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Is Iceland the Canary in the Mineshaft?

DK Matai - March 27, 2008

icelandic krona.jpg
Icelandic Krona

Dear Friends, Iceland is described as a Nordic hedge fund masquerading as a country! Like many hedge funds, Iceland is now in trouble. Their central bank was forced to raise interest rates to 15% this week...

...in an emergency move to halt the collapse of the Krona, which has fallen 18% since mid-March as "Carry Trades" have been unwound.

Particularly, the unwinding of Japanese Yen positions has been a key factor in the sudden capital flight away from Iceland this month. The Yen's surge in recent weeks has played havoc with the capital in-flows into many countries across the world. While Iceland's inflation target is 2.5%, the February inflation rate was 6.8%. The central bank's rate hike is designed to increase confidence in the Krona, that has slumped and made imported goods more costly. It is now apparent that sovereign central banks cannot manage the "Global Credit Crunch" without severe pain and it would appear that the financial markets and margin calls are calling the shots in the accelerating "Great Unwind near The Speed of Light." This leaves central banks and regulators as front row interactive spectators who are following the markets and NOT leading them!

From where did the troubles emanate in Iceland? Banks. The country's all-conquering banks -- including Kaupthing, Glitnir, and Landsbanki -- pushed the asset base of the Icelandic banking system to a world record of eight times GDP, tapping the global capital markets to launch M&A raids across the UK, Scandinavia and beyond. As access to easy credit all but dried up in the financial markets, the spreads on Icelandic bank debts rose from less than 50 basis points to 800 over a few months. They are now near levels seen in Bear Stearns' debt just before the Federal Reserve's rescue. This raises a critical question: Is the Icelandic government -- which presides over a population smaller than the Canton of Geneva -- big enough to rescue its highly leveraged banks? If the government tries to raise billions in the global markets it would damage its own credit rating. The central bank has just USD 2bn (GBP 1bn) in reserves.

What happens next? Iceland is not alone in living far beyond its means. The Baltics, the Balkans including Romania, Hungary, Turkey, and South Africa (to some extent) are all in a similar boat as they are all living far beyond their means. History shows that countries which run current account deficits above 10% of GDP for any length of time almost always get into trouble. East Asia's debt crisis in 1997 erupted even before any nation reached double digit deficits. Iceland's deficit is now 16% of GDP. Latvia is at 23%, Bulgaria 21%, Georgia 18%, Estonia 16%, Lithuania 14%, Romania 14%, Serbia 13%, South Africa 7% and Turkey 6%. All these economies have let credit grow faster than what would be considered safe, some exceeding 50% growth a year! The region will need USD 350bn in foreign loans this year to stay afloat. Iceland is one of the first "large deficit nation states" to succumb to investor flight, sending an early warning signal of potential troubles across a great swathe of Eastern Europe, the Mediterranean and across the world.

Peripheral European economies that depend heavily on foreign investors -- most recently Iceland and Romania -- are left with no choice other than to raise interest rates aggressively to shore up their currencies and to fight rising inflation as financial markets question whether the countries can sustain their debt-fuelled growth. Tuesday's 1.25% rate increase in Iceland, took the key short-term rate there to 15%. Romania's central bank has raised its key interest rate by 0.5% to 9.5% on Wednesday to bolster the Leu. Poland's central bank also raised rates on Wednesday. Hungary is expected to do so on Monday.

The rate increases contrast with the US Federal Reserve's policy of cutting rates in the face of turmoil in financial markets and fears about an economic slowdown. Poland, Slovakia, the Czech Republic and Russia, are in a better position to ride out the storm in global markets, thanks to better-balanced economies, strong inflows of foreign direct investment, and in Russia's case, huge oil-and-gas revenue.

