German Bank: Iceland now better off than Ireland

Rebel Alliance Credit

Credit where Credit is due

In the words of the FT’s Tracy Alloway:

Ireland’s membership in the eurozone could be one of the things which hinders its recovery. As the analysts point out, the Icelandic krona’s precipitous fall in value has helped the country’s economy regain some of its national competitiveness. In contrast, Ireland is `stuck’ in the eurozone — unable to competitively devalue its currency

Via Ms. Alloway in Financial Times: Deutsche Bank’s, “Iceland v Ireland: Is the difference really only one letter?”

The most obvious difference between the two situations is Ireland’s membership of [the Economic and Monetary Union] allowing it to access ECB liquidity to help funding the banking sector and sovereign. This allowed Ireland to escape Iceland’s currency collapse, an immediate and rapid deterioration of domestic private sector debt servicing capabilities and the imposition of widespread capital controls…

Looking ahead we see potential for the two case studies to diverge. Iceland’s floating exchange rate, such a foe last year, could become a friend. Over recent quarters it has helped Iceland export its recession while huge competitiveness gains combined with valuable natural resources and the potential for E(M)U entry offer Iceland a chance to emerge from this crisis, of historical proportion by any standards, pretty rapidly over the coming 1-2 years. In contrast Ireland is struggling to improve competitiveness while searching for a new business model. In the absence of growth and at the risk of deflation, paying down its ballooning debt burden will become an increasing challenge. While the downside risks to the Icelandic economy remain hefty, in our view the upside is more obvious than in the case of Ireland.

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