Icelandic news translated into English

November 4, 2008

Warns about high policy rates

Filed under: economy,Politics — newsfrettir @ 10:24 am

Jaakos Kianders
The depression the Icelandic nation is dealing with this moment is very alike the situation in Finland in the nineties, says Jaakos Kianders, superintendent of the Institute of Economics of the trande union of Finland.

“The biggest lesson, that Icelanders can get from the Finland depression, is that it is highly unadvisable to keep the policy rates high in the times of depression to support a weak currency.” says Kiander.

The Finland bank depression started in a similar way as the Icelandic. “The Finnish mark had been for a long time stuck to the currency of other currencies. In the beginning of the eighties there were certain limitations on currency and investment markets removed. Those actions, as well as the currency of the mark, led to a massive rise in the Finnish economy and the foreign capital poured in to the country.” Like in Iceland the investments increased substantially and property prices went up. Then the debt setting increases of families and companies started.

“The project of the Finnish Central Bank was, amongst other, to keep the currency in certain strains. This worked well as long as the foreign investors believed in the Finnish economy.” he says.

“In the year 1989 the soviet posts started to shiver, which were an important export market for Finnish companies. Investors started to ponder if there were economic presumptions for the strong currency of the Finnish mark. That is why fortune investors attacked the Finnish mark.”

The Finnish Central Bank reacted to that by raising the policy rates to support the currency of the mark.

“With that started a season of very high policy rates, which persisted for 3-4 years. This had very extremely bad influence on the homes and companies in the country. Many of them had been indebted and this raise of policy rates became too much for them. In total the whole Finnish economy reduced by 13% in three years.” This depression did not resolve until the year 1993 when the real estate policy was lifted and, what is more important, the policy rates were lowered again.

Kiander thinks that Iceland position would not necessarily have been better if the Euro was it´s currency in stead of the króna. “The Icelandic banks should have just as easily been able to get to financial resources and so the bank system would have been too large for the Icelandic economy.”

(News Article by Bjarni Ólafsson)
Original Article in Icelandic

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