The Turkish Lira is another enigma. How it has stayed so high for so long is thanks to the "Carry Trade." Until now Turkey has been the darling of the Yen "Carry Trade," for example, offering irresistible yields to Japan's army of house wives and investors. There are huge imbalances in the economy. The current account deficit is nearly 8% of GDP, and the chief prosecutor is trying to shut down the government. Last week the court moved to ban the ruling Islamic AKP party, as well as the president and prime minister, for alleged breach of the country's secular laws. Turkey has a foreign debt of USD 275+bn. Turkish companies may have great difficulty raising some USD 50bn of fresh loans needed this year to stay afloat.

The other side of the "Carry Trade," borrowing in foreign currencies, has also been in vogue in the euphoria of the credit bubble. For example, most mortgages in Hungary over the last two years have been in Swiss francs, with the Balkans and Poland not far behind. This is now turning into slow torture. The Swiss Franc has risen 5% against the Euro since October. The real level of the debt is ratcheting up fast. Foreign debts have reached 122% of GDP in Latvia, 101% in Estonia and 73% in Lithuania, mostly in Euros. For now the debtors are shielded by fixed exchange rates in Europe's ERM system, but this could make the shock even worse should the currency pegs start to snap. There is now a real risk of global financial contagion from Iceland as it increasingly looks like the canary in the mineshaft!

[ENDS]

To reflect further on this, please click here and read views as well as respond directly within the online forum.

We welcome your thoughts, observations and views. Thank you.

With love and warm wishes to you and family


DK with family

DK Matai

The Philanthropia, mi2g.net

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Posted by DK Matai at March 27, 2008 02:56 AM

  
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Comments

One of the crucial points of wisdom economy, according to my book, is to spend within your means. We are moving towards it...

DK, oh please can you be more merciful with us? Less verbose and numerical, and more chatty? Because we can get to the depths and details of things just fine, but it's nice to start out slow and easy, and get there after a few steps. As a busy person, I find I resist reading anything long and intense, because my own life is intense enough already.

When I conquer my resistance to reading, I always find much of interest in what you share here. But it's hard to find something to say when you've already covered most of the bases yourself -- for example, you'll ask a question rhetorically and provide your own answer, which closes most doors to debate, unless the reader is willing to do enough technical research to come back at you with a sustainable disagreement, or sincere support. Why not take one side of a position (i.e., don't cover all the ground yourself) and leave questions open, so we can talk with you? Otherwise, it just seems as if you're asking for support of your own views and positions.

Dear hgquinn

Thank you for your feedback.

Please note that this specific piece was originally written by DK Matai for ATCA and Philanthropia members.

Best wishes

Horatio

Dr Horatio Peppers
mi2g Intelligence Unit

ATCA: The Asymmetric Threats Contingency Alliance is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies -- bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of ATCA is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.

The Philanthropia, founded in 2005, brings together over 1,000 leading individual and private philanthropists, family offices, foundations, private banks, non-governmental organisations and specialist advisors to address complex global challenges such as countering climate chaos, reducing radical poverty and developing global leadership for the younger generation through the appliance of science and technology, leveraging acumen and finance, as well as encouraging collaboration with a strong commitment to ethics. Philanthropia emphasises multi-faith spiritual values: introspection, healthy living and ecology. Philanthropia Targets: Countering climate chaos and carbon neutrality; Eliminating radical poverty -- through micro-credit schemes, empowerment of women and more responsible capitalism; Leadership for the Younger Generation; and Corporate and social responsibility.


Dear DK,

Thanks for bringing the detail knowledge to our awareness.

I (we) predicted all this on Intent Blog many months ago, based on a global systems analysis.

Perhaps the insight helped to create it because we all know truth and actuality will bring to collapse systems dependant on ignorance or producing an imbalance.

The current information systems do not support the requirements of the financial and monetary systems. Which themselves are not designed from a holistic perspective. The systems are unable to be integrated because the universal architecture which I understand how to implement has not been implemented.

The systems are not designed to adapt and accommodate the coming black swans.

Gambling is not prudent and does not create economic value. A heavy tax on capital gains and tax free dividends is a quick solution; of course the implementation and design needs some research.

Too many are able to extract value from the system without making a real value contribution.

