Iceland Interest rates and the Euro

Tim Robbins

Iceland interest rates when up to 18% during their finacial crisis because they weren't in the Euro.

How does this happen?

1. Markets see Iceland is looking dodge and expect their currency to devalue.
2. Anyone who doesn't want their currency does their best to get rid of because they sense it will be worth less.
3. Too much of the currency becomes available.
4. Interest rates rocket.

Explain. In sequential logic please.
Thanks.

Victor

High interest rates encourage people to retain the currency.

Tim Robbins

Victor wrote: »

High interest rates encourage people to retain the currency.

Why?

Victor

Imagine you can get 2% in your Irish bank for euro denominated deposits and you expect currency Z to devalue by 10% against the euro over a year. If the banks in country Z pay 15%, you would in theory make a profit of 3% by depositing in a currency Z denominated bank account.

There is of course the matter of risk and currency exchange.

ballsymchugh

a high interest rate means more interest on deposits, so people save more. the first thing i wanted to do after the iceland crash was open a bank account in one of their banks but i couldn't find one that would allow foreigners to do it.

would've been so much better than the pathetic interest you get here.

also, after the irish government guaranteed deposits up to 100k, which was more than what the uk government offered on uk banks, there was an initial influx of money to irish banks, notable BOI that operated from post offices in the uk.

Tim Robbins

Victor wrote: »

Imagine you can get 2% in your Irish bank for euro denominated deposits and you expect currency Z to devalue by 10% against the euro over a year. If the banks in country Z pay 15%, you would in theory make a profit of 3% by depositing in a currency Z denominated bank account.

There is of course the matter of risk and currency exchange.

Sorry this doesn't make any sense.

What's the cause and what's the effect?

Victor

I don't understand your question. There is no reference to cause and effect in the thread.

Hasschu

Interest rates are always related to the inflation rate. In countries with high inflation I have found that $US, Euros, Swiss Francs were in high demand and I would take those notes with me to those countries. The hotel owners, restaurateurs and so on would keep those notes under the mattress until they had reason to leave the country at which time they would deposit the notes in banks in Madrid, Miami, Frankfurt, Geneva or Brussels. If the official rate was 4 local to one Euro I would get my room for 5 local to one Euro, this was the typical gain for me. If one lives in those high inflation countries one spends all income on the day it is received. It is easy to see why saving rates have to be high in order to get people to park their cash in a bank.