Did their currency already hyperinflate?
What exactly happened to iceland?
The Icelandic Meltdown
Excerpted from the article:
By expanding credit, banks create demand deposits (zero maturity)
in order to invest in loans issued to the public (longer-term maturity). A similar
maturity mismatch occurred, as we shall see, when Icelandic banks borrowed in
(mainly international) wholesale markets (via short-term interbank loans and
repurchase agreements, asset-backed commercial paper, etc.) in order to invest
in long-term loans, such as commercial and residential mortgages.
Maturity mismatching deceives both investors and entrepreneurs about the
available amount of real long-term savings.
Hence, by borrowing short and lending long, long-term interest rates are artifi -
cially reduced. Entrepreneurs think that more long-term savings are available
than really exist and accordingly engage in malinvestments that must be liquidated,
once it becomes obvious that there are not enough real savings to sustain
them to completion.
In the Icelandic case, the malinvestments were made mainly in the aluminum
and construction industries. Both aluminum mines and residential and
commercial housing represent long-term investment projects that were fi nanced by
short-term funds and not by savings of an equal term.
Official inflation (which I take to be some kind of CPI) rose by 16,4% in 2009. It was estimated to rise by "just" 12% but they brilliantly outdid themselves.
While this may not be textbook hyperinflation it's a signal their central bank has been inflating like there's no tomorrow and the frail dams between monetary supply and everyday economics are breaking down fast.
The Icelandic government estimate 2009 revenues in about 3800 billions krona while expenditures are estimated around 5400 billions. Public debt is again estimated at 95% of the GDP for 2009. Unemployment is 8,8% and rising.
If we apply the mindlessly optimistic/downright false meter used by politicians and mainstream economists recovery is here but it's still frail.
Iceland's GDP is about 12 Billion dollars. Bailing it out was as trivial as buying a cup of coffee in the morning. I don't think people understand that this is why they can still go around down there and rant about the evil Capitalists using their mobile phones.