The attention of the world’s management is in the wrong place, and there is a lack of accountability, a “take the money and run” attitude is dominant leaving a mess for others. The world’s management is not using the technology to it’s fullest potential because of a “proprietary / monopoly” mindset.

The fox should not be guarding the hen house.

Thanks to technology the individual labor requirements to maintain the real economy (food, health, shelter, energy, and transportation) are about 16 hours per week or less, with an additional 10 hour per week educational requirement.

So there is no real big issue, other than the forced participation in an artificial economy and the control by a few of the symbolic unit used to represent value. Like I have been pointing out our systems are flawed having been warped by egoic intention and perspective.

The only thing that can stop us from solving these problems are ego and individuals clinging to old fictions it takes a very special person(s) that will be able to make it happen, extraordinary spirit and intelligence.

I would love it if someone would enlist me somehow to help.

Speaking of ICE and this Black Swan may make other issues insignificant.

Note that correcting the current problems may put us into a position to handle the bigger ones coming. So they could be considered a good thing.


We should know that the other day a 225 square mile sheet of ice broke off in, one the size of Connecticut hangs by a thread down in Antarctica. This is unexpected and surprising to scientist, the speed at which it happened. But not surprising is that it supports the phonon based calculations. I discussed phonons on another thread. Experimented with some ice cubes didn’t need big budget. The planet is having a massive increase in phonons which exponentiate themselves. It is also scientifically correct to state that the planets vibration is increasing. Which something oddly enough people used to talk about before we were able to explain it. The faster it vibrates the more energy it can receive.

Based on these phonon calculations we have 18 months to switch off dependency on oil. At about that time the extreme weather which will affect ports, refineries and shipping will disrupt the oil supply chain. Of course this is not certain because of the uncertainty principle; it is just possible and probable. There may not be much exporting going on.

The good news is this is a good thing, by switching to an advanced and evolved energy system we will solve the mortgage and finance crisis and the value of the dollar will skyrocket.


Phonons of course have the same wave particle nature as photons.

Phonons are why a sound a (vibration) can break a glass, shattering the lattice of atoms.

Another black swan is the possibility being investigated that inferior or intentionally compromised electronic components have been introduced into the information technology infrastructure in the west. One wonders about China's involvement.

In the last year an enormous number of anomalies have begun to appear and it is proving impossible to isolate the cause and there is such diversity of effects which are somewhat random in their occurrence.

The effects it do not kill the systems, which are usually are fixed with a reboot, but it causes productivity draining issues and data corruption from lost connections. All the elements are so interconnected that if any suffer problems it affects the others.

It could be something else other than hardware for example code defects especially in the network layers or even malicious code resulting from vendors being infiltrated and compromised.

Or something like the browser service in Microsoft's OS which is not very well documented by MS and they don't seem to understand how it really works either I am told. Perhaps the programmer that wrote the C code is no longer around and with the dominance of switches that replaced hubs.

It could also be high energy particles flipping a zero to one somewhere deep inside which would cause totally unpredictable results.


It could be all the above, happening in concert. As we know the more parts a system has the more likely it is to fail. For example the financial system is overly complex and operates hidden in shadow.

It needs to be fixed if we are to handle the wide scale rapidly forming phenomena that are coming this included awareness induced system, industry, and profession changes.

Does everyone realize that mortgage companies and banks take taxpayer money and loan it back to the taxpayers?

They get these exorbitant profits for servicing the loan. Why should an industry profit from loaning taxpayers money back to themselves? Whoever thought this scheme up was a genius. Taking into account that it is a mostly left brained function that can be performed by computers based on a transparent standard and formula? Do we really need thousands of people and billions in physical infrastructure to support this system?

I wonder if Inflation isn’t a good thing, true in a properly designed system there would not be any. We could simply increase worker wages to keep up with the inflation. This devalues all the ill gotten gains. In other words those that hoard wealth lose it, those that dynamically create new value with their wealth are the owners of the true wealth and maintain great riches. Maybe not maybe so.

perhaps it is a blessing in disguise, with less money people might come together and work on their spiritual sides more1

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