Europe's Worst Currency Is Still Strong a Decade After Crisis

(Bloomberg) -- Iceland’s krona isn’t having a meltdown.

The krona is the world’s second worst-performing currency this month, only above the rupee in Pakistan, a nation seeking a bailout from the International Monetary Fund. Still, the currency is “by no means” weak at current levels and the central bank has a war chest to intervene if needed, said Jon Bjarki Bentsson, chief economist at Islandsbanki.

Europe's Worst Currency Is Still Strong a Decade After Crisis

“It is actually pretty similar to levels seen in mid-2016 when the krona was widely seen to be on the strong side,” Bentsson said. “It isn’t as if it’s weakening to very depreciated levels. It’s more that it’s returning from a very strong currency to a real exchange rate that is closer to equilibrium.”

Iceland’s krona has fallen five percent this month and reached 137.30 per euro on Oct. 18, its weakest level since June 2016. That was some way from a 109.88 peak in June last year, which was the strongest krona level since 2008 when Iceland was on the brink of financial and economic collapse. Bentsson said the current level of 135 per euro is in the middle of the 125-145 range he sees the krona trading in over the next few quarters.

A decade after the credit crisis, new stress points are appearing in Iceland. The country’s key tourism industry is declining and upcoming negotiations for wage increases amid high inflation are hurting sentiment. Concerns on how the struggling Icelandic airline Wow Air Ehf could impact the economy have also weighed on the currency and prompted the central bank to intervene.

Europe's Worst Currency Is Still Strong a Decade After Crisis

While the krona has been susceptible to negative sentiment, Daniel Svavarsson, the director of economic research at Landsbankinn, points out that Iceland’s currency market is “very thin” so the krona can move “quite drastically in relatively low trading volume.”

These are “temporary jitters,” Svavarsson said. “There’s been no big news in the economic data in the past months that changes the fundamentals for the Icelandic krona,” he said, adding that he foresees “healthy GDP growth” and remains upbeat on international investment in Iceland.

The central bank is trying to curb volatility rather than actually stop the currency from weakening, with a “moderate” intervention last month, Islandsbanki’s Bentsson said.

“They only used a minuscule amount of the 5 billion euros ($5.75 billion) net currency reserves, a pretty big war chest,” he said. “It seems to have done the trick. It was definitely not panic.”

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