Iceland bond site shows a pretty inverted yield, so I'm not sure how much is priced in. The crash is CPI growth was certainly quite dramatic though.

  3. Nick,

    I am doing some work on that now, as soon as I have more info I will post on it.

  4. Policy rate just lowered by 150 basis pts to 15.5%: